e10vk

(Exact name of registrant as specified in its charter)

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.

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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

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, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $17,317,620.81.

The number of shares outstanding of the registrant’s Common Stock as of December 31, 2003 was 10,002,952 (excluding 1,018,788 treasury shares).

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 6, 2004 are incorporated by reference into Part III, Items 10 through 14 hereof.

Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events, but are not guarantees of performance. Actual results may differ materially from those described in forward-looking statements. Many factors mentioned in this report will be important in determining future results. Therefore, you are requested to read the more detailed cautionary statement about forward-looking statements set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, and to consider all forward-looking statements in light of the risks and uncertainties described under the heading “Outlook and Risk Factors” under Item 7 below.

XETA Technologies, Inc., (“XETA”, the “Company”, “we”, or “our”) an Oklahoma corporation formed in 1981, is a leading provider of communications solutions including: converged systems applications such as VoIP, wireless, contact centers, unified messaging, video solutions, as well as traditional voice and data solutions. We specialize in providing these solutions to multi-location mid-size and large companies throughout the United States. In addition to selling these products to customers, we derive a significant portion of our revenues and gross profits from the installation and maintenance of these systems, utilizing our nation-wide network of Company-employed design engineers and service technicians as well as our 24-hour, 7-days-per-week call center located in our headquarters building in Broken Arrow, Oklahoma.

We entered the commercial market as a voice and data integrator in fiscal 1999. Prior to that time, our traditional focus had been on the telecommunications needs of the lodging industry, selling and servicing our own proprietary call accounting systems and Hitachi PBX systems. Early in 1999, we became a reseller of Avaya, Inc., (“Avaya”) formerly Lucent Technologies’ PBX systems. In late 1999, we acquired St. Louis-based U.S. Technologies Systems, Inc. (“UST”), which largely established for us a nationwide beachhead to deliver telephony applications to the broader commercial market. In early 2000, we acquired Portland, Oregon-based Advanced Communications Technologies, which allowed us to strengthen our services and sales presence in the Pacific Northwest and add competencies in call centers, unified messaging, converged systems and data networking systems. Late in 2000, we acquired St. Louis-based PRO Networks Corporation, which allowed us to enter the VoIP market and more firmly entrenched us in the traditional data networking market. Concurrently with this acquisition, we also acquired Seattle-based KMI, Inc., a consulting firm specializing in LAN/WAN networking solutions and unified messaging. In June 2003, we became a “Premium Partner” with Nortel Networks, Inc. (“Nortel Networks”). Nortel Networks’ share of the U.S. communications market is similar in size and loyalty to that of Avaya. Therefore, we have significantly expanded our potential market by adding this product line.

Despite battling difficult economic conditions for the past three years, we believe our long-term strategy of becoming an integrated communications solutions provider to the broader commercial market has proven to be on target. In our view, the market acceptance of converged voice and data products, specifically VoIP products, is finally accelerating and we have recently enhanced our market position by adding the Nortel Networks product line to our existing Avaya and Hitachi products, effectively doubling our market of potential customers. In addition, we have steadily increased both the depth and breadth of our technical capabilities in these new technologies, further establishing ourselves as one of the premier voice and data integrators in the United States, and one of the few that has nation-wide reach.

We completed fiscal 2003 financially stronger than at any time in the past three years. Having maintained our profitability throughout the economic downturn by carefully controlling our costs, we have also shed more than $20,000,000 in debt since October 31, 2000. During the fourth quarter of this year, we moved our credit facility to a new bank and restructured the remaining debt on more favorable terms, thereby reducing our per quarter cash flow previously committed to debt reduction by over $500,000. Under our new credit facility, we have $7.5 million available under a revolving line of credit for working capital expansion.

As we enter fiscal 2004, the economy appears to be improving and the pessimism that has plagued the business sector for three years seems to be improving. In addition, most communications equipment providers, ourselves included, have experienced improved order rates during the last portion of calendar 2003. However, since early 2001 there have been several short periods of improvement like this, only to be followed by swift and sudden downturns. Therefore, we will continue to balance our investment in growth initiatives with tight cost controls until the economy is on a more stable growth track.

We sell a broad range of communications systems and software for commercial enterprises including Voice Over IP (“VoIP”), call centers, customer relationship management, wireless, and messaging systems. In the past three years, the technology that drives these systems has migrated from traditional, stand-alone voice systems to fully networked communications servers that are integrated into data networks. These converged voice and data systems provide customers with enhanced functionality, lower maintenance costs, and lower toll costs.

We design, install and maintain communications systems manufactured by Avaya and Nortel Networks. Both of these manufacturers hold significant portions of the communications equipment market and are migrating their customer bases to the new converged technology platform. We are one of the largest Avaya dealers in the U.S. Avaya sells a variety of media servers and gateways. The heart of these systems is the Avaya Communications Manager which is an open, scalable, highly reliable and secure telephony application. It provides user and system management functionality, intelligent call routing, application integration and extensibility, and enterprise communications networking. The Communications Manager runs on proprietary Avaya media servers to control a wide variety of Avaya proprietary media gateways and communications devices. We also sell Avaya’s media server 8100, formerly known as the IP600, to mid-sized enterprises or as part of larger customers’ networks. Avaya also has a wide range of messaging systems marketed under the names Intuity™ Messaging Solutions, Octel, and Partner messaging. We also market Avaya’s unified messaging systems under the name Unified Communications Center. In a unified messaging environment, users can access voice mail, email and fax messages seamlessly throughout the day from their desktops.

As stated above, we became a “Premium Partner” with Nortel Networks in June, 2003. As a Premium Partner, we can provide a complete range of communications solutions offered by Nortel Networks. This product portfolio includes solutions for circuit-switched or packet switched networks. Migration from traditional telephony systems to VoIP is available under the Meridian, Succession, Norstar and Business Communication Manager family of products. We offer Nortel Networks messaging systems marketed under the CallPilot name. These systems provide flexible and scaleable messaging options for call answering, automated attendant, fax messaging and desktop integration. We market the Nortel Networks Symposium call center product portfolio. These multi-media products combine traditional telephone contacts with web-based contacts using advanced skill based routing. Networked call centers can be managed with a single platform and self-service applications with advanced speech recognition which can provide 24-hour, seven day a week convenience to customers. Nortel Network’s open architecture and evergreen design philosophy enables customers to benefit from changing technologies while retaining their initial investment.

We sell data networking products to the commercial market under non-exclusive dealership agreements with Avaya, Cisco Systems Inc., Nortel Networks, and Hewlett-Packard Co.

Sales of communications systems and products to the commercial market represented 40%, 41% and 49% of total revenues during fiscal years 2003, 2002 and 2001, respectively.

Communications Systems. We distribute Avaya’s DEFINITY^® Guestworks™ Systems, Hitachi’s 5000^® Series Digital Communications Systems, and the Nortel Networks’ product line to the hospitality industry under nationwide, non-exclusive dealer agreements. These systems are equipped with lodging specific software, which integrates with nearly all aspects of the hotel’s operations. We also 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 lodging-specific software features. Most of these products are sold in conjunction with the sale of new communications systems and, with the exception of voice mail systems, are purchased from regional and national suppliers.

Call Accounting Products. We also market a line of proprietary call accounting systems under the Virtual XL^® (“VXL”) series name. Introduced in 1998, the VXL is a PC-based system designed to operate on a hotel’s local or wide area network, and if that network is connected to the Internet, the VXL can also be accessed via an Internet connection. The VXL systems are our latest technology in a series of call accounting products we have successfully marketed since our inception. Many of those earlier products remain in the field and are supported by our service and technical staff.

Sales of communications systems and products to the lodging industry represented 12%, 11%, and 12% of total revenues in fiscal 2003, 2002, and 2001, respectively.

We provide nation-wide customer service, project management, professional services, installation and consulting to support our customers. This extensive services organization is one of the key differentiators between our competitors and us. The purchase price of our systems typically includes charges for professional services, project management activities, and installation costs, all of which are reflected as installation and service revenues in our financial statements.

Our service organization includes our National Service Center (“NSC”) housed at our headquarters building in Broken Arrow, OK. Our NSC supports our customers who have purchased maintenance contracts on their systems, as well as other customers who purchase service on a time and materials basis. We employ a network of highly trained technicians who are strategically located in major metropolitan areas and can be dispatched by the NSC to support our customers in the field or install new systems. We also employ a cadre of design engineers (the Professional Services Organization “PSO”) trained in the design of the new, converged networks discussed above. The PSO provides high-end services to assist our customers in navigating their way to a cost-effective and productivity-boosting network design. Much of the work done by the PSO represents pre-sales work and is often not recovered in revenues, representing a significant investment. We believe, however, that by hiring the most qualified personnel possible and keeping their talents in-house, we have built a competitive advantage in the marketplace as most of our competitors do not have the financial strength to make this investment. Finally, we have a boutique software consulting operation to assist customers in Microsoft Exchange and Unified Messaging applications. Revenues from our software consulting business are mostly derived from the Pacific Northwest region and represent less than 2% of total revenues.

For our distributed products, we typically 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 Avaya products, we attempt to sell Avaya’s post-warranty maintenance contracts, for which we earn a commission. In some circumstances however, we sell our own post-warranty maintenance plan. Most of these contracts are with our lodging industry customers. Nortel Networks and Hitachi, unlike Avaya, do not have their own field service forces. Therefore, for these products, we attempt to sell our own post-warranty maintenance contract.

For proprietary call accounting products sold to the lodging industry, we provide our customers with a limited one-year warranty covering parts and labor. Subsequent to the expiration of the warranty, we offer after-market service contracts to our lodging customers under one year and multi-year service contracts. We earn a significant portion of our recurring service revenues from lodging customers who maintain service contracts on their systems.

Installation and service revenues represented 44%, 47%, and 38% of total revenues for fiscal years 2003, 2002 and 2001, respectively.

Our marketing efforts to the commercial sector (non-lodging) are targeted at the “enterprise” space, which we define as mid-sized to large commercial customers. We especially prefer complex, multi-site applications in which we can leverage our in-house PSO capabilities and our standard nation-wide implementation capabilities. We market our products and services primarily through our direct sales force, but also through a variety of other means including networking at trade shows and conferences, and through relationships with Avaya’s direct sales force. Through these relationships, Avaya selects dealers to assist in fulfilling a customer’s order for some of its major accounts. We have carefully positioned ourselves as a preferred dealer by building our in-house engineering capabilities, providing nationwide implementation services, and through access to our 24 X 7 service center. We aggressively market these capabilities and differentiators to the Avaya direct sales force who generally select the dealers for their accounts.

In addition to the broad commercial sector, we also have marketing initiatives in two specific markets: middle market customers located in targeted metropolitan areas and the federal government. These initiatives generally encompass having sales personnel dedicated to understanding the unique needs and buying channels of these markets and tailoring our solutions designs and implementation to these markets.

Our marketing efforts to the lodging industry rely more heavily on our experience and reputation. Over the course of serving this market for 20 years, we have built strong long-term relationships with a wide range of personnel (corporate hotel chain personnel, property management officials, industry consultants, hotel owners, and on-site financial or operating

officers) that can be the key decision makers for the purchase of hotel telecommunications equipment. We have relationships with nearly all hotel chains and major property management companies. These relationships are key to our past and future success and our lodging marketing efforts are targeted at strengthening and deepening those relationships rather than the more broad promotional efforts sometimes employed in our marketing efforts to the commercial sector.

In addition, we offer a variety of sales programs to the lodging industry, the most significant of which is the XETAPLAN program. Under the XETAPLAN program, customers are provided one of our call accounting products for a period of three to five years in exchange for a monthly fee paid to us. Service on the products is also included in the contract. For communications systems we sell to the lodging industry, we offer a package of value-added services including a call accounting system and a service package with a specified number of free labor hours and weekly appointments with our certified technicians to correct minor malfunctions or to perform routine maintenance.

During fiscal 2003, we did not have any single customer that comprised more than 10% of our revenues.

At December 18, 2003 our backlog of orders for systems sales was $6.2 million compared to $7.0 million at the same time last year. We expect all of this backlog to ship and be recognized as revenue by October 31, 2004.

Commercial. The market for the communications systems products and services we sell to commercial customers is highly competitive. As communications systems rapidly evolve from stand-alone voice systems to highly integrated, software-driven, IP-based systems, they become subject to more rapid technological change. We sell the Avaya and Nortel Networks product lines to our commercial customers. The customer bases of these two companies represent approximately 60% of the total market for sales of communications systems. Generally, established customers have made prior investments in either an Avaya or Nortel Networks system and they typically do not convert their communications infrastructure to another vendor’s products due to the expense involved and the high level of satisfaction with the product. Therefore, most of the competition is at the dealer level competing for replacements, expansions, or upgrades to existing systems. In the Avaya product line, the dealer community is comprised of a few larger dealers with super-regional or nationwide capabilities such as us, and several hundred smaller dealers, most of which concentrate on a particular metropolitan area.

In the Nortel Networks product line, sales of systems is dominated by a group of very large, well-capitalized, and well-established companies, generally known as the former Regional Bell Operating Companies (“RBOC’s”). In addition to competing with the RBOC’s, we also compete with other larger Nortel Networks dealers similar in size and financial strength to us as well as several hundred smaller dealers who focus on smaller geographies.

Hospitality. We sell Avaya, Hitachi, and Nortel Networks communications systems to the lodging market and, as such, face similar competitive pressures to those discussed above under “Commercial Competition”. However, since the lodging market is a small, niche market, we believe our most effective competitive strengths are the performance and reliability of our proprietary hospitality systems and our high level of service commitment to this unique market. While we believe that our reputation and nation-wide presence contribute significantly to our success in the lodging market, there can be no assurance given that we will be able to continue to expand our market share in the future.

All of the assembly of systems relates to our proprietary call accounting systems sold exclusively to the lodging industry. As a mature product line, these systems comprise less than 2% of our total revenues. We assemble these products, which include the XL^®, Virtual XL^®, and XPERT^® systems, 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 which 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. Our proprietary products are based on PC technology, which is continually and rapidly changing. As a result, some of the components originally designed for use in our systems have been phased out of production and replaced by more advanced technology. To date, these substitutions have not forced us to substantially redesign our systems and there has been minimal effect on the overall system cost. There can be no assurance given, however, that future obsolescence of key components would not result in unanticipated delays in shipments of systems due to redesign and testing of assemblies.

We use outside contractors to assemble our proprietary printed circuit boards. The components and blank circuit boards are purchased, inventoried, and supplied to the outside contractors for assembly and quality control testing. We perform various quality control procedures, including powering up completed systems and allowing them to “burn-in” before being assembled into a final unit for a specific customer location, and performing final testing prior to shipment.

At December 12, 2003, we employed 300 employees. There were no part-time employees.

We recognize that our reputation for quality products and services gives value to our lodging products and service offerings names. Therefore, we place high importance upon protecting such names by obtaining registered trademarks where practicable and appropriate. We own registered United States trademarks on the following names for use in the marketing of our services and systems: “XETA,” “XETAXCEL,” “XACT,” “XPERT,” “XPERT+,” “XL,” “XPANDER,” “Virtual XL,” and “XTRAMILE”. All of these marks are registered on the principal register of the United States Patent and Trademark Office, with the exception of XPANDER^®, which is registered on the supplemental register.

We attempt to protect our proprietary technology through a combination of trade secrets, non-disclosure agreements, copyright claims, and technical measures. We believe that patent protection is less significant to protecting our proprietary technology and technical expertise than the other measures listed above. For this reason, we have never applied for patents on our hardware or software technology with the exception of the technology for “XPANDER.”

Our principal executive office and Service Center are located in a 37,000 square foot, Company-owned, single story building located in a suburban business park near Tulsa, Oklahoma. This facility also houses our warehouse and assembly areas to support our hospitality sales channel. The building is located on a 13-acre tract of land. The property is subject to a mortgage held by Bank of Oklahoma, NA, to secure our credit facility.

Our commercial channel shipping operations are primarily located in leased facilities near St. Louis, Missouri. In addition to the warehouse, this facility houses sales staff, technical design, professional services, and installation support personnel. We also lease other office space throughout the U.S. for sales, consulting, and technical staff and have informal office arrangements with our regional technicians to allow for some storage of spare parts inventory.

On August 1, 2003, the Software & Information Industry Association (“SIIA”), an association of software publishers, contacted us by letter and claimed that we had violated the Copyright Act, 17 U.S.C. § 501, et seq. by allegedly using unlicensed software in our business. SIIA made demand that we audit all of our computers and servers to determine whether we used both licensed and/or allegedly unlicensed software for any of SIIA’s 965 members. We conducted this audit and determined that some software present on a limited number of our computers was unlicensed. Even though many of these programs were located on personal computers utilized by employees for both personal and business use, or on computers that were “inherited” through our various acquisitions and were most likely loaded prior to our acquisition of these companies, we have potential exposure to damages under the law for possessing unlicensed software. Consequently,

we have recorded a loss contingency representing our best estimate of the potential damages based upon available facts of the claim at the present time. We initiated settlement negotiations with SIIA but the nature of our liability and the amount of damages due SIIA was in dispute. We therefore filed a declaratory judgment in the U.S. District Court for the Northern District of Oklahoma on December 1, 2003 seeking a judicial determination of liability and damages. Based on our review of the claim, the results of our internal review of potentially unlicensed software, and discussion with legal counsel, we do not believe that the ultimate resolution of this claim will have a material adverse effect on our financial position or results of operations. This action is still pending.

Since 1994, we have been monitoring numerous patent infringement lawsuits filed by Phonometrics, Inc., a Florida company, against certain telecommunications equipment manufacturers and hotels who use such equipment. While we were never named as a defendant in any of these cases, several of our call accounting customers were named defendants and notified us that they will seek indemnification under the terms of their contracts with us. However, because there were other equipment vendors implicated along with us in the cases filed against our customers, we never assumed the outright defense of our customers in any of these actions. All of the cases filed by Phonometrics against our customers were originally filed in, or transferred to, the United States District Court for the Southern District of Florida. In October 1998, the Florida Court dismissed all of the cases filed against the hotels for failure to state a claim. After years of appeals by Phonometrics, all of which were lost on the merits, a final order dismissing the cases with prejudice was entered in November 2002, and the defendant hotels have been awarded attorney fees and costs against both Phonometrics and its legal counsel. Phonometrics continues to dispute the amount of fees awarded in some cases, and this issue continues to be litigated by Phonometrics.

Our directors and executive officers are set forth below. There is no family relationship between any of the named persons.

Mr. Ingram has been our Chief Executive Officer since July 1990. He also served as our President from July 1990 until August 1999 and re-assumed that position in June 2001. He has been a director since March 1989. Mr. Ingram’s business experience prior to joining was concentrated in the oil and gas industry. Mr. Ingram holds a Bachelor of Science Degree in Petroleum Engineering from the University of Tulsa.

Mr. Wagner has been our Vice President of Finance and Chief Financial Officer since March 1989. He has been with us since July 1988 and became a member of the Board of Directors in March 1996. Mr. Wagner is a Certified Public Accountant licensed in Oklahoma and received his Bachelor of Science Degree in Accounting from Oklahoma State University.

Mr. Patterson joined us in March 2000 and serves as Senior Vice President, Sales and Marketing. Prior to his employment with us, Mr. Patterson worked for Exxon Corporation and held various executive positions in Europe, Asia and

Latin America with Exxon Company, International. He is a member of the American Management Association and is active in Organizational Development, Leadership Development and Investment Management activities. Mr. Patterson received his Bachelor of Science Degree in Engineering from Oklahoma State University.

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

Our Common Stock, $.001 par value, is currently traded on the over-the-counter market and is reported in the National Association of Securities Dealers Automated Quotation (“NASDAQ”) System under the symbol “XETA.”

The high and low bid prices for the Common Stock, as reported by the National Association of Securities Dealers through its NASDAQ System, for each of the quarters during our two most recent fiscal years are set forth below. These prices reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

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.

As of December 15, 2003, the latest practicable date for which such information is available, we had 186 shareholders of record. In addition, based upon information received as of December 15, 2003, we have approximately 5,195 shareholders who hold their stock in brokerage accounts.

(1)

All of these options were granted as part of an initial compensation package to several different officers upon their hiring. These options generally vested or were earned over periods ranging from one to three years, and are exercisable for a period of ten years from the date of grant or date earned.

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

In the following discussion and elsewhere in this report, we make forward-looking statements regarding future events and our future performance and results. These and other 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. Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” “targets”, “plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. These forward-looking statements are subject to risks and uncertainties, which are difficult to predict. Thus, actual results may differ materially and adversely from those expressed in such statements. Factors that might cause or contribute to such different results include, but are not limited to, those discussed below under the heading “Outlook and Risk Factors,” and in our Quarterly Reports on Form 10-Q and other reports filed by us with the Securities & Exchange Commission. Consequently, investors are cautioned to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. Further, all forward-looking statements are subject to the provisions of the Private Securities Litigation Reform Act of 1995.

For the year ending October 31, 2003, we earned net income of $1.6 million or $.16 per diluted share on revenues of $52.7 million. These results reflect an increase in earnings of 77% on relatively flat revenues compared to fiscal 2002. This improvement in earnings reflects increases in the gross margins across all of our revenue streams despite enduring another year of depressed buying activity in the communications equipment sector. As a result of the economic conditions, we continued to execute on short-term tactics designed to carefully manage our costs, maximize operating cash flows, and preserve our technical capabilities for the future. As a result of successfully executing these tactics and improving our gross margins, we were able to dramatically improve our profits and retire $8.9 million of our debt.

In addition, we initiated limited growth initiatives, the most significant of which was to become a Nortel Networks (“Nortel Networks”) Premium Partner with a nation-wide market reach. By adding the Nortel Networks product line, we have effectively doubled our market potential because Nortel Network’s market share is very similar to that of Avaya Communications’ (“Avaya”) market share. Both Nortel Networks and Avaya have focused their recent research and development investments on converged communications systems that allow voice communications to travel over what were previously data-dedicated networks, and both companies now have deep and rich converged product selections. Approximately 60% of the U.S. market has an installed base of either Nortel Networks or Avaya equipment and has been loyal to their chosen manufacturer for many years. In addition, we believe most of these customers will likely choose to preserve their existing investment as they migrate to the new converged technology. Therefore, in almost all cases, we will offer new Nortel Networks products to existing Nortel Networks customers and offer new Avaya products to existing Avaya customers. In summary, our decision to add the Nortel Networks product line to our product and service offerings was made to extend our market reach. We will not de-emphasize our efforts to sell Avaya equipment and service products in any way.

We continue to be very optimistic about our long-term prospects. During fiscal 2003, we have improved our efficiencies throughout our operations thereby improving our gross margins; we have slashed and restructured our debt to improve our financial condition and reduce cash flow dedicated to debt reduction; and we have preserved and enhanced our technical competence and continue to maintain our position as a premier integrator of voice and data technologies with nation-wide reach. We believe that we are well-positioned for rapid growth as acceptance of these new products grows and as capital spending returns to historical levels.

The discussion that follows provides more details regarding the factors and trends which affect our financial results, liquidity, and capital resources in fiscal 2003 when compared to the previous year.

Year ending October 31, 2003 compared to October 31, 2002. Net revenues for fiscal 2003 were $52.7 million compared to $53.7 million in fiscal 2002, a 2% decline. Net income for fiscal 2003 was $1.6 million compared to $.9 million in fiscal 2002, a 77% increase. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2003.

Systems Sales. Sales of systems and equipment were $27.5 million in fiscal 2003 compared to $27.9 million in fiscal 2002, a 1% decrease. These results reflect the static market conditions experienced during fiscal 2003 as customers continued to defer most of their buying decisions. In the early portion of fiscal 2003, we experienced a spike in new orders, indicating that the market for our products was prepared to return to historical levels of growth. However, order rates quickly returned to fiscal 2002 levels as a high degree of pessimism returned to the overall economy reflecting concerns about the Iraq war and future business profits. As we enter fiscal 2004, we have received three large orders for new equipment, each totaling more than $1 million. However, except for these orders, we have not seen a change in order rates for new equipment from the levels experienced in fiscal 2003. As discussed above, we have added the Nortel Networks product line to our product and service offering to expand our market penetration. We expect to start receiving orders of Nortel Networks equipment during the first quarter, with order rates reaching meaningful levels mid-year.

Nearly all of the new systems sold during fiscal 2003 were combination traditional and converged (“IP-enabled”) systems or were full converged IP systems, reflecting the fact that the market is accepting the new technology that has been developed and is beginning to see economic benefits associated with it. We fully expect this trend to continue. However, we cannot predict at this time when macroeconomic factors will improve sufficiently for capital spending in our market to return to historical growth rates.

Installation and Service Revenues. Revenues earned from installation and service related activities were $23.3 million, an 8% decrease from fiscal 2002. This decrease was due primarily to lower discretionary spending by customers on “time and materials” work. The decrease also reflects a slow-down in our Microsoft consulting business. Most of our customers have focused very heavily on cost controls during the current economic downturn and, as a result, consistently defer all service work that is not essential. Also, because most companies are not increasing their employee base, they are not spending money on expansions of their systems, movement of employees, etc., all of which generate service revenues for us.

Our service revenues include three other sources in addition to “time and materials” revenues: installation revenues, contract revenues and professional services revenues. Installation revenues were flat in fiscal 2003 compared to the prior year. This result was expected given the relatively stable level of systems sales, which is the primary driver of installation revenues. Contract revenues in fiscal 2003 were also consistent with fiscal 2002 levels. This revenue stream continues to be derived primarily from our lodging business, which did not expand during fiscal 2003. To date, our efforts to build a similar base of recurring revenues from our commercial customers has been hampered because Avaya vigorously restricts our ability to compete with them for service contracts, but instead pays us a commission for selling their contracts. Nortel Networks, on the other hand, does not maintain a service department and expects dealers like us to maintain customer systems. We believe that over time we will be able to build a base of recurring revenues from Nortel Networks customers similar to the base of revenues that we have enjoyed from our lodging business. Finally, we derive service revenues from our PSO which provides sales support, complex implementation services, and operating systems consulting for our customers. The consulting portion of our business declined slightly during fiscal 2003 as customers continued to limit their discretionary spending in this area.

Gross Margins. Gross margins were 27.2% in fiscal 2003 compared to 21.6% in fiscal 2002. This increase reflected increases in the gross margins of all our revenue sources.

Gross margins on systems sales were 28.8% in fiscal 2003 compared to 23.2% in fiscal 2002. A portion of this increase relates to an adjustment we made during fiscal 2002 to the reserve for inventory obsolescence. During the third quarter of fiscal 2002, we increased the inventory reserve and systems cost of goods sold by $775,000. Without this adjustment, our gross margins on systems sales in fiscal 2002 would have been 26.0%. The remainder of the improvement in systems sales reflects improvements in sales quoting processes installed during the year. By establishing procedures to focus more closely on gross margins prior to finalizing the order and by more aggressively seeking price support from the manufacturer, we were able to significantly improve our margins on systems sales. While we believe that these improvements can be sustained, the gross margins earned on our systems sales remains highly volatile. The factors affecting our gross margins on systems sales include the following: 1) we sell a wide variety of products, some of which generate gross margins in excess of 50% and some of which earn gross margins of less than 20%; 2) we sell to several different

customer sets, some of which have pre-negotiated contracts with Avaya which result in lower margins for us; and 3) as a distributor, we receive various forms of financial incentives from our suppliers and from Avaya which can vary based on special promotions, product-types purchased, the end-user customer, seasonality, etc. All of these factors contribute to the unpredictability of our systems gross margins.

The gross margins earned on installation and service revenues was 29.1% in fiscal 2003 compared to 25.9% in fiscal 2002. This increase was primarily due to improvements surrounding our commercial installation cost structure and processes. Despite the fact that installation revenues declined in association with a drop in systems sales, and that a portion of the costs associated with installation activities is fixed payroll-related expenses, we were still able to improve the gross margins on installations during the year by further consolidation and integration of installation related activities. Also, the margins earned by our National Service Center improved slightly in fiscal 2003, reflecting additional cost controls deployed during the year.

A final component to our gross margins is the margins earned on other revenues and our corporate cost of goods sold expenses. Other revenues represent sales and cost of goods sold on equipment outside our normal provisioning processes and commissions earned on the sale of manufacturer service contracts. Corporate cost of goods sold represents the cost of our material logistics and purchasing functions. Corporate cost of goods sold declined 8% in fiscal 2003 compared to fiscal 2002.

Operating Expenses. Operating expenses were $11.2 million or 21.3% of revenues in fiscal 2003 compared to $10.5 million or 19.4% of revenues in fiscal 2002. In fiscal 2002, we recorded an adjustment to decrease the reserve for bad debts by $700,000 which resulted in a reduction in bad debt expense. Without this adjustment, fiscal 2002 operating expenses would have been 20.8% of revenues. The remainder of the increase in operating expenses as a percentage of revenues was related to the loss of certain marketing reimbursement programs from Avaya. Avaya replaced these programs with a different incentive system that we participated in, but the contributions received under the new incentive system only partially offset the loss of cost reimbursements under the previous program.

Since April of 2001, we have managed our operating expenses primarily by closely monitoring and managing our headcount and by implementing tight controls over discretionary expenditures. In fiscal 2003, we continued this course except for a few strategic investments in sales resources related to our mid-market initiative. Also, in the fourth quarter of fiscal 2003, we began making a few investments in technical and sales resources related to our Nortel Networks initiative. In both cases, these investments were partially funded by the manufacturers under specified cost reimbursement programs. We expect to continue this cautious course of action for the foreseeable future.

Interest and Other Income. Interest expense consists of interest paid or accrued on our credit facility. Interest expense declined in fiscal 2003 by $413,000, reflecting lower average debt levels and lower interest rates. Also, during fiscal 2003, we capitalized interest costs of approximately $337,000 related to our Oracle implementation project compared to approximately $277,000 in fiscal 2002. During fiscal 2003, we reduced our overall bank debt by $8.9 million through cash on hand and funds generated from operations.

Net other expense in fiscal 2003 was approximately $71,000 compared to net other income of approximately $1.2 million last year. Fiscal 2002’s results include income from the partial reversal of an acquisition-related accrual set up during fiscal 2000 and interest income earned from sales-type leases. The amount of the non-recurring accrual reversal recorded to other income was $826,000. We set up this accrual as part of the purchase of UST in November, 1999 to reflect the fact that we were inheriting an aggressive tax position taken by UST. At the time of the acquisition, we chose to accrue for the potential losses to be incurred if the tax position was overturned. After consultation with our financial and tax advisors and having monitored this matter since the time of the acquisition, we believed it was appropriate to reduce the accrual and did so last year. There was no such entry made in fiscal 2003.

Tax Expense. We have recorded a combined federal and state tax provision of 39% in all years presented. 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 2003 was 3.0% compared to 1.6% last year. This increase reflects higher gross margins earned in fiscal 2003 while holding operating expenses relatively constant. We believe that our current business model would support a target operating margin of 8%. However, we will have to realize sustained growth in our revenues, primarily through increased sales of systems to commercial customers, and hold our gross margins to reach this target.

Year ending October 31, 2002 compared to October 31, 2001. Net revenues for fiscal 2002 were $53.7 million compared to $86.1 million in fiscal 2001, a 37% decline. Net income for fiscal 2002 was $.878 million compared to $3.481 million in fiscal 2001, a 75% decline. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2002.

Systems Sales. Sales of systems and equipment were $27.9 million in fiscal 2002, a 46% decrease from fiscal 2001. This decrease consisted of a decrease in systems sales to commercial customers of $20.2 million or 48% and a decrease in systems sales to lodging customers of $4 million or 40%. These decreases reflect the market conditions present during fiscal 2002 in which customers severely curtailed capital spending on telecommunications related equipment. These decisions by customers reflected an unusually high degree of pessimism regarding the overall economy in fiscal 2002, as customers perceived the need to use their available capital cautiously until a clear economic recovery is underway.

Installation and Service Revenues. Revenues earned from installation and service related activities (i.e., installation, contracts, MACs (moves, adds and changes), and consulting) were $25.4 million in fiscal 2002, a 23% decrease from fiscal 2001. Installation revenues, which are derived primarily from sales of new systems, decreased 55% in fiscal 2002 compared to the prior year. Contract revenues, which have been a relatively stable source of profitability and cash flows, increased 1% in fiscal 2002 compared to fiscal 2001. These consistent revenues were the key to our remaining profitable during the market downturn. MAC revenues decreased 40% in fiscal 2002 as customers deferred minor upgrades, expansions, and preventative maintenance projects during the down business cycle. Consulting revenues increased 65% in fiscal 2002 reflecting our increased emphasis on providing professional services to customers as well as the increase in complex implementations completed.

Gross Margins. Gross margins were 21.6% in fiscal 2002 compared to 27.2% in fiscal 2001. This decrease consisted of a decrease in gross margins earned on systems sales to 23.2% in fiscal 2002 compared to 30.3% in fiscal 2001 and a decrease in gross margins earned on services revenues to 25.9% in fiscal 2002 compared to 28.7% in fiscal 2001.

One of the primary factors affecting our gross margins on systems sales during fiscal 2002 was an adjustment we made to the reserve for inventory obsolescence. During the third quarter, we increased the reserve for obsolete inventory by $775,000. This increase was charged to systems cost of goods sold in our financial statements. Without this non-recurring adjustment, our gross margins on systems sales would have been 26%. The remainder of the decline in gross margins is related to a variety of factors including product mix, customer mix, and increasing competitive pressures.

The decline in gross margins earned on services revenues is directly related to the decline in sales of systems, which as discussed above, is the primary driver of the installation and professional services components of our services revenues. A significant portion of our services costs of sales are relatively fixed headcount-related expenses such as wages, benefits, payroll taxes, etc. Therefore, as our installation revenues declined, our margins on this component of our services revenues suffered in direct proportion.

Operating Expenses. Operating expenses were $10.5 million or 19.4% of revenues in fiscal 2002 compared to $16.1 million or 18.7% of revenues in fiscal 2001. The decrease in operating expenses reflected: 1) cost reductions totaling approximately $2.3 million produced primarily by reduced headcount, salary reductions for officers and directors, and reduced marketing expenditures to adjust to our declining revenue base, 2) reduced commission expense of $1.2 million reflecting the decrease in gross profits, 3) a non-recurring adjustment to decrease the reserve for bad debts of $700,000, and 4) reduced amortization expense of $1.4 million due to our adoption as of November 1, 2001 of Statement of Financial Accounting Standard No. 142 (“SFAS 142”) regarding the accounting for intangible assets and goodwill.

Interest and Other Income. Interest expense, which consists of interest paid or accrued on our credit facility, declined in fiscal 2002 by $1.2 million, reflecting lower average debt levels. Also during fiscal 2002, we capitalized interest costs of $277,000 related to our Oracle implementation project compared to $131,000 in fiscal 2001. During fiscal 2002, we reduced our overall bank debt by $9.6 million through funds generated from operations. Net other income earned in fiscal 2002 represented the partial reversal of an acquisition related accrual set up during fiscal 2000 as part of the purchase of U.S. Technologies, Inc. in November, 1999 to reflect the fact that we were inheriting an aggressive tax position taken by UST, and interest income earned from sales-type leases. The amount of the non-recurring accrual reversal recorded to other income was $826,000.

Tax Expense. We recorded a combined federal and state tax provision of 39% in all years presented. 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 2002 was 1.6% compared to 4% in fiscal 2001. This decline primarily reflected lower gross margins earned in fiscal 2002 as discussed above.

During fiscal 2003, we made significant strides in improving our financial condition and balance sheet structure. Specifically, we earned $8.0 million from operations, which we combined with existing cash balances to reduce our bank debt by $8.9 million, and we restructured our credit facility more appropriately to our balance sheet.

We generated these strong cash flows from operations from the following sources: earnings and non-cash charges of $2.9 million, reduction in accounts receivable of $3.9 million, reductions in inventories of $1.9 million, and decreases in prepaid taxes of $1.2 million. These sources of cash flows were partially offset by $2.2 million in reductions in accounts payable, yielding total cash flows from operations of $8.2 million. We used cash flows plus beginning cash balances of $2.0 million to reduce our bank debt by $8.9 million and to make $1.0 million capital investments, primarily related to the implementation of our Oracle enterprise resource system. This system is expected to be fully implemented during fiscal 2004.

We completed fiscal 2003 with only $5.2 million in term and mortgage debt outstanding, a reduction of nearly $20 million in three years despite the severe economic conditions that we have battled during this time. Also at the end of the year, we completed a restructuring of our credit facility with a new bank. The structure of the new credit facility is similar to the previous agreement, but on more favorable terms. The facility contains three pieces: 1) a Term Loan of $3.0 million amortizing over 36 months due September 30, 2006, 2) a Mortgage Loan of $2.2 million amortizing over 13 years due September 30, 2006, and 3) a $7.5 million working capital revolver supported by accounts receivable and inventories, which matures on September 29, 2004. The Company had approximately $5.2 million available under the revolving line of credit at October 31, 2003.

By re-amortizing the Term Loan over a new 36-month period, we have reduced our per-quarter cash flow previously committed to debt reduction by over $500,000 and have shifted approximately $2.1 million out of current maturities to long-term debt, significantly improving our working capital position and current ratio. In addition, our financial covenants have been reset to reflect our current financial position and earnings levels. The financial covenants are common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to Earnings Before Interest, Taxes, Depreciation, and Amortization “(EBITDA”), limitations on capital spending, and debt service coverage requirements. With these changes in place, we believe that our financial condition is greatly improved and we are well-positioned to be able to support rapid increases in the demand for working capital should our business expand.

In addition to the available capacity under our working capital line of credit, we believe we have access to a variety of capital sources such as additional bank debt, private placements of subordinated debt, and public or private sales of additional equity. However, there are currently no plans to issue such securities.

The table below presents our contractual obligations at October 31, 2003 as well as payment obligations over the next five years:

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123” (“SFAS 148”). This statement provides alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim

financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Presently, we account for stock-based employee compensation under an alternative to the fair-value method allowed by SFAS 123. Under this alternative method, we are only required to disclose the impact of issued stock options as if the expense had been recorded in the financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. In particular, this statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying instrument to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. The adoption of SFAS 149 is not expected to have a material impact on our operating results, financial position, or cash flows.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”) was issued in May 2003. This Statement establishes standards for how certain financial instruments with characteristics of both liabilities and equity are classified and measured. It requires that many financial instruments previously classified as equity now be classified as a liability (or an asset in some circumstances). These financial instruments are as follows: A financial instrument issued in the form of shares that is mandatorily redeemable — that embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur; a financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets; a financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following: a) a fixed monetary amount known at inception, for example, a payable settleable with a variable number of equity shares; b) variations in something other than the fair value of equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of equity shares; c) variations inversely related to changes in the fair value of equity shares, for example, a written put option that could be net share settled. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material effect on our operating results, financial position, or cash flows.

We elected to early adopt SFAS 142, “Goodwill and Other Intangible Assets” on November 1, 2001. Under SFAS 142, goodwill recorded as a part of a business combination is no longer amortized, but instead will be subject to at least an annual assessment for impairment by applying a fair-value-based test. As required by the new standard, we conducted an initial fair-value-based goodwill impairment test to determine if the carrying value of the goodwill on their balance sheet is impaired. To assist us in our initial fair-value assessment, we engaged an independent valuation consultant. The results of our assessment indicated that no impairment existed in the value of recorded goodwill on our books as of November 1, 2001. Additional impairment tests have been conducted by us shortly after the close of our fiscal year on both October 31, 2003 and 2002. The results of each of these appraisals indicated that the fair value of our reporting units in which goodwill is associated was higher than their respective carrying values on the balance sheet. Therefore no impairment loss was recognized. An annual impairment test will be conducted in future periods shortly after the close of our fiscal year. The adoption of SFAS 142 resulted in a reduction to our amortization expense of approximately $1.6 million per year.

The goodwill for tax purposes associated with the acquisition of UST exceeded the goodwill recorded on the financial statements by $1,462,000. We are reducing the goodwill recorded on the financial statements for the tax effect and the “tax-on-tax” effect of the $1,462,000 basis difference over a 15-year period. Accrued income taxes and deferred tax liabilities are being reduced as well. We reduced the carrying value of goodwill by $55,576 and $162,094 for the impact of the basis difference for the years ended October 31, 2003 and 2002, respectively.

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 significant judgment about future events that affect the amounts reported throughout our financial statements. Actual events could unfold quite differently than our previous judgments had predicted. Therefore the estimates and assumptions inherent in the financial statements included in this report could be materially different once those actual events are known. 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 sales of equipment based on shipment, which is generally easily determined. Revenues from installation and service activities are recognized based upon completion of the activity and customer acceptance, which sometimes requires judgment on our part. Revenues from maintenance contracts are recognized ratably over the term of the underlying contract.

Collectibility of Accounts Receivable. We must make judgments about the collectibility 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 which we believe will ultimately become uncollectible. Late in fiscal 2002, we reduced our estimated allowance for bad debts by $700,000 because of better than expected collection results. There was no such adjustment made during fiscal 2003. 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. In the second half of fiscal 2002, we recorded increases to our provision for excess and obsolete inventories of approximately $962,000 reflecting our judgment that our provision was understated at that time. This amount was recorded as an increase to systems cost of goods sold. While there were additions to the reserve and write-offs of worthless items in fiscal 2003, there was not a similarly large adjustment made as in fiscal 2002.

Goodwill and Other Long-lived Assets. We have a significant amount of goodwill on our balance sheet resulting from the acquisitions made in fiscal 2000 and 2001. As required by generally accepted accounting principles, we conduct an annual goodwill impairment review immediately after the completion of the fiscal year to determine the fair value of our reporting units. In fiscal years 2002 and 2001, we engaged an independent valuation consultant to assist us in this review. The results of management’s assessment indicated that no impairment existed in the value of recorded goodwill on our books as of November 1, 2001 or October 31, 2002. To make this assessment in fiscal 2003, we prepared a long-term forecast of the operating results and cash flows associated with the major reporting units of our business. We prepared this forecast in order to determine the net discounted cash flows associated with each of these units. We then compared the value of the discounted cash flows, less bank debt, to the book value of each of those units. Based on our work in this area, we determined that the fair value, based on the discounted cash flows, was greater than our carrying value and therefore no impairment has occurred. There is a great deal of judgment involved in making this assessment including the growth rates of our various business lines, gross margins, operating margins, discount rates, and the capital expenditures needed to support the projected growth in revenues.

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.

Accruals for Contractual Obligations and Contingent Liabilities. On products manufactured 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 addition, from time-to-time we are a party to threatened litigation or actual litigation in the normal course of business. 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.

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

Our business is adversely affected by unfavorable economic conditions in the United States and, in particular, market conditions for telecommunications and networking equipment and services.

Our business is directly affected by capital spending on technology equipment in the U.S. Since April 2001, the U.S. economy has been weak and most companies have significantly curtailed or even frozen their capital spending in general, and communications equipment in particular. It is likely that our operating profits will not improve dramatically until this macroeconomic trend also improves.

In the short-term, our business remains heavily dependent upon Avaya, our primary supplier of communications equipment for resale. Also, our long-term strategy includes continued commitment to the Avaya product line.

Although we have recently added Nortel Networks equipment to our product line, we do not expect sales of Nortel Networks products and services to be a material portion of our revenues until late fiscal 2004. Consequently, in the near term, our financial results will continue to be heavily dependent upon the quality and reputation of Avaya’s products. As such, our success in this market will continue to depend heavily upon Avaya’s ability to develop its products on a timely basis and compete effectively with other manufacturers’ products in this market. From a longer-term perspective, we expect the Avaya product line to always be a material part of our business and we have no plans to diminish our Avaya related efforts in any way. Therefore, we expect to always be dependent to some degree on Avaya as a significant supplier of the equipment that we resell.

Avaya frequently changes the incentive programs offered to their business partners. Such changes had a detrimental effect on our fiscal 2003 results and could do so again in the future.

Avaya, like many major manufacturers, provides various financial incentive programs to support the advertising and sale of its products. We receive substantial rebates through these common incentive programs to offset both costs of goods sold and selling expenses. We also receive commissions from Avaya to sell their maintenance contracts. These amounts are material to our operating results. Avaya has changed several of these programs in fiscal 2003. As a result of these changes, we received less incentive compensation in fiscal 2003 than we did in fiscal 2002. Avaya may change the incentive programs again in fiscal 2004 or we may not qualify for incentives at the same level in fiscal 2004 as we did in fiscal 2003. It is possible that such changes could have a material, adverse impact on our operating results.

If Avaya chose to reduce or eliminate its “Business Partner” program, our revenues would likely be significantly lower.

Revenues earned from customers in which we “partner” with Avaya through its “Business Partner” program (see “Marketing” under ITEM 1. BUSINESS, above) are a significant portion of our overall revenues. Therefore, our near-term financial results are dependent upon Avaya continuing this program, and upon our ability to maintain our status with Avaya as one of a few favored Business Partners.

We are investing significant resources to add Nortel Networks products and services to our product line and our efforts may not produce satisfactory results. Our current Nortel Networks expertise is isolated in a few individuals.

To extend our market reach and diversify our reliance on Avaya, we have added the Nortel Networks product line to our business. We are investing significant resources in the hiring and training of personnel to sell, design, install and maintain Nortel Networks products. While we believe that revenues derived from the sale of Nortel Networks systems and services will be a material part of our operating results in the future, it may take longer than we expect or this effort may not be successful at all. Furthermore, our current expertise in Nortel Networks products is concentrated in a few individuals, the loss of any of which could result in a significant setback in our ability to grow our Nortel Networks business.

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

We are selling a variety of new, highly complex products that incorporate leading-edge technology, including both hardware and software. The early versions of these products, which we are selling currently, can contain software “bugs” and other defects that can cause the products to not function as intended. We will likely be dependent upon Avaya to fix these problems as they occur. An inability of Avaya to correct these problems quickly could result in damage to our reputation, reduced revenues, reduced customer satisfaction, and delays in payments from customers for products purchased.

We are connecting our products to our customers’ computer networks and problems with the implementation of these products could cause disruption to our customers’ entire operations.

Unlike traditional, stand-alone voice systems, our new products typically are connected to our customers’ existing local and wide area networks. While we believe the risk of our products disrupting other traffic or operations on these networks is low, these products are new and unforeseen problems may occur, which could cause significant disruption to our customers’ operations. These disruptions, in turn, could result in reduced customer satisfaction, delays in payments from customers for products purchased, damage to our reputation, and even reduced revenues.

Our gross margins are impacted 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 as we make 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 Avaya, Inc., Hitachi Telecom, (USA), Inc., and Nortel Networks. We are a major dealer for Avaya and Hitachi and consider our relationship with both to be good. Nevertheless, if our strategic relationship with these 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 structure provided in the dealer agreements. Failure to meet these requirements could cause material, adverse consequences to our gross margins and overall operating results.

Our growth and ability to meet customer demand also depends in part on our capability to obtain timely deliveries of parts from suppliers. Both Avaya and Nortel Networks utilize a two-tier distribution model in which a few third party companies (super distributors) distribute their products to their respective dealer communities. In the case of one such distributor, they distribute both Avaya and Nortel Networks products. The limited amount of distribution available for each of these product lines increases our risks of interruptions in the supply of products in the future.

The success of our business depends significantly upon our ability to retain and recruit 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 telecommunications industry is typically intense, although the current economic conditions have temporarily eased some of this pressure. As we have transformed our company into an integrated communications solutions provider, we have invested heavily the in the hiring and training of personnel to sell and service our new products and service offerings. If we are unable to retain our skilled employees or to hire additional qualified personnel as needed, it could adversely impact our ability to implement our strategies efficiently and effectively.

We are faced with intense competition and rapidly changing technologies in the industry and market in which we operate.

The market for our products and services is highly competitive and subject to rapidly changing technologies. As the industry itself evolves and new technologies and products are introduced into the marketplace, new participants enter the market and existing competitors seek to strengthen their positions and expand their product/service offerings. There has been a trend toward industry consolidation, which can lead to the creation of stronger competitors who may be better able to compete as a sole-source vendor for customers. While we believe that through the expansion and transformation of 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.

We might have to record a significant goodwill impairment loss in the event our business were to suffer a severe decline.

Under SFAS 142, we are required to evaluate the fair value of each of our reporting units annually and determine if the fair value is less than the carrying value of those reporting units, and if so, an impairment loss is recorded in our statement of operations. The determination of fair value is a highly subjective exercise and can produce very different results based on the assumptions used and methodologies employed. It is likely that if our financial results were to decline substantially and if macroeconomic conditions eroded, we would have to record a non-cash impairment loss in our statement of operations. The amount of such impairment is impossible to predict, but would likely be very material to our operating results and could represent a significant portion of our shareholders’ equity.

The successful completion of the upgrade to our technology infrastructure and information systems is critical to our ability to effectively and efficiently operate our business in the future. Also, implementation of the system will significantly increase our depreciation expense.

Our success in navigating the current market will depend heavily upon our ability to assemble the necessary information to make informed decisions and implement those decisions quickly and effectively. For the past 30 months, we have been working on a major upgrade to our technology infrastructure and information systems. This upgrade will result in a consolidation from four critical legacy systems to one. Due to constraints that we have imposed on capital spending, we have purposely slowed down the development of this system. Furthermore, at our current revenue and activity levels, conversion to this new system is not critical to our near-term success. However, we believe it is prudent to proceed with the conversion while our revenues are at these lower levels in anticipation of future growth. While we are taking great care to properly plan this implementation and to test the solution fully prior to the conversion, there can be no guarantees given that the conversion will not disrupt our operations. In addition, at the time we place the new information system into service, we will begin depreciating our investment in the system. This depreciation will result in a pre-tax, non-cash charge to our earnings of approximately $240,000 per quarter based on the $6.7 million currently invested in this project.

We believe that our current business model would support a target operating margin of 8%. This target assumes that we can: 1) generate significantly higher revenues; 2) maintain our gross margins; and 3) operate our material logistics and general and administrative functions at about the same levels as we currently do. These assumptions are not tested through past experience operating in the commercial sector of our market and may not be achievable.

Historically, our stock is not widely followed by investment analysts and is subject to price and volume trading 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 manmade problems such as computer viruses or terrorism.

Our corporate headquarters and NSC is located in northeastern Oklahoma, a region known to be part of “tornado alley”. A significant natural disaster, such as a tornado, 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, break-ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could also cause a material adverse impact on our business, operating results, and financial condition. In addition, acts of war or acts of terrorism could have a material adverse impact on our business, operating results, and financial condition. The continued threat of terrorism and heightened security and military response to this threat, or any future acts

of terrorism, may cause further disruption to our economy and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our 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 the merit of a claim, these types of claims can be time-consuming, result in costly litigation, 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 whether they infringe upon another’s proprietary rights; nor would it be practical or cost effective for us to do so. Rather, we rely on infringement indemnities given to us by the manufacturers of the equipment we distribute. 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 an infringement claim, our indemnification by the equipment manufacturer will be adequate to hold us harmless or that we will even be entitled to indemnification by the equipment manufacturer.

If any infringement or other intellectual property claim is brought against us and is successful, whether it is based upon a third party manufacturer’s equipment that we distribute, or upon 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 certain risks that are inherent in doing business, such as general industry and market conditions and growth rates, general economic and political conditions, 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.

Market risks relating to our operations result primarily from changes in interest rates. We did not use derivative financial instruments for speculative or trading purposes during the 2003 fiscal year.

Interest Rate Risk. We are subject to the risk of fluctuation in interest rates in the normal course of business due to our utilization of variable debt. Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate (“LIBOR”) (1.12% at October 31, 2003) plus 1.25 to 2.75% or the bank’s prime rate (4.0% at October 31, 2003) less 0.0% to 1.125%. In an effort to manage the risk associated with variable interest rates, in November 2001 we entered into interest rate swaps to hedge the variability of cash flows associated with variable rate interest payments, on amortizing notional amounts of $10.0 million. At October 31, 2003, the notional amount included under the interest rate swap was $6.2 million. The “pay fixed rates” under the swap agreements are 3.32%. The “receive floating rates” for the swap agreements are “1-month” LIBOR, resetting monthly. The interest rate swaps expire in November 2004. Variable rate debt outstanding at October 31, 2003, net of the swap agreements was $5.2 million. A hypothetical 10% increase in interest rates would not have a material impact on our financial position or cash flows.

We have audited the accompanying consolidated balance sheets of XETA Technologies, Inc. (an Oklahoma corporation) and subsidiaries as of October 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. 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. The consolidated financial statements of XETA Technologies, Inc. and subsidiaries for the year ended October 31, 2001, were audited by other auditors, who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated December 11, 2001.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of XETA Technologies, Inc. and subsidiaries for the year ended October 31, 2001, were audited by other auditors, who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of November 1, 2001. Our audit procedures with respect to the disclosures in Note 1 for 2001 included (i) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in that year related to goodwill, to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and the matter discussed in the following paragraph and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

As discussed above, the consolidated financial statements of XETA Technologies, Inc. and subsidiaries for the year ended October 31, 2001, were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the disclosures required by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and

Disclosures, which was adopted by the Company Partnership for the year ended October 31, 2003. Our audit procedures with respect to the disclosures in Note 1 for 2001 included (i) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing compensation expense recognized in that year under APB No. 25, Accounting for Stock Issued to Employees and the pro forma compensation expense under Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, to the Partnership’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and the matters discussed in the previous paragraph and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

The following audit report of Arthur Andersen LLP, our former independent public accountants, is a copy of the original report dated December 11, 2001 rendered by Arthur Andersen LLP on our consolidated financial statements included in our Annual Report on Form 10-K for the year ended October 31, 2001. This audit report has not been reissued by Arthur Andersen LLP since December 11, 2001 nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K. We are including this copy of the Arthur Andersen LLP audit report pursuant to Rule 2-02(e) of Regulation S-X under the Securities Act of 1933.

We have audited the accompanying consolidated balance sheets of XETA Technologies, Inc. (formerly XETA Corporation, an Oklahoma corporation) and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2001. 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 auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States.

The accompanying notes are an integral part of these consolidated balance sheets.

[Continued from above table, first column(s) repeated]


				Comprehensive			Retained
		Paid-in Capital		Loss			Earnings		Total

Balance-October 31, 2000		$	9,486,776	$	—		$	18,313,380	$	25,565,159
Stock options exercised $.001 par value			369,169		—			—		369,763
Tax benefit of stock options			1,781,867		—			—		1,781,867
Net Income			—		—			3,480,637		3,480,637

Balance-October 31, 2001			11,637,812		—			21,794,017		31,197,426
Stock options exercised $.001 par value			115,785		—			—		116,250
Tax benefit of stock options			439,432		—			—		439,432
Components of comprehensive income:
	Net income		—		—			878,239		878,239
	Unrealized gain/loss on hedge, net of tax of $71,148		—		(110,353	)		—		(110,353	)

	Total comprehensive income									767,886

Balance-October 31, 2002			12,193,029		(110,353	)		22,672,256		32,520,994
Stock options exercised $.001 par value			74,700		—			—		75,000
Tax benefit of stock options			413,952		—			—		413,952
Components of comprehensive income:
	Net income		—		—			1,557,564		1,557,564
	Unrealized gain on hedge, net of tax of $28,050		—		43,507			—		43,507

	Total comprehensive income									1,601,071

Balance-October 31, 2003		$	12,681,681	$	(66,846	)	$	24,229,820	$	34,611,017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2003

XETA Technologies, Inc. (“XETA” or the “Company”) is a leading communications integrator with sales and service locations nationwide, serving business clients in sales, consulting, engineering, project management, installation, and service support. The Company sells products which are manufactured by a variety of manufacturers including Avaya, Nortel Networks, Cisco, Hitachi, and Hewlett Packard. In addition, the Company provides XETA-manufactured call accounting systems to the hospitality industry. XETA is an Oklahoma corporation.

During fiscal 2003, U.S. Technologies Systems, Inc. (USTI) was merged into XETA for tax purposes. There was no impact on the Company’s financial statements. Formerly, USTI was a wholly-owned subsidiary of XETA, which was purchased on November 30, 1999 as part of the Company’s expansion into the commercial market. Xetacom, Inc., is a wholly-owned, but dormant, subsidiary of the Company.

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

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

The fair value of the Company’s long-term debt is estimated based on the expected current rates which would be offered to the Company for debt of the same maturities.

Equipment revenues from systems sales are recognized upon shipment of the system. Installation and service revenues are recognized upon the completion of the installation or service assignment. Service revenues earned from contractual arrangements are recognized monthly over the life of the related service agreement on a straight-line basis. The Company recognizes revenue from sales-type leases as discussed below under the caption “Lease Accounting.”

In accordance with Emerging Issues Task Force Issue 00-10, “Accounting for Shipping and Handling Fees and Costs,” 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.

The Company receives various forms of incentive payments, rebates, and negotiated price discounts from the manufacturers of the products it sells. 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. Incentive payments which are based on purchasing certain product lines exclusively from one manufacturer (“loyalty rebates”) are also recorded as a reduction in systems cost of goods sold. 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.

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 lodging 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, as required by accounting principles generally accepted in the U.S.

Interest and other income is primarily the recognition of interest income on the Company’s sales-type lease receivables and income earned on short-term cash investments. Interest income from a sales-type lease represents that portion of the aggregate payments to be received over the life of the lease, which exceeds the present value of such payments using a discount factor equal to the rate implicit in the underlying leases.

Accounts Receivable are recorded at amounts billed to customers less an allowance for doubtful accounts. The allowance for doubtful accounts is based on management’s assessment of the realizability of customers’ balances and any specific disputes. The Company recorded a reversal of the provision for doubtful accounts of $45,907 and $748,200 for the years ended October 31, 2003 and 2002, respectively, and recorded net bad debt expense of $290,000 for the year ended October 31, 2001.

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 systems 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 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 capitalized $337,000, $277,000 and $131,000 in interest costs in fiscal years 2003, 2002 and 2001, respectively.

In the past, the Company developed proprietary telecommunications products related to the lodging industry. The Company capitalized software production costs related to a product upon the establishment of technological feasibility as defined by accounting principles generally accepted in the U.S. Amortization is provided on a product-by-product basis based upon the estimated useful life of the software (generally seven years). All other research and development costs (including those related to software for which technological feasibility has not been established) are expensed as incurred. Since the Company’s expansion into the general commercial market in fiscal 1999, the Company has ceased research and development of new products for the lodging market.

The Company applies the provisions of SOP 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.” Under SOP 98-1 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, as provided under the provisions of SFAS No. 34, “Capitalization of Interest Costs,” should be capitalized after the “preliminary project stage” has been completed. Accordingly, the Company had capitalized $6.7 million and $5.9 million related to the software development as of October 31, 2003 and 2002, respectively.

The Company applies the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 requires companies to recognize all derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value.

The Company accounts for its stock-based awards granted to officers, directors and key employees using APB Opinion No. 25, Accounting for Stock Issued to Employees. Options under these plans are granted at fair market value on the date of grant and thus no compensation cost has been recorded in the financial statements. Accordingly, the Company follows fixed plan accounting. XETA applies the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (“SFAS 148”). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Presently, the Company accounts for stock-based employee compensation under the intrinsic value method, an alternative to the fair value method allowed by SFAS 123. Under this alternative method, the Company is only required to disclose the impact of issued stock options, as set forth below, as if the expense had been recorded in the financial statements.

The fair value of the options granted was estimated at the date of grant using the Modified Black-Scholes European pricing model with the following assumptions: risk free interest rate (3.42% to 5.78%), dividend yield (0.00%), expected volatility (80.50% to 86.64%), and expected life (6 years).

Several items of income and expense, including certain sales revenues under sales-type leases, are included in the financial statements in different years than they are included in the income tax returns. Deferred income taxes are recorded for the tax effect of these differences.

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. See “Unearned Service Revenue” below.

Most of the systems sold by the Company are manufactured by third parties. In these instances the Company passes on the manufacturer’s 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.

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.

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

The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and 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 tabulation of business segment information for 2003, 2002 and 2001.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” In particular, this statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying instrument to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for derivative contracts entered into after June 30, 2003. The adoption of SFAS 149 is not expected to have a material impact on the Company’s operating results, financial position, or cash flows.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”) was issued in May 2003. This Statement establishes standards for how certain financial instruments with characteristics of both liabilities and equity are classified and measured. It requires that many financial instruments previously classified as equity now be classified as a liability (or an asset in some circumstances). These financial instruments are as follows: financial instrument issued in the form of shares that is mandatorily redeemable — that embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur; a financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets; a financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following: a) a fixed monetary amount known at inception, for example, a payable settleable with a variable number of equity shares; b) variations in something other than the fair value of equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of equity shares; c) variations inversely related to changes in the fair value of equity shares, for example, a written put option that could be net share settled. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material effect on the Company’s operating results, financial position, or cash flows.

The Company elected to early adopt Financial Accounting Statement No. 142, “Goodwill and Other Intangible Assets” on November 1, 2001. Under SFAS 142, goodwill recorded as a part of a business combination is no longer amortized, but instead will be subject to at least an annual assessment for impairment by applying a fair-value-based test. As required by the new standard, the Company conducted an initial fair-value-based goodwill impairment test to determine if the carrying value of the goodwill on the balance sheet was impaired. To assist management in their initial fair-value assessment, the Company engaged an independent valuation consultant. The results of management’s assessment indicated that no impairment existed in the value of recorded goodwill on the Company’s books as of November 1, 2001. Additional impairment tests have been conducted by the Company shortly after the close of its fiscal year on both October 31, 2003 and 2002. The results of each of these appraisals indicated that the fair value of the Company’s reporting units in which goodwill is associated was higher than their respective carrying values on the balance sheet. Therefore no impairment loss was recognized. An annual impairment test will be conducted in future periods shortly after the close of the Company’s fiscal year.

The following table reconciles the impact on net income of the adoption of SFAS 142:

The goodwill for tax purposes associated with the acquisition of UST exceeded the goodwill recorded on the financial statements by $1,462,000. The Company is reducing the goodwill recorded on the financial statements for the tax effect and the “tax-on-tax” effect of the $1,462,000 basis difference over a 15-year period. Accrued income taxes and deferred tax liabilities are being reduced as well. The Company reduced the carrying value of goodwill by $55,576 and $162,094 for the impact of the basis difference for the years ended October 31, 2003 and 2002, respectively.

Aggregate amortization expense of intangible assets was $220,525 and $219,430 for the years ended October 31, 2003 and 2002, respectively, which includes $40,525 and $39,430 recorded as interest expense in the consolidated statements of operations for the years ended October 31, 2003 and 2002, respectively. The estimated aggregate amortization expense for the next five fiscal years is $114,646 for 2004; and $0 thereafter.

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

Inventories are stated at the lower of cost (first-in, first-out or weighted-average) or market and consist of the following components at October 31:

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

Income tax expense is based on pretax income. Deferred income taxes are computed using the asset-liability method in accordance with SFAS No. 109, “Accounting for 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 income tax provision for the years ending October 31, 2003, 2002 and 2001, consists of the following:

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

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:

On October 1, 2003, the Company entered into a new revolving credit and term loan agreement with a new banking institution, replacing the previous credit facility and bank syndicate. This new agreement contains three separate notes: a term loan amortizing over 36 months, a mortgage agreement amortizing over 13 years, and a $7.5 million revolving credit agreement to finance growth in working capital. Availability under the revolving line of credit is secured by trade accounts receivable and inventories. The Company had approximately $5.2 million available under the revolving line of credit at October 31, 2003. Advance rates are defined in the agreement, but are generally at the rate of 80% on qualified trade accounts receivable and 40% of qualified inventories. The revolving line of credit matures on September 29, 2004. At October 31, 2003, long-term debt consisted of the following:

Maturities of long-term debt for each of the years ended October 31, are as follows:

Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (which was 1.12% at October 31, 2003) plus 1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’s prime rate (which was 4.00% at October 31, 2003) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At October 31, 2003, the Company was paying 3.13% on the revolving line of credit borrowings, 3.12% on the term loan and 2.87% on the mortgage note. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to EBITDA, limitations on capital spending, and debt service coverage requirements. At October 31, 2003, the Company was in compliance with all of the covenants contained in the agreement.

Based on 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.

The Company has an outstanding interest rate swap in a notional amount of $6.2 million which expires in November, 2004. Under this contract, the Company pays a fixed interest rate of 3.32% and receives a variable interest payment based on one-month LIBOR rates. The Company currently pays an additional 1.25% to 2.75% above LIBOR or the bank’s prime rate (4.0% on October 31, 2003) less 0.0% to 1.125% on the various pieces of its credit facility. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 137 and SFAS 138 governs the accounting for derivative instruments such as interest rate swaps. Under the provisions of SFAS No. 133, as long as the interest rate hedge is “effective”, as defined in the standard, the Company’s interest rate swap is accounted for by recognizing an asset or liability at fair value with the offsetting entry to other comprehensive income or loss in Company’s stockholders’ equity section. Accordingly, the Company has recognized a current liability and other comprehensive loss of $66,846 at October 31, 2003. No material ineffective portion of the interest rate swap existed at October 31, 2003.

During fiscal 2000, the Company adopted a new stock option plan (2000 Plan) for officers, directors and key employees. The 2000 Plan replaces the previous 1988 Plan, which had expired. 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. Although there are exceptions, generally options that have been granted under the 2000 Plan expire 10 years from the date of grant, have 3-year cliff-vesting and are incentive stock options as defined under the applicable IRS tax rules. Options granted under the previous 1988 Plan generally vested 33 1/3% per year after a 1-year waiting period.

The Company has also granted options outside the Plan to certain officers and directors. These options generally expire ten years from the date of grant and are exercisable over the period stated in each option. The table below presents information regarding options granted outside the Plan.

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 years ended October 31, 2003, 2002, and 2001, respectively, 1,226,268 shares at an average price of $7.22; 1,001,501 shares at an average price of $8.18; and 319,900 shares at an average price of $14.26, were excluded from the calculation of earnings per share because they were antidilutive.

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. Minimum future annual payments to be received under various leases are as follows for years ending October 31,:

During fiscal 2003, 2002 and 2001, no single customer represented 10 percent or more of revenues.

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, 2003.

The majority of the Company’s systems sales are derived from sales of equipment designed and marketed by Avaya. As such, the Company is subject to the risks associated with Avaya’s financial condition, ability to continue to develop and market leading-edge technology systems, and the soundness of their long-term product strategies. A single third-party company manufactures this equipment under an outsourcing agreement with Avaya. This arrangement subjects the Company to potential shipment delays in the event of financial difficulties incurred by the manufacturer and man-made or natural disasters to the manufacturing facility. The Company purchases most of its Avaya products from a single distributor under a three-party agreement between the Company, Avaya, and the distributor. However, Avaya has several other distributors of its products and the Company believes that its distribution arrangement could be converted to another provider quickly enough so as to not to materially disrupt its business.

In June, 2003, the Company signed a dealership agreement to represent the Nortel Networks product line in the U.S.

The Company has two incentive compensation plans: one for sales professionals and one for all other employees. The bonus plan for sales professionals is based on a percentage of their “contribution”, defined as the gross profit generated less their direct and allocated sales expenses. The Company paid $224,907, $104,031, and $248,985 during 2003, 2002 and 2001, 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 management and the Board of Directors as key employees. The purpose of the EBP is to provide an incentive for senior executives to reach Company-wide targeted financial objectives and to reward key employees for leadership and excellent performance. Those targeted results were not fully achieved in fiscal 2003, 2002 or 2001; however, the Company elected to pay partial bonuses of approximately $240,000, $180,000 and $157,500, respectively.

Future minimum commitments under non-cancelable leases for office space and equipment are approximately $272,000, $86,000, $40,000, and $18,000 in fiscal years 2004 through 2008, respectively.

On August 1, 2003, the Software & Information Industry Association (“SIIA”), an association of software publishers, contacted the Company by letter and claimed that XETA had violated the Copyright Act, 17 U.S.C. § 501, et seq. by allegedly using unlicensed software in XETA’s business. SIIA made demand that the Company audit all of its computers and servers to determine whether it used both licensed and/or allegedly unlicensed software for any of SIIA’s 965 members. This audit was conducted and the Company determined that some software present on a limited number of Company computers was unlicensed. Many of these programs were located on personal computers utilized by employees for both personal and business use, or on computers that were “inherited” through the Company’s various acquisitions and were most likely loaded prior to XETA’s acquisition of these companies. Nevertheless, XETA has potential exposure to damages under the law for possessing unlicensed software and has recorded a loss contingency representing Management’s best estimate of the potential damages based upon available facts of the claim at the present time. While no assurance can be given, based upon the current status of the claim Management does not believe that the ultimate damages will exceed the current loss contingency in an amount that would materially impact the Company’s results of operations. The Company initiated settlement negotiations with SIIA which later stalled because the nature of XETA’s liability and the amount of damages due SIIA was in dispute. The Company therefore filed a declaratory judgment in the U.S. District Court for the Northern District of Oklahoma seeking a judicial determination of liability and damages. This action is still pending.

The Company has a 401(k) retirement plan (Plan). In addition to employee contributions, the Company makes discretionary matching and profit sharing contributions to the Plan based on percentages set by the Board of Directors. Contributions made by the Company to the Plan were approximately $457,000, $482,000 and $534,000 for the years ending October 31, 2003, 2002 and 2001, respectively.

The following quarterly financial data has been prepared from the financial records of the Company without an audit, and reflects all adjustments, which in the opinion of management, were of a normal, recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented.

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) 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 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.

Information relating to directors required by this Item is incorporated by reference to relevant sections under the caption “Election of Directors” in our Proxy Statement to be filed with the Securities and Exchange Commission (the “Commission”) in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

Information relating to executive officers required by this Item is included in Part I of this Report under the caption “Executive Officers of the Registrant”.

Other information required by this Item is incorporated by reference to the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance—Code of Conduct” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

Information required by this Item is incorporated by reference to the sections under the captions “Executive Compensation and Related Information,” and “Stock Performance Graph,” and to the section under the subheading “Director Compensation” under the caption “Election of Directors,” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

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 section captioned “Market for the Registrant’s Common Stock and Related Stockholder Matters.”

Other information required by this Item is incorporated by reference to the section under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

Information required by this Item is incorporated by reference to the section under the caption “Related Transactions” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

Information required by this Item is incorporated by reference to the section under the subheading “Fees and Independence” under the caption “Independent Public Accountants” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 6, 2004.

	(1)		Financial Statements - See Index to Financial Statements at Page 22 of this Form 10-K.

	(2)		Financial Statement Schedule - None.

	(3)		Exhibits – The following exhibits are included with this report or incorporated herein by reference:

(b)

We filed the following Reports on Form 8-K during the last quarter of the fiscal year covered by this report:

	1.		August 20, 2003—Item 12—Earnings Press Release

	2.		October 9, 2003—Item 5—Bank of Oklahoma Credit Agreement

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.

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.

EX-10.4 3 d11884exv10w4.htm EX-10.4 AUTHORIZED DISTRIBUTOR AGREEMENT FOR 2003 exv10w4

AGREEMENT made this 1st day of January 2003, by and between HITACHI TELECOM (USA), INC., a Delaware corporation having an office at 3617 Parkway Lane, Norcross, GA, 30092 (hereinafter referred to as “HITEL’) and XETA CORPORATION, a corporation having an office at 1814 West Tacoma, Broken Arrow, OK 74012 (hereinafter referred to as “DISTRIBUTOR”).

WHEREAS, HITEL is engaged in the business, among other things, of selling communication systems, materials and parts and licensing related application and other software, all as described in Exhibit A attached hereto (hereinafter referred to as “PRODUCTS”); and

WHEREAS, DISTRIBUTOR desires to engage in the sale, installation and maintenance of PRODUCTS, subject to the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual obligations set forth herein, the parties hereto agree as follows:

This Agreement shall constitute an overriding master agreement fully setting forth the rights and responsibilities of the parties with respect to the subject matter hereof, and all sales and shipments of PRODUCTS shall be made on the terms and conditions set forth herein. The terms and conditions of this Agreement shall supersede the terms and conditions of any purchase order or other document submitted by DISTRIBUTOR, and HITEL shall not in any event be bound by the terms and conditions of DISTRIBUTOR’s purchase order forms or any other documents submitted by DISTRIBUTOR. Any conflicting or additional provisions on purchase orders issued by DISTRIBUTOR to HITEL (specifically including, without limitation, all terms and conditions printed on back of such documents), or on any acceptance, confirmation, acknowledgment or similar forms issued by HITEL shall be inapplicable to such agreements to purchase and sell, unless specifically and expressly agreed to in a single writing signed by both parties. DISTRIBUTOR will issue an individual Purchase Order for each system ordered.

Subject to the terms and conditions hereinafter provided, HITEL hereby appoints DISTRIBUTOR and DISTRIBUTOR hereby accepts appointment by HITEL as a non-exclusive distributor of PRODUCTS for resale to end users as specified in this Agreement including its Exhibits.

The term PRODUCTS, as used herein, shall refer only to PRODUCTS as identified in Exhibit A, and shall include and refers collectively to the specified HITEL PRODUCTS and Supplier PRODUCTS as defined in Exhibit A.

The term of the Agreement shall commence on January 1, 2003 and shall continue until December 31, 2003. At the written request of either party given at least ninety (90) days prior to the expiration of the Agreement, both parties may negotiate in good faith and for a reasonable period for an extension of the term of this Agreement. Expiration shall not affect any liabilities occurring prior thereto, including, but not limited to, obligations with respect to payment and delivery in connection with orders accepted prior to expiration.

DISTRIBUTOR shall use its best efforts to maintain a sales and service staff adequate to support effectively the sale, service and reputation of PRODUCTS in the geographic area(s) specified in Exhibit B. It is the expectation of HITEL and DISTRIBUTOR that DISTRIBUTOR will purchase and take delivery of new systems, upgrade orders, parts and subcomponents to meet the minimum purchase volume(s) for the contract year, as specified in Exhibit C. DISTRIBUTOR’s failure to meet the specified minimum purchase volume(s) shall entitle HITEL to adjustments as described in Exhibit C in addition to all other remedies available to HITEL at law.

(b) DISTRIBUTOR may, from time to time, request HITEL to provide on-site sales support assistance to DISTRIBUTOR for pre-sale activities. Subject to available manpower and at HITEL’s sole discretion, HITEL may provide such services. This sales support assistance may be provided by HITEL or its assignee, designee, subcontractor or the like from a HITEL location, DISTRIBUTOR location or on-site at the customer location and shall be referred to as sales support. Whenever possible, DISTRIBUTOR shall request sales support from HITEL no less than fifteen (15) days prior to the date upon which DISTRIBUTOR would like such service to be performed. Shorter notice may result in increased travel costs, which HITEL, in its sole discretion, may require DISTRIBUTOR to pay in exchange for the support. Such charge must be negotiated and agreed between both parties before the date of the Sales Support.

(c) DISTRIBUTOR shall be responsible for the application, installation, repair and maintenance of PRODUCTS in such a manner as to further effectively promote the sale and use of PRODUCTS. DISTRIBUTOR shall comply with all applicable laws, ordinances and regulations of all applicable federal, state and local jurisdictions.

(d) DISTRIBUTOR agrees that sales of PRODUCTS will be to end users of PRODUCTS and DISTRIBUTOR will not sell PRODUCTS to distributors, dealers, sub-dealers or the like for the purpose of resale by such party(-ies) to end users unless agreed to in writing by HITEL, prior to any such sale to such distributor, dealer, sub-dealer or the like.

Within thirty (30) days from the signing of this Agreement, DISTRIBUTOR shall inform HITEL of DISTRIBUTOR’S public business plan for PRODUCT. DISTRIBUTOR shall also, (i) provide quarterly updates to said annual business plan no later than two (2) weeks before the beginning of each calendar quarter, (ii) keep HITEL informed of its activities relating to PRODUCTS, (iii) furnish HITEL with information relative to the number of proposals offered, the progress of potential sales orders and the reason for lost sale(s) and (iv) on a quarterly basis, furnish HITEL with information summarizing significant marketing activities, trends and conditions in DISTRIBUTOR’s Territory.

From time to time, HITEL may advise DISTRIBUTOR of its public business plan for PRODUCT.

(b) DISTRIBUTOR shall provide to HITEL a rolling forecast of PRODUCT to be delivered. The forecast shall be provided by the 25th day of each month and cover the DISTRIBUTOR’S expected PRODUCT order activity for the three (3) months immediately following the date of the forecast. The monthly forecast shall be in the format as provided in Exhibit D. DISTRIBUTOR understands that the completion and accuracy of such forecasts may affect its ability and priority to obtain PRODUCT within the otherwise agreed delivery intervals.

(a) DISTRIBUTOR shall obtain PRODUCTS by placing firm orders on HITEL, which orders shall include a description and specification of PRODUCTS, quantities, prices, a “requested” delivery schedule, and the name and location of the end user (in the case of system orders).

(b) No order shall be binding upon HITEL unless and until it has been accepted by HITEL in writing. HITEL shall have the right to accept or reject any purchase order, and if HITEL rejects any purchase order, DISTRIBUTOR hereby agrees to indemnify HITEL and hold HITEL harmless from any claim resulting from HITEL’s refusal to accept purchase orders from DISTRIBUTOR. HITEL’s acceptance of purchase orders shall not be unreasonably withheld.

(c) HITEL may delay or stop any shipment to DISTRIBUTOR if DISTRIBUTOR fails to pay when due amounts owed to HITEL after demand for payment has been made by HITEL (in which case DISTRIBUTOR shall be charged for storage and cancellation at normal rates and at HITEL’s discretion) or if HITEL, in its reasonable discretion, shall have reservations concerning DISTRIBUTOR’S financial condition and DISTRIBUTOR fails to provide HITEL with adequate assurances of performance after demand by HITEL.

(d) Except for PRODUCTS covered by accepted purchase orders, HITEL may, at any time and from time to time, upon ninety (90) days notice to DISTRIBUTOR in case of HITEL PRODUCTS and thirty (30) days notice in case of Supplier PRODUCTS, or sooner if accepted by DISTRIBUTOR, suspend or discontinue the sale of any PRODUCTS of any type or model and substitute a new type or model, change the design or make improvements to PRODUCTS, eliminate any type or model, or completely discontinue the importation or sale of PRODUCTS, without any liability on its part to DISTRIBUTOR. HITEL shall not have any obligation to furnish or install any change, substitution or improvement on any PRODUCTS previously sold to DISTRIBUTOR whether previously delivered or undelivered and covered by an accepted purchase order. HITEL will provide to DISTRIBUTOR, on a timely basis, all engineering change notices issued. Upgrades, Spare Parts, sub-components and RMA orders will be provided at the current list prices minus applicable hardware discounts as set forth in Exhibit C.

(e) A delivery schedule shall be established by HITEL for each order submitted by DISTRIBUTOR and accepted by HITEL within ten (10) business days of acceptance by HITEL. Delivery may be made in installments. Supplier PRODUCTS may be drop-shipped from third party supplier locations. Default or delay by HITEL in delivering or shipping the whole or any part or installment of any order shall not affect any other portion thereof, nor shall it affect any other order between the parties. DISTRIBUTOR may cancel the order without penalty if HITEL

is unable to ship the complete order (or a sufficient part or installment of the order so that PRODUCTS may be resold) within sixty (60) days of the delivery schedule established by HITEL at the time of acceptance of such order.

(f) Invoices for partial or installment deliveries shall be issued at the time of shipment of such partial order or installment, except where the systems delivered are incomplete to the point of being unsuitable for resale.

(g) Except as provided in Subsection (e) hereof, DISTRIBUTOR shall not have the right to cancel, reschedule, change or modify all or any portion or installment of any order for PRODUCT covered by this Agreement without HITEL’s prior written consent.

(h) DISTRIBUTOR may, pursuant to the terms and conditions of this Agreement, order and HITEL shall provide spare parts, software and third level technical support as required for the maintenance of HITEL PRODUCT for a period of ten (10) years from the ship date of HITEL PRODUCT, provided that DISTRIBUTOR is, at all times, in full compliance with this Agreement and HITEL has not terminated this Agreement due to DISTRIBUTOR’s material breach. HITEL shall not have any such corresponding obligations with respect to Supplier PRODUCT.

(i) The acceptance by HITEL of any purchase order from DISTRIBUTOR or the sale of any PRODUCTS by HITEL to DISTRIBUTOR after the termination of this Agreement shall not be construed as a renewal or an extension, or as a waiver of termination of this Agreement, but in the absence of a new written Agreement, all such transactions shall be governed by the provisions of this Agreement.

The prices charged to DISTRIBUTOR shall be according to a written or “Configurator” quote provided to DISTRIBUTOR for each system, discounted according to the schedule shown in Exhibit C. Each quote shall be valid for ninety (90) days from the date of such quotation. No verbal quotation or verbal confirmation given to DISTRIBUTOR shall be binding upon HITEL unless it is confirmed in writing by HITEL.

(a) DISTRIBUTOR shall be responsible for the installation, timely maintenance and service to users of PRODUCTS; and shall perform such responsibilities in a satisfactory manner to maintain and enhance HITEL’s and the PRODUCTS’ respective good name and reputations. Maintenance, services and consultation as provided by DISTRIBUTOR technicians at customer locations are referred to as first level support. Maintenance, services and consultation as provided by DISTRIBUTOR technical experts at a centralized location providing support to the first level support technicians are referred to as second level support. Both first and second level support is the responsibility of DISTRIBUTOR. For this purpose, DISTRIBUTOR shall maintain or have contracted with a number of competent Hitachi Certified service technicians, as defined in Exhibit B, who are readily accessible to end users. DISTRIBUTOR shall, at its own

expense, maintain the technical level of its staff to provide PRODUCT technical support in performing all of its activities under the Agreement. DISTRIBUTOR shall also maintain an adequate inventory of parts and equipment, in accordance with Exhibit G hereof, to maintain satisfactory operation of PRODUCTS being used by its customers, without relying upon urgent supplies from HITEL.

(b) DISTRIBUTOR acknowledges that failure to fulfill its obligations under subparagraph (a) could irreparably damage the business reputation of PRODUCTS, and that HITEL, upon fifteen (15) days notice (one (1) day notice if system is not processing calls), may take corrective measures as may in HITEL’s discretion be required, holding DISTRIBUTOR fully responsible for cost and expenses thereof, if DISTRIBUTOR has not initiated appropriate corrective measures within the fifteen (15) days (one (1) day if system is not processing calls), following notice by HITEL.

(c) HITEL shall have access to customers at any time to review DISTRIBUTOR’S installation and maintenance performance and degree of customer satisfaction, and DISTRIBUTOR shall take such remedial action and/or make such improvements in service as may be reasonably requested by HITEL in writing. HITEL may request references from customers in connection with the promotion of HITEL sales. HITEL, in its sole discretion: may provide customers with PRODUCT or system passwords; or, upon the written request of customer(s), may change PRODUCT or system password(s) without notice to DISTRIBUTOR of the new password(s).

(d) Within one hundred twenty (120) days of cutover, HITEL or its assignee may perform a technical audit to determine if the PRODUCT installation meets HITEL’s published standards as defined in current system documentation. If installation of the PRODUCT does not meet such standards, HITEL may require the DISTRIBUTOR to take corrective action to meet HITEL’s standards. If DISTRIBUTOR fails to take such action within thirty (30) days, HITEL may take such action and invoice DISTRIBUTOR at published technical support rates. Failure of DISTRIBUTOR to take such actions is cause for HITEL to terminate this Agreement.

(e) DISTRIBUTOR may request on-site Technical Support from HITEL by submitting written purchase orders therefore to HITEL. Subject to its available manpower and in HITEL’s reasonable discretion, HITEL may agree to provide such on-site Technical Support assistance to DISTRIBUTOR for installation and/or troubleshooting of systems. Any and all such on-site Technical Support shall be provided by HITEL at the rates set forth in HITEL Price Guides at the time HITEL accepts the purchase order(s) for such Technical Support, and shall include separate charges for the use of test equipment and all travel and living expenses related to HITEL’s provision of such Technical Support. This activity, as provided by HITEL or its assignee either from a HITEL location or at a DISTRIBUTOR or customer location (on-site), is referred to as third level support. The rate shall be subject to change upon ninety (90) days prior written notice. This charge will be waived if: (i) the system is in-warranty and on-site third level support is initiated by HITEL; or (ii) the system is out of warranty, the on-site third level support is initiated by DISTRIBUTOR and the problem was found to be caused by in-warranty PRODUCT. Case (i) does not require a purchase order. DISTRIBUTOR shall make every reasonable effort to inform HITEL two (2) weeks in advance when on-site third level support is requested, and such support may be limited by HITEL as it may deem necessary in view of its available manpower.

(f) Subject to its available manpower, HITEL Technical Support engineers shall give telephone assistance for PRODUCTS. Telephone assistance for out of warranty PRODUCTS will be billed at the rates set forth in HITEL Price Guides with time charged to the nearest one-half (1/2) hour. If HITEL determines that DISTRIBUTOR’s request for third level support should not be included in third level support, including, but not limited to, problems that are related to installation, configuration, integration, third party repair or unintended usage, DISTRIBUTOR will be billed as described above regardless of warranty status. Rates are subject to change upon ninety (90) days prior written notice.

(g) HITEL will only accept calls for assistance from HITEL Certified Technicians currently registered with HITEL by an Authorized DISTRIBUTOR and only if the system in question is equipped with Remote Maintenance (or the Technician has a portable Remote Maintenance unit available on site) and the technician has ready access to spare parts.

(h) Nothing contained in this Section 10, or otherwise in this Agreement, shall be construed as obligating HITEL, in any way, to take any action with respect to any customer of DISTRIBUTOR.

Technical courses will be conducted for DISTRIBUTOR’s technicians at HITEL facilities in Norcross, Georgia. Training shall be approximately two weeks for Technicians. All pertinent, required documentation will be furnished by HITEL to attendees.

The training will be conducted by HITEL employee(s) who will be dedicated to this function whenever a class is in progress. The training will be conducted in a suitable area reserved for this purpose.

DISTRIBUTOR shall bear all salary, transportation and other expenses for its personnel in addition to tuition and material charges set forth in HITEL Price Guides. HITEL will not release a system for shipment until DISTRIBUTOR has had a minimum number (as defined in Exhibit B) of Technicians complete the initial training required to receive HITEL certification and DISTRIBUTOR provides written authorization for technician’s call privilege level to HITEL. A purchase order for a training class shall be issued by DISTRIBUTOR listing the Technician’s name, the geographical area to be served by the technician and charges for the class.

Risk of loss and/or damage shall pass to DISTRIBUTOR upon delivery by HITEL, at HITEL’s plant F.C.A. Norcross, Georgia (Incoterms 2000) for HITEL PRODUCTS and Supplier PRODUCTS shipped from HITEL’s Norcross facilities, and F.C.A. HITEL’s supplier’s shipping location (Incoterms 2000) for Supplier PRODUCT that is drop-shipped or otherwise not shipped from HITEL’s Norcross location. The issuance of a clean bill of lading by the railroad or trucker or the issuance of a clean receipt by the freight agent designated by DISTRIBUTOR, upon such delivery, shall constitute conclusive proof that the package(s) containing PRODUCTS were not damaged at the time of delivery to DISTRIBUTOR and that the number of packages delivered were those set forth on such bill of lading or receipt. Any claim for shortages or damage to PRODUCTS shall be made by DISTRIBUTOR to HITEL (2002 says and, except for those claims covered by the warranty hereinafter set forth, shall be made by DISTRIBUTOR to HITEL) within thirty (30) days after delivery by the railroad, trucker or freight agent, as the case

may be. Such claims shall be in writing, shall specify the items under claim and the nature of the damages, and all other details as may be reasonably required by HITEL to consider such claim. HITEL or its representatives shall have the right to inspect and/or test the PRODUCTS covered by such claim. If, in the reasonable opinion of HITEL, such claim is justified, HITEL shall have the right, at its option, to promptly repair or replace the PRODUCTS or part, or issue a credit for the invoice value thereof.

HITEL shall not under any circumstances or for any cause, be liable for any actual, consequential, special or other damages or loss of use of PRODUCTS. If DISTRIBUTOR does not make its claim within the time above provided, it shall be deemed to have unconditionally accepted delivery of the PRODUCTS.

DISTRIBUTOR understands that the PRODUCTS are not immune from unauthorized use or fraudulent intrusions and that third parties may commit various forms of toll fraud using the PRODUCTS as conduits. HITEL hereby expressly disclaims that the PRODUCTS have been designed to completely prevent or are otherwise immune from such unauthorized uses and toll fraud. DISTRIBUTOR shall notify and warn each of its customers, verbally and in writing, of the possibility that the PRODUCTS may be fraudulently used including, but not limited to, unauthorized or fraudulent use of the PRODUCT’s interconnection to long distance services, 1OXXX and 101XXXX calling, external call forwarding, trunk to trunk calling, voice mail and DISA. In no event shall HITEL be liable to DISTRIBUTOR, DISTRIBUTOR’s customers or subsequent purchasers or users of PRODUCTS for any claim relating in any way to unauthorized use of the PRODUCT or toll fraud.

HITEL warrants to DISTRIBUTOR alone, that PRODUCTS sold to DISTRIBUTOR pursuant to this Agreement will be delivered free from defects in material and workmanship under normal and proper use and will materially conform to HlTEl’s specifications at the time of delivery to DISTRIBUTOR, with the term of said warranty being fifteen (15) months for all PRODUCTS, except MAXimilian Software, from the date of delivery to DISTRIBUTOR provided that:

(b) DISTRIBUTOR provides HITEL with the means and access to examine and test the PRODUCTS within a reasonable period of time, and at DISTRIBUTOR’s cost; and

(c) HITEL’s examination of such items shall disclose to its reasonable satisfaction that the claimed defect in the PRODUCTS constitutes a breach of the above warranty and was not caused by such occurrences as misuse, abuse, neglect, improper handling, installation, operation, maintenance, unauthorized repair, alteration or accident. Modification of PRODUCTS by DISTRIBUTOR or at DISTRIBUTOR’s direction, unless specifically authorized in writing by HITEL, shall invalidate the above warranty; and

(d) DISTRIBUTOR complies in all respects with the procedures for implementing HITEL’s warranty protections set forth in HITEL’s Return Material Authorization (RMA) Policy for HITEL Products in Exhibit G hereof.

This Limited Warranty does not cover any items normally consumed in operation of Products (such as lamps and fuses) or cosmetic damage, and does not cover the MAXimilian Software PRODUCT.

HITEL’s liability under this warranty is limited to repairing, replacing or issuing a credit in the amount of the unit Agreement price, at its election, for any such claim, Any repair or replacement shall not extend the warranty period, except as provided in Exhibit G, hereof. If HITEL elects to replace a defective PRODUCT, HITEL’s obligation is limited to making a replacement PRODUCT available to DISTRIBUTOR F.C.A. HITEL’s warehouse, Norcross, Georgia, and does not include such items as the provision of any labor involved or connected therewith, such as that which is required to diagnose trouble, service faults, etc., or removing or installing any PRODUCT, responsibility for any transportation expense other than delivery to the F.C.A. point, and any taxes, duties or the like in connection therewith. HITEL may replace PRODUCT hereunder with new or refurbished parts or PRODUCTS, in HITEL’s discretion.

DISCLAIMER OF WARRANTY. THIS WARRANTY IS EXTENDED TO DISTRIBUTOR ONLY AND IS NOT TRANSFERABLE TO SUBSEQUENT PURCHASERS OR USERS OF PRODUCTS. THIS WARRANTY IS GIVEN IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL HITEL BE LIABLE FOR DAMAGES IN EXCESS OF THE VALUE OF THE DEFECTIVE PRODUCT(S) OR PART, NOR SHALL HITEL BE LIABLE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, LOSS OF PROFITS OF ANY KIND OR FOR LOSS OF USE OF THE PRODUCTS.

HITEL agrees to perform repair service on HITEL PRODUCTS returned by DISTRIBUTOR to HITEL’s designated repair facility during the term of this Agreement and for a period of three (3) years after the last delivery of HITEL PRODUCT under this Agreement. All HITEL PRODUCT returned by DISTRIBUTOR to HITEL for repair will be repaired only if deemed repairable in HITELs sole discretion. DISTRIBUTOR will follow the procedure in Exhibit G (RMA) Policy, which may be changed at HITEL’s sole discretion) for the return of HITEL PRODUCT for repair. Repaired HITEL PRODUCT will be shipped to DISTRIBUTOR within thirty (30) days (unless specified differently in said Exhibit G) after receipt of HITEL PRODUCT at HITEL’s designated repair facility. DISTRIBUTOR will be billed for such repair at HITEL’s current prices in effect at the time DISTRIBUTOR presents HITEL PRODUCT for repair. A copy of HITEL’s current repair price list is attached to Exhibit G. In no event will HITEL be liable for data stored on HITEL PRODUCTS presented for repair.

The repair and return procedure for handling repairs of HITEL PRODUCTS both in and out of warranty (Sections—14 and 15) is set forth in HITEL’s Return Material Authorization (RMA) Policy for HITEL PRODUCTS set forth in Exhibit G. The RMA Policy is available to DISTRIBUTOR upon request and may be changed by HITEL upon thirty (30) days written notice by HITEL. Repair and return of Supplier PRODUCTS is handled directly between DISTRIBUTOR and Supplier.

(a) Unless otherwise agreed in writing, HITEL’s or its suppliers’ respective factory inspection shall be final.

(b) Should any specific inspection or test be requested by DISTRIBUTOR, all expenses therefor shall be at DISTRIBUTOR’S expense and the delivery period and validity period (if any) shall be adjusted accordingly.

All PRODUCTS sold to DISTRIBUTOR under this Agreement which bear the HITEL or Hitachi name and/or logo or the name and/or logo of a HITEL supplier, shall not have such name or logo removed nor defaced by DISTRIBUTOR. The placing of the DISTRIBUTOR logo on PRODUCTS sold under this Agreement is permitted only upon the prior written consent of HITEL.

Any cause beyond the reasonable control of HITEL or HITEL’s suppliers, including but not limited to sabotage, fires, floods, strikes, riots, labor difficulties, insurrection, war, priorities created at the request or for the benefit of, directly or indirectly, any government authority, agency or agencies thereof, act of God, breakdown of machinery or equipment, or inability to obtain material, labor, equipment or transportation, or any failure by any of HITEL’s suppliers to deliver or supply PRODUCT, parts or components which results in HITEL’s failure to perform in accordance with the terms hereof, shall not give rise to any liability or damages on account of such delay or nonperformance, but shall be deemed an excuse for HITEL’s performance. In any such event, HITEL shall have the right, at its election and without any liability on it to DISTRIBUTOR to (a) cancel all or any portion of this Agreement, or (b) perform the Agreement as so restricted or modified to the extent determined by HITEL in its sole and absolute discretion or (c) perform the Agreement within a reasonable time after the causes for nonperformance or delay have terminated.

HITEL may, as it deems necessary and desirable, advertise PRODUCTS on a national or local basis. HITEL may list DISTRIBUTOR’s name, address and telephone numbers in its advertising and promotional materials, at its discretion, for as long as this Agreement is in force.

DISTRIBUTOR does not have and is not granted any right or interest in or to the name “HITACHI”, “HITACHI TELECOM (USA), INC.”, “HITEL’ or any trademark or trade names owned, used or to be owned or used by HITEL or HITACHI, LTD. or any of HITEL’s suppliers. Any use of such names, trade names or trademarks by DISTRIBUTOR shall be only upon the prior written consent of HITEL and for HITEL’s exclusive benefit. Under no circumstances shall DISTRIBUTOR register any such name, trademarks or trade name. DISTRIBUTOR further agrees not to contest or dispute, directly or indirectly, HITEL’s or HITACHI, LTD.’s proprietary interest in or ownership of the name “HITACHI”, or any trade names owned or used by HITACHI, LTD. or HITEL or any of HITEL’s suppliers. DISTRIBUTOR shall not remove,

obliterate, alter or cover the trademark or name “HITACHI” on any PRODUCT. However, DISTRIBUTOR may place on HITEL PRODUCTS its own name or trademark.

(a) HITEL agrees to defend, at its expense, any suit or proceeding brought against DISTRIBUTOR based upon a third party claim of direct infringement of a U.S. patent by HITEL PRODUCTS furnished hereunder, HITEL also agrees to hold DISTRIBUTOR harmless against actual damages for such direct infringement.

(b) HITEL’s agreement to defend and its obligation to indemnify DISTRIBUTOR herein, which extends only to actual damages for direct infringement of a U. S. patent which are awarded against DISTRIBUTOR in such suit or proceeding, are subject to the following terms and conditions:

(1) The agreement and obligation shall arise only if DISTRIBUTOR gives HITEL prompt notice of the infringement claim; grants HITEL, in writing, exclusive control over its defense and settlement; and provides reasonable information and assistance to HITEL at HITEL’s expense, in the defense of such claim;

(2) The agreement and obligation will cover only the HITEL PRODUCT as delivered by HITEL to DISTRIBUTOR and not to any modification or addition made by DISTRIBUTOR or third parties;

(3) The agreement and obligation shall not cover: (i) any claim based on the furnishing of any information, service or technical support to DISTRIBUTOR; or (ii) any claim of infringement of any third party’s rights arising from use of any HITEL PRODUCT furnished hereunder in combination with any other products or articles if such infringement would be avoided by the use of the HITEL PRODUCT alone, nor does it extend to any HITEL PRODUCT furnished hereunder of DISTRIBUTOR’S design or formula; or (iii) any claim that the use of the HITEL PRODUCTS furnished hereunder infringes any third party’s process patent rights; or (iv) any claim of infringement of any third party’s rights in respect to patents, where it is the policy of such third party to offer patent license agreements separately to end users;

(4) If an infringement claim is asserted, or if HITEL believes one likely, HITEL will have the right, but not the obligation: (i) to procure for DISTRIBUTOR the right to use the HITEL PRODUCTS furnished hereunder for the use contemplated by HITEL and DISTRIBUTOR in making this Agreement; (ii) to modify the HITEL PRODUCTS furnished hereunder as appropriate to avoid such rightful claim of infringement, as long as modification for this purpose does not materially impair the operation thereof; or (iii) to accept the HITEL PRODUCT returned and reimburse DISTRIBUTOR for the purchase price thereof less a reasonable charge for wear and tear; and

(5) The sale of any PRODUCT hereunder does not convey any license by implication, estoppel, or otherwise covering combinations of any PRODUCT furnished hereunder with other devices, articles or elements.

(c) DISTRIBUTOR shall indemnify and hold HITEL and its supplier(s) harmless against any expense or liability from claims of patent infringement of any patents related to PRODUCTS sold hereunder arising from: (i) HITEL’s compliance with specifications or instructions

furnished by DISTRIBUTOR; (ii) use of any PRODUCT hereunder in connection with a manufacturing or other process; or (iii) use of any PRODUCT in combination with products not supplied by HITEL.

THE FOREGOING STATES HITEL’S EXCLUSIVE OBLIGATION WITH RESPECT TO CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS OF ANY KIND, AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED. IN NO EVENT SHALL HITEL’S TOTAL LIABILITY TO DISTRIBUTOR EXCEED THE PURCHASE PRICE RECEIVED BY HITEL FROM DISTRIBUTOR OF THE ALLEGED INFRINGING HITEL PRODUCT(S).

HITEL may, from time to time during the term of this Agreement, furnish DISTRIBUTOR Confidential Information relating to PRODUCTS. “Confidential Information” includes without limitation:

(i) any source code and internal (programmers’) documentation for any software disclosed to DISTRIBUTOR;

(ii) non-public financial information concerning HITEL;

(iii) HITEL’s or its respective suppliers’ research and development;

(iv) HITEL’s or its respective suppliers’ pricing or marketing plans;

(v) technical support information, materials and documentation concerning the operation, design and functionality of PRODUCTS;

(vi) HITEL’s customer lists; and

(vii) any information designated as confidential in writing.

Confidential Information may be furnished orally, in written form, including descriptive material, diagrams, specifications and other documents, or by way of consignment. Written Confidential Information shall be marked “Confidential”. DISTRIBUTOR agrees that all Confidential Information made available to it by HITEL shall be kept strictly confidential by it, and DISTRIBUTOR shall not divulge any such Confidential Information to any other person, firm, corporation, association or entity without the express prior written consent of HITEL. Confidential Information may be disclosed only to such of DISTRIBUTOR’s employees who reasonably require access to such Confidential Information for the purpose for which it was disclosed. DISTRIBUTOR shall not make use of such Confidential Information without HITEL’s prior written consent and agrees that in no event shall it use any such Confidential Information in connection with the manufacture by it or by others of any product or equipment similar to the PRODUCTS. The obligations of DISTRIBUTOR under this paragraph shall survive any termination of this Agreement for a period of seven (7) years.

(a) publicly available prior to this Agreement or is made publicly available by HITEL without restrictions;

(b) rightfully received by DISTRIBUTOR from third parties without accompanying secrecy obligations;

(d) independently developed by DISTRIBUTOR and can be so shown by written evidence; or

The secrecy of the Confidential Information and know-how shall be maintained for a period of seven (7) years from the day of disclosure thereof. Upon request of HITEL, any written information subject to these provisions shall be returned to HITEL.

DISTRIBUTOR agrees to indemnify, defend and save harmless HITEL and its officers, directors, agents, employees, shareholders, legal representatives, successors and assigns, suppliers, and each of them, from any and all claims, actions and suits, whether groundless or otherwise, and from and against any and all liabilities, judgments, losses, damages, costs, charges, attorneys’ fees, and other expenses of every nature and character by reason of DISTRIBUTOR’S business and/or actions with respect to the PRODUCTS including any claims, actions or suits not covered under HITEL’s warranty as set forth in Section 14 hereof. DISTRIBUTOR further agrees that the provisions contained in this Section 24 shall survive the termination or expiration of this Agreement.

NEITHER HITEL NOR ITS SUPPLIERS WILL BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY THEREOF IN ADVANCE. THESE LIMITATIONS APPLY TO ALL CAUSES OF ACTION IN THE AGGREGATE, INCLUDING WITHOUT LIMITATION CAUSES OF ACTION ARISING OUT OF TERMINATION OF THIS AGREEMENT, BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION AND OTHER TORTS. NO ACTION MAY BE BROUGHT BY DISTRIBUTOR AT ANY TIME MORE THAN TWELVE (12) MONTHS AFTER THE CAUSE OF ACTION ARISES. IN NO EVENT SHALL HITEL’S OR ITS SUPPLIERS’ LIABILITY IN CONNECTION WITH PRODUCTS OR THIS AGREEMENT EXCEED AMOUNTS PAID TO HITEL BY DISTRIBUTOR HEREUNDER.

(a) On the thirtieth (30th) day after either party gives the other notice of a material breach by the other of any term or condition of this Agreement, or of any agreement between HITEL and DISTRIBUTOR relating to the PRODUCTS, unless the breach is cured before that day; or

(b) When DISTRIBUTOR experiences any significant change in the ownership, control, organization, legal form of doing business, key personnel, merger or consolidation which HITEL, in its discretion, believes will have an adverse effect on future sales or service.

(c) Either party may terminate this Agreement on ten (10) days written notice if the other party is insolvent, files a petition of bankruptcy, or has made any assignment by operation of law or otherwise of this Agreement or of any of its rights hereunder for the benefit of creditors.

(a) DISTRIBUTOR may continue to sell the PRODUCTS in its possession for which it has fully paid HITEL, and to market those PRODUCTS in its customary manner in the ordinary course of business.

(b) DISTRIBUTOR’s payment and indemnification obligations arising prior to termination and the obligations of each party to keep the other’s Confidential Information confidential, will remain in force.

(c) The due date for all invoices for PRODUCTS or Spare Parts shall automatically be accelerated so that they shall immediately become due and payable on the effective date of termination, even if longer terms had been provided previously. This Subsection (c) does not apply to termination due to expiration of the term of the Agreement as provided for in Section 4.

(d) In the event of termination of this Agreement due to DISTRIBUTOR’s material breach, HITEL’s obligation to provide Spare Parts and repair support under this Agreement will terminate at that same time.

(e) DISTRIBUTOR shall immediately cease to hold itself out as an Authorized DISTRIBUTOR of PRODUCTS and shall cease to exercise any rights granted in accordance with this Agreement, and remove all signs, telephone directory listings, advertisements, logotypes, names, insignia and/or all other promotional materials identifying it in any way as an authorized HITEL DISTRIBUTOR. DISTRIBUTOR shall return to HITEL all copies of HITEL furnished proprietary information except information specifically required to operate and maintain installed PRODUCTS.

26.3 Liability and Other Remedies. Neither party will be liable for damages of any kind as a result of exercising its right to terminate this Agreement, and termination will not affect any other right or remedy available in law or in equity of either party.

Neither party shall commit any act or request the other party to commit any act which would violate either the letter or spirit of the export control laws or regulations of the United States, or other export control laws, rules or regulations, and neither party shall fail to take any action reasonably within its capacity to assure compliance with such laws, rules or regulations.

DISTRIBUTOR represents and warrants that it shall not, directly or indirectly, export, re-export or transship PRODUCTS and/or technical data (“the Commodities”) in violation of any applicable export control laws promulgated and administered by the government of any country having jurisdiction over the parties or the transaction(s) contemplated herein.

HITEL shall have the right to refuse to accept DISTRIBUTOR orders for PRODUCTS, or to deliver PRODUCTS to fulfill any previously accepted DISTRIBUTOR order if HITEL determines, in good faith, that such proposed sale or other disposition of the PRODUCTS poses an unreasonable risk of a violation of any applicable export control law or regulation.

DISTRIBUTOR acknowledges that various countries’ laws and regulations regulate the export of computer products and technology, and may prohibit use, sale, or re-export of same. If DISTRIBUTOR knows, becomes aware of, or has reason to know that the PRODUCTS and any technology in conjunction therewith are for use in connection with the design, development, production, stockpiling, or use of nuclear, chemical, or biological weapons or missiles, or if DISTRIBUTOR sells or transfers its title and/or right to use all and/or any part of the PRODUCTS, and/or other products or materials supplied by HITEL to a third party or itself exports the PRODUCTS, DISTRIBUTOR shall ensure that all current export restrictions are observed.

In the event HITEL refuses to deliver PRODUCTS to fulfill previously accepted DISTRIBUTOR orders as set forth in the paragraph immediately preceding, or the necessary export or re-export authorizations are not obtained within a reasonable period of time, HITEL, at its option, may cancel the order or this Agreement, without penalty.

The relationship created between the parties hereto is that of vendor and vendee, and neither party nor any of its employees, customers or agents shall be deemed to be the representative, agent or employee of the other party for any purpose whatsoever, nor shall any of them have any right or authority to assume or create an obligation of any kind or nature, expressed or implied, on behalf of the other, nor to accept service of any legal process addressed to or intended for the other.

DISTRIBUTOR shall provide HITEL immediate written notice of any of the following events: (i) any material change in DISTRIBUTOR’S business or financial situation; (ii) any significant sale, bequest, or other transfer of the ownership (or any portion thereof) of DISTRIBUTOR’S business; (iii) a change in DISTRIBUTOR’S service management; and (iv) a change in the location of DISTRIBUTOR’S senior sales or service facilities or personnel.

All notices to be given pursuant to this Agreement shall be in writing and sent by registered or certified mail, return receipt requested, postage pre-paid, to the address of the respective party first set forth above or to such other address as such party may hereafter designate by notice in accordance with this paragraph.

DISTRIBUTOR shall not voluntarily or by operation of law, assign this Agreement or any right accruing to it hereunder or delegate any duty owed by it, without the prior written consent of HITEL. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective permitted successor in interest and permitted assigns.

Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach thereof (“Dispute”), shall be settled by binding arbitration, conducted on a confidential basis, under the then current Commercial Arbitration Rules of the American Arbitration Association (“the Association”) strictly in accordance with the terms of this Agreement and the substantive law of the State of New York. The arbitration shall be held at a mutually agreeable location in New York, NY and conducted by one arbitrator chosen from a list of attorneys who are members of the Association’s commercial arbitration panel, from a neutral geographic location, who is knowledgeable about telecommunications systems and private branch exchange systems and who has been engaged in the practice of law for a period of at least ten (10) years. If the parties cannot promptly, within 30 days, agree on the selection of the arbitrator, the arbitrator will be chosen pursuant to Rule 13 of the Commercial Arbitration Rules of the Association. The costs of the arbitration, including fees to be paid to the arbitrator, shall be shared equally by the parties to the Dispute. Each party shall bear the cost of preparing and presenting its case to the arbitrator. The parties to the Dispute shall be limited to taking no more than three (3) depositions each. The length of each deposition shall be limited to one (1) day. No interrogatories shall be permitted. The scope of document production shall be governed by the Commercial Arbitration Rules of the Association and the decision of the arbitrator with respect thereto.

The arbitration shall be completed within six (6) months from the date of the selection of the arbitrator. The arbitrator shall issue his/her award and a brief description of the basis for the award in writing. The judgment upon the award rendered by the arbitrator may be entered and enforced in any court of competent jurisdiction. Neither party shall be precluded hereby from seeking provisional remedies in the courts of any jurisdiction including, but not limited to, temporary restraining orders and preliminary injunctions, to protect its rights and interests, but such shall not be sought as a means to avoid or stay arbitration. The parties agree that they have voluntarily agreed to arbitrate their disputes in accordance with the foregoing.

No claim or right arising out of a breach of this Agreement shall be discharged in whole or in part by a waiver or renunciation of the claim or right unless the waiver or renunciation is in writing signed by the aggrieved party. The failure of DISTRIBUTOR or HITEL to enforce at any time or for any period of time any of the provisions hereof shall not be construed to be a waiver of such provisions nor the right of DISTRIBUTOR or HITEL thereafter to enforce each and every such provision.

(a) Each party hereto warrants and represents to the other that it is legally free to enter into this Agreement, that the execution hereof has been duly authorized, and that the terms and conditions of this Agreement, and each party’s obligations hereunder, do not conflict with or violate any terms or conditions of any other agreement or commitment by which such party is bound.

(b) This Agreement, including all Exhibits hereto, is intended to be the sole and complete statement of the obligations of the parties relating to the subject mailer hereof, and supersedes all previous understandings, agreements, negotiations and proposals as to this Agreement. Any pre-printed or other terms and conditions on DISTRIBUTOR’s order form or HITEL’s confirmation or acknowledgement form shall be of no force or effect. Except as otherwise provided herein, no

provisions of this Agreement shall be deemed waived, amended or modified by any party unless such waiver, amendment or modification shall be in writing and duly signed by both parties hereto. The paragraph headings are for purposes of convenience only.

(c) This Agreement may be executed in several counterparts, each of which shall be deemed the original, but all of which shall constitute one and the same instrument.

This Agreement and the relationship created hereby shall be governed and construed in all respects in accordance with the law of the State of Georgia, United States of America.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

The term “HITEL PRODUCT” as used in this Agreement means the digital HCX5100 and HCX5000i PBX systems, and all related application software. The term “Supplier PRODUCT” as used in this Agreement means telephone sets for guest rooms supplied by Teledex, Telematrix and/or SciTek and voice mail systems supplied by Innovations.. The term “PRODUCT” as used in this Agreement means any or all HITEL PRODUCT, MAXimilian personal computer-based, application software and Supplier PRODUCT collectively. The HCX systems above referred include both hardware and software required to enable the systems to function according to their respective specifications. All PRODUCT software, including MAXimilian, is licensed to DISTRIBUTOR pursuant to the terms and conditions of this Agreement, including this Exhibit A, and shall not be deemed to be sold to or purchased by DISTRIBUTOR.

ALL OF THE SOFTWARE PROVIDED PURSUANT TO THIS AGREEMENT INCLUDING EACH OF THE APPLICATION PRODUCTS IS PROVIDED FOR THE LIMITED PURPOSES CONTEMPLATED IN THIS AGREEMENT. DISTRIBUTOR SHALL ONLY BE AUTHORIZED TO USE, SUBLICENSE OR THE LIKE ANY OF THE SOFTWARE PROVIDED BY HITEL OR ITS SUPPLIERS WITH THE SPECIFIC HCX5000 OR HCX5000i THAT INCORPORATES SUCH SOFTWARE OR FOR WHICH SUCH SOFTWARE IS EXPRESSLY PROVIDED AND IN CONJUNCTION WITH LEGITIMATE EFFORTS BY DISTRIBUTOR TO RESELL THE DIGITAL HCX5000 OR HCX5000i COVERED BY THIS AGREEMENT. IN ADDITION, DISTRIBUTOR AND ITS CUSTOMERS SHALL BE BOUND BY THE TERMS AND CONDITIONS OF USE OF THE SOFTWARE CONTAINED IN THE SHRINK-WRAP LICENSES PACKAGED WITH EACH RESPECTIVE SOFTWARE PACKAGE, A COPY OF HITEL’S SHRINK-WRAP LICENSE IS ATTACHED TO THIS EXHIBIT A.

THE TERM “PRODUCT” NOT ONLY INCLUDES THE ABOVE SYSTEMS AND PARTS, BUT ALSO UPGRADES, SUBCOMPONENTS AND REPAIRED ITEMS TO THESE SYSTEMS THAT ARE OFFERED FOR SALE BY HITEL OR ITS SUPPLIERS. UPGRADES FROM THESE SYSTEMS TO OTHER HCX5000 SYSTEMS THAT ARE NOT LISTED ARE NOT INCLUDED IN THE TERM “PRODUCTS”.

READ THE TERMS AND CONDITIONS OF THIS LICENSE AGREEMENT CAREFULLY BEFORE OPENING THE PACKAGE CONTAINING THE PROGRAM DISKETTES, THE SOFTWARE THEREIN, AND ACCOMPANYING DOCUMENTATION (THE “PROGRAM”). THE PROGRAM IS COPYRIGHTED AND LICENSED (NOT SOLD). BY OPENING THE PACKAGE CONTAINING THE PROGRAM, YOU ARE ACCEPTING AND AGREEING TO THE TERMS OF THIS LICENSE AGREEMENT. IF YOU ARE NOT WILLING TO BE BOUND BY THE TERMS OF THIS LICENSE AGREEMENT, YOU SHOULD PROMPTLY RETURN THE PACKAGE IN UNOPENED FORM.

Hitachi Telecom (USA), Inc. (“Licensor”) hereby grants to you, and you hereby accept the non-exclusive right to use the Program Diskettes and the computer programs contained therein in machine-readable, object code form only (collectively referred to as the “Software”), and the accompanying documentation only as authorized in this License Agreement. The Software may be used only on a single computer which is owned, leased, or otherwise controlled by you solely for the purpose of your own internal business operation. You may NOT distribute copies of the Software or related documentation to others. You shall use any documentation provided by Licensor only in conjunction with your business use of the Software. This License is restricted to use within the United States and Canada and is not transferable except as expressly provided herein.

You may NOT transfer the Software and License to another person or company unless:

2. the person or company to whom you are transferring it agrees to accept the terms and conditions of this License and does so in a writing signed by that party. If you transfer the Software, you must at the same time either transfer all copies, whether in printed or machine readable form, to the same party or destroy any copies not transferred. This includes all portions of the Software contained or merged into other programs.

You agree to reproduce and include the copyright notice on any copy, modification or portion merged into another program.

You acknowledge and agree that the Software is a proprietary, unpublished product of Licensor, protected under U.S. copyright law and trade secret laws of general applicability. You further acknowledge and agree that all right, title and interest in and to the Software is and shall remain with Licensor. This License does not convey to you an interest in or to the Software but only a limited right of use revocable in accordance with the terms of this License. You hereby agree that Licensor may hold you liable or responsible for any violation of this License.

YOU MAY NOT USE, COPY, SUBLICENSE, ASSIGN OR TRANSFER THE LICENSE OR THE SOFTWARE IN WHOLE OR IN PART, EXCEPT AS EXPRESSLY PROVIDED FOR IN THIS LICENSE. YOU MAY NOT MODIFY, TRANSLATE, ADAPT, REVERSE ENGINEER, DECOMPILE, DISASSEMBLE, OR CREATE DERIVATIVE WORKS BASED ON THE SOFTWARE OR RELATED DOCUMENTATION. IF YOU TRANSFER POSSESSION OF ANY COPY, MODIFICATION OR MERGED PORTION OF THE SOFTWARE TO ANOTHER PARTY WITHOUT PRIOR WRITTEN CONSENT OF LICENSOR, YOUR LICENSE IS AUTOMATICALLY TERMINATED.

Any attempt to sublicense, assign or transfer any of the rights under this License, except as expressly provided for in this License, will void any of Licensor’s duties or obligations hereunder.

The License is effective until terminated by either party. You may terminate it at any time by destroying the Software together with all copies, modifications, and merged portions in any form. The License will also terminate upon the conditions set forth elsewhere in the Agreement or if you fail to comply with any term or condition of the Agreement. You agree that upon termination, you will destroy the Software together with all copies, modifications and merged portions in any form.

THE SOFTWARE IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT LICENSOR) ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE OTHER RIGHTS, WHICH VARY, FROM STATE TO STATE.

Licensor does not warrant that the functions contained in the Software will meet your requirements or that the operation of the Software will be uninterrupted or error free.

Licensor’s entire liability to you or any other party for any loss or damages resulting from any claim, demands, or actions arising out of or relating to this License and your exclusive remedy shall be:

2. if Licensor is unable to deliver a replacement media free from defects in materials and workmanship, you may terminate this License by returning any copies of the Software.

IN NO EVENT SHALL LICENSOR OR ITS SUPPLIER(S) BE LIABLE FOR ANY DAMAGES, INCLUDING ANY LOST PROFITS, LOST SAVINGS, OR OTHER INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE SUCH SOFTWARE EVEN IF LICENSOR OR ITS SUPPLIER(S) HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY.

SOME STATES DO NOT ALLOW LIMITATIONS OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATIONS MAY NOT APPLY TO YOU.

ALL UPDATES, MODIFICATIONS, AND ENHANCEMENTS PROVIDED TO YOU SHALL BECOME PART OF THE MATERIALS GOVERNED BY THE TERMS OF THIS LICENSE. IF THE REGISTRATION CARD IS NOT RECEIVED BY LICENSOR, LICENSOR IS UNDER NO OBLIGATION TO MAKE AVAILABLE TO YOU ANY UPDATES EVEN THOUGH YOU HAVE MADE PAYMENT OF THE APPLICABLE UPDATE FEE.

This License Agreement shall be governed by the laws of the state of Georgia and shall inure to the benefit of Licensor, its successors, administrators, heirs, and assigns. Should you have any questions concerning this Agreement, you may contact Licensor by writing to Hitachi Telecom (USA), Inc., 3617 Parkway Lane, Norcross, GA 30092.

BY USING THE SOFTWARE, YOU ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. YOU FURTHER AGREE THAT IT IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US WHICH SUPERSEDES ANY PROPOSAL OR PRIOR AGREEMENT, ORAL OR WRITTEN, AND ANY OTHER COMMUNICATIONS BETWEEN US RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.

The Software media may not be copy protected in all cases. You may make backup copies for your own use, if available, but this does not mean that you can make unlimited copies. The Software is protected by copyright law. IT IS ILLEGAL TO GIVE A COPY OF THE SOFTWARE TO ANOTHER PERSON OR COMPANY.

DISTRIBUTOR shall be given access to certain software downloads only upon the terms and conditions of this Agreement, including the Software Download Agreement below.

This Software Update Download Agreement is provided by Hitachi Telecom (USA), Inc. (“Hitel”) only to its Authorized Distributors, in good standing, subject to the terms and conditions of the Authorized Distributor Agreement, including all licensing terms contained or referred to in Exhibit A thereto, and the following. You are not an Authorized Distributor unless you are a party to a current HCX5000/HCX5000i Authorized Distributor Agreement with Hitel. By downloading each software update, you represent and warrant that: you are a Hitel HCX5000/HCX5000i Authorized Distributor in good standing under a current Authorized Distributor Agreement; and, you have read, understood and will comply with all of the terms and conditions hereof.

1. You shall provide written notice to Hitel of each and every site to which you apply each software update and the Update Level for that site that is provided by this download, within twenty-four (24) hours of your application of this software update to the respective site(s).

2. You shall comply in all material respects with any and all instructions provided by Hitel relating to the application of this software update.

3. You shall download this software update in its entirety at each site to which you apply this software update. Partial downloads are prohibited.

4. After completely applying this software update to a system, you shall IMMEDIATELY perform a system reload.

5. You shall NOT distribute or copy this software update in any form, including electronic and/or printed copies.

6. You shall comply with whatever instructions Hitel may give, should Hitel determine this software update needs to be replaced, including all Hitel instructions relating to obtaining and applying replacement software.

7. You have agreed in writing that this Software Update Download Agreement is an Addendum to and incorporated in the Authorized Distributor Agreement between you and Hitel.

8. It is the responsibility of the Distributor to keep their sites at the current Software Update Level.

9. You are required to comply with the terms and conditions of the EXPORT CONTROL PROVISIONS as included in Section 15 of this Agreement.

HITEL appoints DISTRIBUTOR as a nonexclusive distributor for PRODUCTS as described in Exhibit A. DISTRIBUTOR’S appointment covers the sale and service of PRODUCTS in DISTRIBUTOR’S REGIONS shown on the schedule below. DISTRIBUTOR may close any marketing location and relocate it within DISTRIBUTOR’S geographical area of coverage. HITEL reserves the right to appoint additional PRODUCT sales distributors anywhere in the United States including any or all of the marketing locations shown below. DISTRIBUTOR shall maintain an adequate and aggressive sales organization at all times during the term of this Agreement in order to assure maximum distribution of PRODUCTS.

DISTRIBUTOR is required to maintain a Technical Assistance Center (TAC) to provide second level remote maintenance support of all geographical areas covered in (1). DISTRIBUTOR agrees to provide TACs as described above located as follows:

	DISTRIBUTOR will inform HITEL which systems will be handled by each TAC.

	(b) Spare Parts. DISTRIBUTOR is required to maintain an adequate supply of spare parts (as defined in Exhibit G) in each geographical region covered in (1) to support troubleshooting of system or PRODUCT problems and normal system or PRODUCT maintenance.

	(c) DISTRIBUTOR is required to maintain or provide access to a minimum of two (2) HITEL Certified Technicians per geographical region served. National Distributors (REGION is Continental U.S.) are required to maintain a minimum of 15 HITEL Certified Technicians.

	(d) DISTRIBUTOR is required to furnish to HITEL as part of this Agreement, a list of HITEL certified technicians. DISTRIBUTOR is also required to furnish to HITEL a technical support authorization, in writing, designating the certified technicians authorized by DISTRIBUTOR to call HITEL for third level support, and authorized by DISTRIBUTOR to issue purchase orders to HITEL during non-business hours and in emergency situations. Such list must include technician’s name and certification number.

	(e) Immediately upon termination or separation from DISTRIBUTOR’s employ of any such listed certified technician, DISTRIBUTOR is required to notify HITEL in writing of such termination or separation, Until such written notice is received, HITEL may provide such technician with the services for which they were previously authorized and HITEL will in no way be responsible for the actions of such terminated technician. Upon receipt of such written notice, HITEL will remove said technician’s name from its approved list until such time as said technician has been employed and re-registered with HITEL by the same or another Authorized Distributor. The charge by HITEL to Authorized Distributors for re-registration of certified technicians shall be seventy-five ($75.00) Dollars per individual re-registered.

List all employees who have received a Technician Certification Number. DISTRIBUTOR is responsible for notifying HITEL when a technician leaves the employ of the DISTRIBUTOR.

Xeta Technologies
Hitachi Certified Employees
As of March 1. 2003
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*

* 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.

HITEL periodically issues list price information in written or “Configurator” form for new systems, upgrade orders, parts, sub-components and HITACHI PRODUCTS Return Material Authorization (RMA). This information is referred to in this Agreement as HITEL Price Guides. The current new system Configurator or upgrade and Unit Parts Price Guide represent the only definition of PRODUCTS list prices except where superseded in specific instances by other written quotations issued by HITEL. Discounts in this Exhibit apply to list prices of hardware (or other items defined as discountable in HITEL Price Guides, except for items for which other specific discounts are specified in such Price Guides).

1. DISTRIBUTOR agrees to purchase and pay for a minimum $ * in total net to Hitel, from Hitel during this contract year. These purchases will receive a discount as defined above of * %.

SPECIAL CONSIDERATION. HITEL will review DISTRIBUTOR sales versus commitment quarterly. If DISTRIBUTOR does not order, accept delivery and pay for at least the amount of prorated PRODUCT committed, HITEL has the option, upon sixty (60) days written notice, to change the discount schedule

- UpGrade Orders. Upgrade orders are quoted at a net price. No discount maybe applied.

(a) A volume order of more than $ * net price, covered by one (1) purchase order, shipped as a unit (except for back order items) to one (1) address with a minimum delivery schedule of thirty (30) days, shall receive the discount shown above off list price. NOTE: The $ * amount must be met after the discount is applied.

(b) Less than $ * net cost per order shall receive a discount of * % off list price.

Standard payment terms are net thirty (30) days after invoice from HITEL for the total outstanding invoiced amount, including new systems, parts, patches, upgrades, expansions, etc., within the preset credit line. For the portion, if any, exceeding the preset credit line, HITEL requires a cash payment or issuance of an irrevocable letter of credit before shipment. HITEL may revoke the net thirty (30) days payment terms at any time upon written notice to DISTRIBUTOR stating the reason(s) for such revocation and insist upon an irrevocable letter of credit, payment in advance or such other method as HITEL may determine for all goods to be delivered after such notice.

Any invoices which remain due and payable after thirty (30) days are subject to a 1.67 percent (1.67%) per month service charge for each month or the fraction thereof that the payment is not received by HITEL, or, if this interest rate exceeds the maximum allowed by applicable law, then at the maximum lawful rate.

Two other payment terms may be chosen by noting their selection on the purchase order, If no selection is noted, net 30 days will apply.

1. - Net 60 with Interest. (Only available for orders of $10,000.00 or greater net cost.) Payment terms are net sixty (60) days after shipment from HITEL for the total outstanding invoiced amount, including new systems, parts, patches, upgrades, expansions, etc., within the preset credit line. For the portion, if any, exceeding the preset credit line, HITEL requires a cash payment or issuance of an irrevocable letter of credit before shipment. A service charge equal to 1.2 percent (1.2%) of the total invoiced amount shall be added to each such invoice by HITEL and shall be due and payable by DISTRIBUTOR as part of such invoice. HITEL may revoke the Net 60 with Interest payment terms at any time upon written notice to DISTRIBUTOR stating the reason(s) for such revocation and insist upon an irrevocable letter of credit, payment- in advance or such other method as HITEL may determine for all goods to be delivered after such notice.

Any balance which remains due and payable after sixty (60) days is subject to a 1.67 percent (1.67%) per month service charge for each month or the fraction thereof that the payment is not received by HITEL, or, if this interest rate exceeds the maximum allowed by applicable law, then at the maximum lawful rate.

2. - 50/50. (Only available for orders of $10,000.00 or greater net cost.) Payment terms are 50% before shipment and 50% net sixty (60) days after shipment from HITEL for the total outstanding invoiced amount, including new systems, parts, patches, upgrades, expansions, etc., within the preset credit line. For the portion, if any, exceeding the preset credit line, HITEL requires a cash payment or issuance of an irrevocable letter of credit before shipment. HITEL may revoke the 50/50 payment terms at any time upon written notice to DISTRIBUTOR stating the reason(s) for such revocation and insist upon an irrevocable letter of credit, payment in advance or such other method as HITEL may determine for all goods to be delivered after such notice. HITEL may revoke the 50/50 payment terms at any time upon written notice to DISTRIBUTOR stating the reason(s) for such revocation and insist upon an irrevocable letter of credit, payment in advance or such other method as HITEL may determine for all goods to be delivered after such notice.

Any balance which remains due and payable after the above mentioned terms is subject to a 1 .67 percent (1.67%) per month service charge for each month or the fraction thereof that the payment is not received by HITEL, or, if this interest rate exceeds the maximum allowed by applicable law, then at the maximum lawful rate.

Security Interest, So long as HITEL has not received full and complete payment for any delivered PRODUCTS, a purchase money security interest in the PRODUCTS shall be created and remain in HITEL until HITEL receives full payment of the full invoice amount thereof. It is further understood and agreed that until said security interests are extinguished as set forth herein, HITEL shall have the absolute right to repossess and resell the PRODUCTS.

It is understood by the parties hereto that the ability of DISTRIBUTOR to make the payments contemplated hereunder is of the essence of this Agreement and in the event that DISTRIBUTOR is unable to make the payments in accordance with the terms and conditions of this Agreement, for any reason or cause, including without limitation, by virtue of any regulation or order of any government authority, HITEL, in addition to whatever other remedies may be available to it, may elect to terminate this Agreement immediately.

Delivery terms for all HITEL PRODUCTS and Supplier PRODUCTS shipped from HITEL’s Norcross facilities shall be F.C.A. HITEL’s plant, Norcross, GA (Incoterms 2000). Delivery terms for all Supplier PRODUCT that is drop-shipped by HITEL’s supplier(s) or otherwise not shipped from HITEL’s Norcross location shall be F.C,A. HITEL’s supplier’s shipping location (Incoterms 2000).

Any orders, which at DISTRIBUTOR’S request, are not shipped within sixty (60) days of acceptance by HITEL shall be subject to a rental charge as described in HITEL price guides.

DISTRIBUTOR shall not have the right to cancel, reschedule, change or modify all or any portion or installment of any PRODUCT covered by this Agreement without HITEL’s prior written consent. Each cancellation so agreed to by HITEL shall be subject to a cancellation fee as described in HITEL price guides.

All notices to be given pursuant to this Agreement shall be in writing and sent by registered or certified mail.

Attached is HITEL’s current HITACHI PRODUCTS Return Material Authorization Policy. This policy is subject to change by HITEL upon written notice. (All repair and return of Supplier PRODUCTS is handled directly between DISTRIBUTOR and Supplier.)

I.		POLICIES

1.		The Return Material Authorization (RMA) program as per contracted agreement described herein is offered only to authorized Hitachi Telecom (USA), Inc. (HITEL) Distributors.

2.		Subject to the terms and conditions of the Distributors and HITEL and the terms and conditions set forth in this statement, HITEL will provide printed circuit boards and technical support for each HCX5000 sold to Distributors for a period often (10) years from the date that the last HCX5000 is sold and shipped to Distributors by HITEL.

3.		Distributors are required to have Hitachi certified technicians and to stock spare parts sufficient to handle normal maintenance and most emergencies as defined in Appendix A. In order for Distributors to obtain parts and repair of parts from HITEL, Distributors must follow the procedures set forth herein.

4.		This Return Material Authorization procedure specifies the terms and conditions for returning parts to HITEL.

5.		HITEL will use reasonable efforts to repair or replace defective parts as specified herein within thirty (30) days from the date of receipt of said defective parts by HITEL. HITEL in its sole discretion may replace defective equipment with either used or new equipment, as it deems appropriate.

6.		Warranty coverage on new HCX5000 systems and parts is defined in the Distributorship Agreement.

7.		Warranty coverage on repaired parts shall be identical to the warranty set forth in the Distributorship Agreement with new HCX5000 systems and parts with the exception that the warranty covering repaired parts will be effective for three (3) months from shipment date or the remainder of the original warranty, whichever is longer.

8.		Any parts returned without a bar code label will be considered out of warranty.

9.		HITEL will only provide advance replacement parts in limited situations described herein under RMA Definitions and Replacement Parts.

II.		RMA DEFINITIONS

1.		RMA Repair and Return. All parts returned to HITEL pursuant to this RMA statement will be treated as RMA Repair and Return, except for cases of RMA Special Approval and RMA DOA as defined herein. All RMA Repair and Return will be considered as either in-warranty or out-of-warranty.

2.		In-Warranty. Parts which are covered by a HITEL warranty that has not expired and is other-wise in effect and which are not subject to any exceptions, exclusions or the like (including but not limited to exceptions listed in the Authorized Distributor Agreement) will be treated as in-warranty according to the warranty provisions set out in the Distributor Agreement.

3.		Out-of-Warranty. Parts which are not covered by a HITEL warranty for whatever reason will be treated as out-of-warranty.

4.		RMA DOA. Parts will be treated as Dead on Arrival (DOA) only when they meet the following criteria:

	a.		New system and parts found to be defective due to poor material or workmanship within sixty (60) days of the date of shipment must be reported to HITEL Sales Administration Department within sixty (60) days of the date of shipment.

	b.		RMA DOA may be issued under the following conditions only:

RMA Special Approval. The following cases will be treated as RMA Special Approval. No system or parts will be treated as RMA Special Approval without written approval and an RMA number issued by HITEL’s Sales Administration Department prior to return shipment to HITEL. RMA Special Approval may be issued only under the following conditions:

	a.		Shipment by HITEL of systems or parts that were not ordered.

	b.		The return of loaned equipment.

	c.		Return of Distributor’s Sales Demonstration Equipment for Refurbishment or Upgrade.

6.		DOA Advance Replacement Parts. DOA advance replacement parts are available only under RMA DOA conditions. This allows a Distributor to order replacement parts and when the RMA DOA parts are returned, HITEL will issue a credit against the parts order upon receipt and inspection of the parts. Credit will be issued only if the Distributor has contacted Hitachi Telecom (USA), Inc.’s PBX Technical Support Department who has verified that parts are defective. Parts to be returned must match with the same quantity, serial numbers and bar code labels as the parts originally shipped.

7.		Rejection. HITEL in its sole discretion may reject any equipment or parts that are returned if HITEL determines one of the following conditions exists:

	a.		Equipment damaged by other that defective components or workmanship.

	b.		Equipment with missing parts.

	c.		Improperly packaged equipment. (Refer to Procedure for All Return Material Authorizations, paragraph 8.)

	d.		Packages containing returned equipment that do not display appropriate RMA numbers.

	e.		Equipment modified by other than certified Hitel personnel.

Non-Returnable Parts. The following parts are not repairable and shall not be returned to HITEL unless HITEL so requests.

	a.		Any parts which are defective or damaged due to causes other than defective parts or workmanship (including but not limited to lightning strikes, power surge, water damage, etc.)

	b.		Consumable and non-returnable items shown in the HCX5000 Technician’s Manual CG-50-3090. Labels, fuses, mounting hardware, cables, etc.

	c.		Manual, drawings, faceplates and floppy diskettes.

			NOTE: To order replacement or additional consumable parts, the Distributor may contact HITEL’s Sales Administration Department.

1.		Distributor must notify HITEL in written form as to which employees of the Distributor are authorized to issue purchase orders to HITEL.

2.		Distributor must obtain an RMA number for RMA Repair and Returns and RMA DOAs from HITEL’s Sales Administration Department.

3.		Distributor must issue a purchase order to HITEL to order the RMA parts and work requested.

4.		Distributor must return equipment with an appropriate Defect Tag attached to each machine and part returned. Distributor must include a packing list which lists all RMA parts contained in one box. Boxes must be clearly marked with the HITEL assigned RMA numbers. (Example: RMA #19209R3)

5.		RMA DOA must be returned within thirty (30) days of the issue date of the appropriate RMA DOA number. The RMA DOA number must be written on the attached Defect Tag. (See Appendix B)

RMA DOA parts not returned to HITEL within thirty (30) days of the issue date of the RMA number for the part(s) in question, will be treated as RMA Repair and Return following contact and confirmation with the Distributor. RMA DOA parts that do not match the serial numbers and bar code labels recorded for that RMA DOA authorization will be treated as RMA Repair and Returns. All RMA systems and parts shall be shipped freight pre-paid by Distributors to the following address:

7.		RMA Repair and Return — HITEL will use reasonable efforts to ship repaired parts to the Distributor within thirty (30) days of receipt of the defective part. Exceptions to this thirty (30) day period are SelecSets, which will normally be returned within sixty (60) days of receipt of the defective SelecSets.

		RMA DOA — when HITEL receives DOA parts within thirty (30) days of the date that HITEL issues the RMA number, HITEL will issue credit against the replacement part(s) order, if the part(s) being returned qualify for DOA.

		When DOA parts are received after thirty (30) days of the RMA Authorization date, or if the wrong parts are returned to HITEL, the RMA request will be treated as an RMA Repair and Return following contact and confirmation with Distributor. All equipment must be returned to HITEL.

8.		Packing Returns. Returned materials must be properly packed when returned to HITEL. Printed circuit boards must be placed in an anti-static bag and then placed individually in cartons in accordance with commercially acceptable standards. If the material is returned without the anti-static bag and/or proper packing, the returned material will be rejected by HITEL. For this reason, it is suggested that a quantity of the original anti-static bags and shipping cartons be kept in storage for reuse.

9.		Charge for RMA Services. Repair fees for each case are shown in Appendix C.

10.		All in-warranty repaired equipment will be returned freight pre-paid by HITEL.

IV.		FUNCTIONS

1.		Issue RMA. HITEL Sales Administration Department will issue a numbered RMA form upon request of the Distributor. Distributor will issue a Purchase Order detailing the RMA equipment and work requested. The maximum number of items on one RMA form is ten (10). If additional equipment is requested subsequent RMA forms will be issued. All boxes must be marked with appropriate RMA number(s). Distributor must also indicate the appropriate Reason Code.

		HITEL Sales Administration Department will issue the RMA form with the following filled in:

RMA Inspection. Upon receipt of equipment by HITEL, the contents of each box will be visually checked and matched to items listed on the RMA form(s).

		Should any problems or discrepancies with equipment received or between customer Packing List(s) and the RMA forms, HITEL’s Sales Administration Department will contact Distributor to clarify. A tracer on delivery may be required or parts may need to be returned if Distributor requests.

		For rejected parts, the RMA form will note rejection reason and the part(s) will be rejected on final approval by HITEL’s Sales Administration Department. The rejection notice will include:

3.		RMA Testing and Repair. RMA parts will be tested per HITEL’s Internal Test Procedures Manual, using hardware Test Procedures of system software and hardware.

4.		RMA Invoicing.

	a.		After testing, repaired and returned items will be invoiced for the appropriate amount following shipment of the equipment.

	h.		DOA and Special Approval items will be credited by issuing a credit memo provided they meet the RMA Special Approval and DOA requirements.

The attached table provides the recommended number of spare parts to he carried by a Distributor based on the number of parts in the field to be supported. A 30-day Replacement cycle is assumed.

The columns of the table are as follows: The first is the name of the part. The remainder of the columns show the number of parts that can be supported by the number of spares listed at the top of each of these columns. However, if the probability of not needing any spares during the life cycle of the product is less than the probability stated below, then the number of required spares is 0. (The life cycle is assumed to be 7 years.) For example, for the ICC connector units (IOCNU), there is a very low FIT rate, and the depot can support up to 6 such parts without any spares. With one spare, up to 561 IOCNU parts can be supported. The majority of the parts, however, have 0 in the column under 0 spares. This means that no parts can be supported with 0 spares, and at least one spare is needed when the first of such a part is put into service.

The assumed probability values of having a spare when needed are as follows: Critical parts are assigned a probability value of .995. These are the parts whose failure can generally bring the system down. Semi-critical parts are assigned a probability of .98, and are those parts whose failure can result in a small degradation or outage of a small subset of the system.

In the case of the Floppy Disk Drive Unit (FDDU), the actual FIT rate is 67,000. However, since this part is rarely used, a FIT rate of only one-tenth, 6700, is assumed to apply in actual practice.

EX-10.6 4 d11884exv10w6.htm EX-10.6 RESELLER MASTER TERMS AND CONDITIONS exv10w6

This Reseller Agreement (“Agreement”) is made effective as of 08/06/03 (“Effective Date”) by and between Avaya Inc. (“Avaya”) a Delaware corporation with offices at 211 Mt Airy Rd, Basking Ridge, NJ 07920 and XETA Technologies, Inc., (“Reseller”) a corporation , with offices located at 1814 West Tacoma, Broken Arrow, OK 74012 .

NOW THEREFORE, in consideration of the mutual promises herein set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1.1 “Affiliate” means, with respect to any party, any person or entity that is under common control with, controls, or is controlled by, that party.

1.2 “Agreement” means this Reseller Agreement and all Product Group Attachments, which are incorporated by reference herein.

1.3 “Distributor” means any authorized Avaya distributor identified in the Product Group Attachments.

1.4 “Confidential Information” means all information furnished under or in contemplation of the Agreement, which is marked with a restrictive notice or otherwise designated as proprietary, or which the receiving party knows or should know is being disclosed on a confidential basis; including without limitation, this Agreement and it’s terms and conditions, all trade secrets, and price discount, rebate lists and schedules.

1.5 “End-User” means a third party that purchases Products for use by such third party and not for resale, sublease, or sublicense.

1.7 “Licensed Materials” means the object code computer programs furnished by Avaya and intended for use in or provided for use with Products and also includes the information in the Related Documentation furnished to Reseller for use therewith. Unless otherwise specified, no source code version of software will be included in Licensed Materials.

1.8 “Licensed Trademarks” means those certain Avaya designated trademarks, insignia and symbols which are associated with the Products, and owned by Avaya.

1.9 “Permission to Connect” means any necessary approval by the duly authorized governing authorities for use of a Product or Product Component in the Territory. The term includes but is not limited to “type acceptance”, “type approval”, “prior connection inspection”, “homologation” or any other similar process, which would provide authorization to connect a Product or Product Component to the public telecommunications network and/or to sell a Product in the Territory.

1.10 “Product(s)” means those products and/or services which Reseller has been authorized to resell under the Agreement and listed in an Appendix to a Product Group Attachment. The authorized products may be amended and supplemented by Avaya from time to time in accordance with the provisions of the applicable Product Group Attachment.

1.11 “Product Component” means an item or part of equipment identified by an Avaya equipment code.

1.13 “Related Documentation” means all materials in printed, written or electronic form used to describe the use of Products or Product Components, excluding marketing materials.

1.14 “Reseller” means the party named above as the Reseller and any successor or assignee thereof agreed to by Avaya.

1.15 “Services” are those installation and professional services generally associated with the Products furnished by Avaya to End-Users, when ordered in connection with Products marketed by Reseller.

1.16 “Territory” means the fifty (50) states of the United States of America and the District of Columbia or such other geographic area specified in the applicable Product Group Attachment.

1.17 “Toll Fraud” means the unauthorized use of telecommunications services or facilities accessed through or connected to Products.

1.18 “Unused Product” means a Product or Product Component originally manufactured by Avaya (or an entity controlled by, controlling or under common control with Avaya), never used, frequently still in original packaging with original documentation, but which does not carry an Avaya factory warranty because of an improper acquisition of the Product or Product Component from a non-Avaya authorized source. Purchase and/or sale of Unused Product is a violation of this Agreement.

2.1 This Agreement shall commence upon the Effective Date for a period of one (1) year and shall automatically renew year to year on the anniversary of the Effective Date unless a party gives written notice of its intent not to renew to the other party 180 days in advance of the anniversary of the Effective Date or unless the Agreement is otherwise terminated as hereinafter provided.

3.1 Subject to the terms and conditions herein, Avaya appoints Reseller as an non-exclusive reseller to purchase Products from an authorized Avaya Distributor and resell Products to End-Users in the Territory. Reseller shall have no right to authorize others to resell or market Avaya Products and any such authorization or attempted authorization shall be void and without effect. Except as specifically authorized in writing by Avaya, Reseller is not authorized to employ sales agents (other than an employee of Reseller located at an authorized Reseller marketing location) or other independent contractors to market Avaya Products.

3.2 Unless otherwise expressly stated elsewhere in this Agreement, the relationship of the parties under the Agreement shall be, and at all times shall remain, one of independent contractors, and not that of franchisor and franchisee, joint venturers, or principal and agent, and no fiduciary relationship exists between the parties. Neither party shall have any authority to assume or create obligations on the other’s behalf, and neither party shall take any action that has the effect of creating the appearance of its having such authority.

3.3 Avaya expressly reserves the right to engage directly, or contract with others, to market, sell and/or service the Products in the Territory.

3.4 Reseller accepts the appointment described herein and acknowledges that no payment of any fee is required as a condition of such appointment.

4.1 Performance of Obligations: Reseller shall perform all of its obligations under this Agreement. Reseller shall comply with all of its obligations under this Agreement or the Product Group Attachment, including, but not limited to, those relating to any of the following: (a) service, (b) installation, (c) warranties, (d) training, (e) insurance, (f) reporting and (g) dealings with authorized Avaya Distributors. Reseller shall conduct business in its own name and use commercially reasonable efforts to promote, market and expand the selling of the Products within the Territory. Reseller shall: (a) conduct its business in a manner that reflects favorably on the Products and on the good name, goodwill and reputation of Avaya; (b) avoid deception, misleading or unethical practices; and (c) use best efforts to promote, market, and further the interest of Avaya, its name and Products. Reseller represents and warrants to Avaya that at no time will Reseller substitute competitive products where Avaya is specified by an End-User.

4.2 Training: Reseller shall retain sales and service personnel sufficiently trained to perform its obligations under the Agreement, including but not limited to acknowledge of the industry, the Products and the servicing of the Products. Reseller shall participate in sales training set forth in the Product Group Attachment, including annual sales training updates or refresher courses with options to satisfactorily pass Avaya’s written examination in lieu of such training. Reseller shall ensure that Reseller’s employees or representatives engaged in marketing the Products are qualified and competent to do so, are knowledgeable of the specifications, features and advantages of the Products and are capable of demonstrating the use and capabilities of the Products and their applications to End-Users, obtain relevant training and conduct such marketing activities in a professional manner. If applicable, Reseller shall meet any individual certification requirements to sell the Product(s). Training will be provided at Avaya’s then current rates, terms and conditions.

4.3 Sales Targets: Unless different or additional requirements are set forth in the Product Group Attachment, Reseller shall work with Avaya to establish annual sales targets for the Products, and meet with Avaya on at least a quarterly basis to discuss its ability to meet such annual targets. Reseller shall provide data reasonably requested by Avaya on the overall marketplace, market potentials and other information related to the Products.

4.4 Promotional Materials: Reseller shall use and distribute only Avaya approved and provided promotional materials (e.g., advertising, sales literature and brochures) for Products.

4.5 End-User Technical Support: Reseller shall provide technical support and training to End-User in the effective use of the Products.

4.6 End-User Warranty: Reseller shall not grant any End-User a warranty greater than the warranty granted by Avaya, and any such grant shall be Reseller’s own responsibility, and shall not be binding upon Avaya. Reseller shall, either contractually or before delivery of Products to its End-Users, advise them of the limited scope of Avaya’s warranties and limitations of liability.

4.7 Notice to Avaya: Reseller shall promptly inform Avaya of any facts or opinions likely to be relevant in relation to marketing the Products including, without limitation, all suspected Product defects or safety problems and End-User complaints.


	(a) Reseller shall not directly or indirectly pay, offer, promise or give or authorize to pay, offer or give money or anything of value to any employee or official of a government or department thereof, political party or candidate for political office or to any employees or officials of public international organizations, or to any other person while being aware of or having a belief that such money or item of value will be passed on to one of the above, to influence any act or decision by such person or by any governmental body for the purpose of obtaining, retaining or directing business or to otherwise obtain an improper advantage. Reseller will not undertake any action that may cause Avaya to be in breach of the rules and regulations of the U.S. Foreign Corrupt Practices Act or of any similar legislation of any other country.

	(b) Reseller furthermore shall comply with all applicable laws and regulations of the Territory and the United States, including (among others) the anti-boycott laws and laws pertaining to data protection. If at any time after the effective date hereof, the Agreement or the performance of its obligations by Reseller or Avaya is no longer in compliance with any federal, state or local law or regulation, the Agreement shall be appropriately amended by the parties so as to be in compliance with those laws or regulations or terminated by either party. Reseller shall keep Avaya informed of any applicable laws or regulations of the Territory or any political subdivision or agency thereof, as well as any amendments thereto, whether proposed or adopted, which may affect the rights and obligations of the parties, or the promotion, sales, service or maintenance of the Products.

4.9 Insurance and Bonds: Reseller shall maintain, during the term of the Agreement, all insurance and bonds required by any applicable law and the Product Group Attachments including, but not limited to, worker’s compensation insurance, employer’s liability insurance, environmental impairment insurance, pollution liability insurance, automobile liability insurance and commercial general liability insurance. Upon Avaya’s request, Reseller shall provide Avaya with certificates of such insurance coverage.

4.10 Reporting: Reseller shall maintain an accurate and complete record of sales and licenses to End-Users, by name, installation address, Product and Product Components, serial numbers, and date of sale and installation. Upon reasonable notice, Reseller shall allow Avaya and/or its representatives to inspect Reseller’s records and reports. Reseller shall provide point of sale reporting as may be reasonably requested by Avaya, and any other reports specified in the Product Group Attachment.


	4.10.1. To ensure fulfillment of Avaya’s Product and Software warranties to End-Users, to ensure End-User safety, to ensure End-Users receive the latest information concerning the use of Avaya Products and enhancements thereto, to maintain End-User satisfaction, and to assist Avaya in tracking equipment maintenance obligations and materiel accountability, Reseller agrees to maintain and make available to Avaya on reasonable request an accurate and complete list of Reseller’s Avaya Product and Software End-Users by name, installation address, the Avaya Product Components furnished to each End-User, the transaction date, and all serial numbers associated with the new Avaya Products, Software or new Avaya Product Components. The obligation to maintain and make such information available to Avaya shall survive expiration or termination of this Agreement. Avaya will use this information solely for the purposes set forth in this Section 4.10.1.

	4.10.2 If requested by Avaya, by the fifth (5th) business day of each month, in a format to be provided by Avaya to Reseller, Reseller will submit a point-of-sale report of sales made the previous month, by Avaya order code, ZIP code, and quantity.

4.11 Quality Reviews: To maintain Avaya’s high standards for End-User satisfaction and Avaya Product and Service quality, Reseller agrees to abide by all Avaya quality policies, and periodically visit the BusinessPartner website for policy and procedure changes. Reseller agrees to participate in Avaya’s Customer Satisfaction Surveys. Avaya may conduct performance reviews of all Reseller responsibilities and Reseller fulfillment of Avaya’s quality policies.

4.12 Use of Website: The terms of Web Site Use appearing on any Avaya Website used by Reseller, as such terms may be amended from time to time, are hereby incorporated by reference into this Agreement as if set forth herein.

4.13 Product Sourcing: Other than Avaya’s then current alternate sourcing policy, Reseller shall not knowingly purchase or otherwise obtain new or Unused Avaya Products for resale from any source other than the authorized Avaya Distributor(s) provided on a Product Group Attachment or Appendix to this Agreement.

4.14 Deauthorize Employees: Upon the termination of employment of a Reseller’s employee with password access to any Avaya information system or hotline, Reseller agrees to immediately deauthorize the employee’s password access, and to immediately notify the Avaya Information Administrator of the deauthorization.

4.15 BusinessPartner Certification Program: Reseller may be eligible to participate in the Avaya BusinessPartner Certification Program. Upon Reseller’s request, Avaya will provide to Reseller a copy of any materials pertaining to such program. If Reseller decides to participate in such program, Reseller may be entitled to certain rights and benefits offered pursuant to the program, provided that Reseller complies with all applicable minimum sales amounts, minimum technical support capabilities, and other requirements imposed by the program. Avaya has the right to cancel or modify the BusinessPartner Certification Program at any time for any reason.

5.1 Reseller shall pay all Avaya invoices within thirty (30) days of the invoice date. If Reseller does not pay the invoiced amount for receipt by Avaya within thirty (30) days of the invoice date, Reseller shall pay a delinquent payment charge at the rate of 11/2% per month or the maximum legal rate, whichever is lower. Reseller is responsible for taxes which become due as a result of Avaya’s provision of Products or Services.

6.1 Avaya may, without the consent of Reseller and without liability to Reseller, add, delete or change any Products or modify drawings and specifications relating thereto. Such additions, deletions and changes will be communicated to Reseller within a reasonable time of the decision to add, delete or change. Avaya may substitute Products or Product Components of later design to fill an order, provided the changes, modifications or substitutions under normal and proper use do not adversely impact upon form, fit or function or are recommended by Avaya to enhance safety.

6.2 Reseller agrees not to make or permit any third party to make any changes to the Products.

7.1 All Licensed Materials, and all copies thereof, including translations, compilations, derivative works and partial copies, are and shall at all times remain the property of Avaya or its licensor.

7.2 Avaya grants Reseller a personal, non-exclusive and non-transferable license to use the Licensed Materials only in connection with Products demonstrated or furnished to End-Users. Reseller is authorized to use the software only on the hardware on which it has been loaded by Avaya or on which Avaya has authorized it to be loaded. No title or other ownership rights in intellectual property or otherwise in the Licensed Materials shall pass to Reseller or any sub licensee under the Agreement. Reseller agrees not to export the Licensed Materials out of the Territory.

7.3 Reseller agrees not to reverse engineer, decompile or disassemble software furnished to it in object code form or permit any third party to do so. For any software included as part of the Licensed Materials which inherently includes the capability of being remotely enabled, Reseller expressly agrees that it shall not enable, or permit or assist any third party to enable, such features or capabilities without Avaya’s express written permission.

7.4 Certain software included as part of the Licensed Materials may be provided with a separate “shrink-wrap” or other software license and/or warranty terms. In such cases, the separate software license and/or warranty terms shall supersede any provisions of the Agreement which are inconsistent or in conflict with such license and/or warranty terms. At Avaya’s request, Reseller shall execute any license agreement for software licensed to it. As a condition to the license or sublicense of any of Licensed Materials to an End-User, Reseller shall cause the End-User to be bound by the license agreement specified in the applicable Product Group Contract or furnished by Avaya with the software. Reseller agrees that Avaya shall be a third party beneficiary of the provisions regulating and/or restricting Reseller’s license rights to software from Avaya or its affiliates or outside vendors (“Software License Restrictions”). Accordingly, Reseller acknowledges that Avaya shall have the right to enforce those Software License Restrictions directly. Reseller also agrees that it will cause its End-Users to agree to similar Software License Restrictions; and that those agreements shall similarly establish Avaya as a third party beneficiary with the right to enforce those Software License Agreements directly against Reseller’s End-Users. Reseller also agrees that, upon reasonable request, it will assign to Avaya its rights to enforce the Software License Restrictions directly against Reseller’s End-Users.

7.5 Reseller shall maintain a copy of each such End-User license agreement. Avaya shall have the right to obtain a copy of the license agreements upon request. Reseller agrees that it shall forbid its End-Users to export the software out of the Territory, and shall impose on its End-Users the same restrictions on reverse engineering, decompilation and disassembly as described in Section 7.3 above.

7.6 If the applicable license agreement authorizes Reseller to make copies of the Licensed Materials, Reseller shall make only the copies that are so authorized, and all such copies shall include all copyright and proprietary notices of

Avaya. Reseller shall mark all media containing such copies with a notice that the Licensed Materials are the property of Avaya and subject to restrictions and limitations of liability.

7.7 Any failure by Reseller to comply with any of the license provisions contained in the Agreement, Product Group Attachment, or Product Appendix shall be a material breach of the Agreement and shall immediately entitle Avaya to terminate any license granted for the Licensed Materials and to exercise any remedy set forth herein, as well as any remedy that may exist at law or in equity. If Reseller’s license is terminated, or when Reseller no longer needs the Licensed Materials, Reseller shall return to Avaya or destroy all copies thereof. Then current licenses properly granted by Reseller to its End-Users shall survive termination of Reseller’s license.

7.8 Avaya may cancel or cause Reseller to cancel any license to Reseller’s End-User, if that licensee fails to comply with any of the license provision contained in the Agreement or any other applicable license agreement. If such cancellation is due to a breach by an End-User without any fault or breach by Reseller, then the cancellation shall not extend to Reseller’s license with respect to itself and the licenses of other End-Users.

7.9 Avaya may, at its discretion, electronically audit each system configuration containing Products sold under the Agreement, to verify compliance with the license provisions of the Agreement, including (among other things) the terms of the software license as it relates to the enablement of any separately licensed features or incremental units of capacity. Such an audit shall be conducted at the time of enablement of any separately licensed feature or incremental unit of capacity and at other times selected by Avaya which, except in emergencies or suspected violations, shall not be more than once per calendar year upon at least three (3) business days notice to Reseller. Reseller shall cooperate with Avaya in conducting such audits. Reseller shall include in its contracts with its End-Users the requirement that such End-Users permit such audits and cooperate with Avaya in conducting such audits, including making remote access available to Avaya for this purpose.

7.10 Avaya will furnish Related Documentation to Reseller in English. Reseller will have the right, at its own expense, to reproduce and translate Related Documentation, provided that: (a) each copy or part thereof includes Avaya’ copyright and other relevant notices; (b) any translation is accurate and complete and reproduces the information in a manner consistent with the original literature; (c) such translation conforms to Avaya then current documentation standards provided to Reseller by Avaya from time to time; and (d) all intellectual property rights in any publication produced by Reseller referring to any Product, Product Component, or Licensed Materials will be assigned to Avaya upon publication and Reseller will take such actions and execute such documents from time to time as requested by Avaya to ensure that Avaya obtains and retains such rights. If Avaya determines that any publication produced by Reseller fails to comply with the preceding sentence, Reseller will do any or all of the following as requested by Avaya in its sole discretion: (a) cease distribution of such publications; (b) reclaim as many copies thereof as is reasonably practical; (c) destroy all copies of such publications within Reseller’s control; and (d) amend the publication in accordance with Avaya’s instructions.

8.1 Confidential Information in any form, whether written or electronic, shall remain the property of the furnishing party. Unless authorized by the furnishing party in writing, such Confidential Information: (a) shall be treated in confidence by the receiving party, not disclosed to third parties and used only for purposes of its performance under the Agreement; (b) shall not be reproduced or copied in whole or in part, except as necessary for use as authorized herein; and (c) shall, together with any copies thereof, be returned or destroyed when no longer needed or when the Agreement terminates, whichever occurs first.

8.2 Confidential Information does not include information which (a) is known to the receiving party free of any restriction, (b) becomes generally available to the public, other than as a result of improper action by the receiving party; or (c) is independently developed by the receiving party.

8.3 The parties agree to keep confidential: (a) the terms of the Agreement; (b) the subject matter of any dispute relating to the Agreement; (c) the terms of any settlement of any dispute relating to the Agreement; and (d) the termination of the Agreement. If a party is compelled by law to make disclosure of any of the above, notice shall be given to the other party pursuant to Section 20.8 prior to any disclosure so that the non-disclosing party will have an opportunity to object and/or to bring proceedings to prevent such disclosure.

8.4 If requested by Avaya, Reseller shall notify Avaya of the identities of its controlling persons and executive management and material changes therein. Such information shall be Confidential Information of Reseller.

9.1 Avaya hereby grants to Reseller a limited nonexclusive, non-transferable license and right to use the Licensed Trademarks for use in connection with the advertisement, promotion, sale or marketing of Products in the Territory, subject to the terms and conditions of this Section and the other provisions of the Agreement.

9.2 Reseller shall apply the Licensed Trademarks only to materials which have been created, in accordance with the standards of quality in materials, design, workmanship, use, advertising and promotion set forth in the Trademark Guidelines, or to materials which Avaya has otherwise approved in writing. The Guidelines for Use of Avaya BusinessPartner Promotional Signatures are set forth on the BusinessPartner website and are incorporated herein by reference. The Trademark Guidelines are Confidential Information of Avaya. Avaya may revise the Trademark Guidelines from time to time, and such revisions shall be effective upon written notice to Reseller.

9.3 Avaya shall have the right to conduct during regular business hours an examination of materials created by Reseller to determine compliance of such materials with the Trademark Guidelines. If such materials shall fail to conform in any material respect with any of the standards set forth in the Trademark Guidelines, (a) without limiting its other remedies, Avaya may so notify Reseller, and (b) upon such notification, Reseller shall promptly cease using the Licensed Trademarks on such materials and not distribute or publicize such nonconforming materials until the standards contained in the Trademark Guidelines have been met.

9.4 Avaya acknowledges that it owns the Licensed Trademarks and all registrations and applications therefore in the US and throughout the world but makes no warranties regarding the validity or enforceability of the Licensed Trademarks. Reseller will acquire no rights in or to Licensed Trademarks by virtue of this Agreement, Reseller’s activities under it, or any relationship Reseller may have with Avaya.

9.5 Reseller shall comply with conditions set forth in the Trademark Guidelines or otherwise established in writing from time-to-time by Avaya with respect to the style, appearance and manner of use of the Licensed Trademarks. Any use of the Licensed Trademarks not specifically provided for by such conditions shall be adopted by Reseller only upon the prior written approval of Avaya. In addition, Avaya may request that notices acceptable to Avaya be used on the materials bearing the Licensed Trademarks to identify the licensed use under the Agreement and the proprietary rights of Avaya.

9.6 All materials using Licensed Trademarks shall be subject to prepublication review and approval, at such reasonable times and in such reasonable manner prior to publication as established by Avaya from time to time, with respect to, but not limited to, content, style, appearance, composition, context, timing, media (including but not limited to broadcast fax, placement on a web site, Yellow Pages, or any other advertising or marketing medium), and geographic distribution plans. Avaya agrees to use reasonable commercial efforts in conducting such prepublication review and approval.

9.7 The Licensed Trademarks are not to be used by Reseller in any way to imply Avaya’s endorsement of products, services or materials, other than those furnished to Reseller pursuant to the applicable Product Group Contract. Reseller will not alter or remove any of the Licensed Trademarks applied to a Product, without the prior written approval of Avaya.

9.8 Reseller agrees not to register in any country or other jurisdiction any name or mark identical to or confusingly similar to the Licensed Trademarks.

10.1 Avaya shall defend or settle all suits against Reseller alleging that any Product furnished under the Agreement infringes any United States patent, and Avaya shall pay all damages and costs which, by final judgment of a court of competent jurisdiction, may be assessed against Reseller on account of such infringement, provided that Avaya shall have the foregoing obligations with respect to third party Products contained within any Products only to the extent Avaya is indemnified for such obligations by such third party vendors. Such defense, settlement and payments are conditioned on the following: (a) Reseller gives Avaya prompt written notice of all such infringement claims and suits, and full opportunity and authority in the name of Reseller or otherwise to assume the sole defense and settlement of such suits; and (b) Avaya shall have sole control of the defense of any action on such claim and all negotiations of its settlement or compromise; and (c) Reseller furnishes Avaya with all information and assistance available to Reseller for such defense.

10.2 In the event of a claim of infringement, or a threatened claim of infringement, Reseller agrees that Avaya, in its sole discretion, may either: (a) procure for Reseller the right to continue selling the Product; (b) replace the Product subject to the claim with a non-infringing Product which is functionally equivalent; (c) modify the Product so that it becomes non-infringing; or (d) re-acquire the infringing Product and refund the purchase price less a reasonable allowance for use and damage.

10.3 Sections 10.1 and 10.2 state the entire liability of Avaya for intellectual property infringement by any Product furnished under the Agreement.

10.4 Avaya’ obligations under Section 10.1 shall not apply to, and Reseller agrees to indemnify and save Avaya harmless from, all costs, expenses, liabilities and claims for infringement of any intellectual property rights: (a) arising from adherence to instructions, specifications or drawings which Avaya is directed by Reseller to follow; (b) relating to use or

sale of the Products in combination with other item(s) not furnished by Avaya; or (c) arising from any modifications made to the Products by Reseller or any of its End-Users.

11.1 Avaya warrants each Avaya-manufactured Product or Product Component (exclusive of Licensed Materials) to its End-Users only to the extent set forth in the applicable Product Group Attachment or documentation accompanying the Product or Product Component. Avaya’s Product warranties are subject to all of the terms and conditions set forth in the Product Group Attachment or documentation accompanying the Product or Product Component, including, but not limited to, exclusive remedies and limitations of liability. Avaya makes no warranty with respect to Unused Products and Products or Product Components not manufactured by Avaya (“Non-Avaya Components”). Avaya, to the extent permitted, assigns to Reseller’s End-Users any warranties given to Avaya by the vendor of such Non-Avaya Components.

11.2 No warranty by Avaya will extend to Products or Product Components that have (a) been subjected to misuse, neglect, power failures or surges, lightning, fire, flood or accident, (b) been used, repaired or altered contrary to Avaya’s instructions, (c) been improperly installed, stored, or maintained, or (d) had their serial numbers or date of manufacturing removed, defaced or altered.

11.3 Although Products are designed to be reasonably secure, Avaya makes no express or implied warranty that Products are immune from or prevent fraudulent intrusion, unauthorized use or disclosure or loss of proprietary information. Certain software features, if purchased, when enabled, could be improperly used in violation of privacy laws. By ordering Products with these features or separately ordering such features, Reseller and its End-Users assume all responsibility for assuring their proper and lawful use and all liability for any improper or unlawful use of such features. Avaya shall not be liable for any improper or unlawful use of such features.

11.4 Avaya does not warrant that the Products will prevent Toll Fraud. If Reseller offers its End-Users any warranty that is inconsistent with this Toll Fraud warranty exclusion, Reseller shall specifically describe to End-Users the sections of Avaya’ material and documentation that regard Toll Fraud and the precautions an End-User can take to prevent Toll Fraud. Avaya shall in no event be liable to Reseller, and End-User or any third party for Toll Fraud, and Reseller shall indemnify Avaya for any damages or liability resulting or arising from any additional Toll Fraud warranties or representations made by Reseller.

11.5 THE FOREGOING WARRANTY IS IN LIEU OF AND EXCLUDES ALL OTHER EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT FOR THE LIMITED PRODUCT WARRANTY TO RESELLER’S END-USERS REFERENCED IN THIS SECTION, AVAYA, ITS AFFILIATES AND SUPPLIERS MAKE NO WARRANTIES EXPRESS OF IMPLIED AND SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.

12.1 Avaya warrants the Licensed Materials End-Users and only to the extent set forth in the applicable Product Group Attachment or documentation accompanying the Product or Product Component. Any warranty is subject to all of the terms and conditions set forth in the Product Group Attachment or documentation accompanying the Product or Product Component, including, but not limited to, exclusive remedies and limitations of liability. The provisions of this limited Licensed Materials warranty shall also govern Reseller’s internal use for the Licensed Materials, including use for sales, service, or training purposes.

12.2 Avaya makes no warranty with respect to any Licensed Material as to defects resulting from (a) Reseller’s or its End-Users’ misuse, neglect, accident or abuse; (b) Reseller’s or its End-Users’ alteration of Licensed Materials; or (c) Licensed Materials used in violation of the Agreement or the license to which its use is subject. Avaya does not warrant that Licensed Materials will meet the specifications or requirements of Reseller or its End-Users, or that the operation of the Product using the Licensed Materials will be continuous over any specified period of time or error-free.

12.3 THE FOREGOING WARRANTY IS IN LIEU OF AND EXCLUDES ALL OTHER EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT FOR THE LIMITED PRODUCT WARRANTY TO RESELLER’S END-USERS REFERENCED IN THIS SECTION, AVAYA, ITS AFFILIATES AND SUPPLIERS MAKE NO WARRANTIES EXPRESS OR IMPLIED AND SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.


	(a) For purposes of the exclusive remedies and limitations of liability set forth in this Section, each party shall be deemed to include its respective subsidiaries and affiliates and the directors, officers, employees, agents, representatives, subcontractors and suppliers of each of them; and “damages” shall be deemed to refer collectively to all injury, damage, loss or expense incurred;

	(b) Avaya’s entire liability and Reseller’s exclusive remedies against Avaya for any damages caused by any Product defect or failure, or arising from the performance or non-performance of any work, regardless of the form of action, whether in contract, tort including negligence, strict liability or otherwise shall be:


	(i) For infringement, the remedies set forth in the section entitled Infringement;

	(ii) For the non-performance of Product or work performed during any warranty period, the remedies stated in the sections entitled Limited Product Warranty and Limited Software Warranty and in the Product Group Attachments;

	(iii) For failure to deliver or for delays in delivery of Production quantities, Avaya shall have no liability unless the delivery is delayed by more than thirty (30) days by causes not attributable either to Avaya or to conditions beyond Avaya’s reasonable control, in which case Reseller shall have the right, as its sole remedy, to terminate the order without incurring termination charges, or to require Avaya to deliver the Products using priority delivery, at Avaya’s Expense;

	(iv) For bodily injury or death to any person proximately caused by Avaya’s negligence, the amount of proven direct damages; and

	(v) For any claims not set forth above, Avaya’s liability shall be limited to direct damages that are proven, in an amount not to exceed the purchase price of the affected Product.


	(c) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, SAVINGS OR REVENUES OF ANY KIND, WHETHER OR NOT ANY SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS PROVISION SHALL SURVIVE FAILURE OF AN EXCLUSIVE REMEDY.

13.2 For all Products ordered or purchased by Reseller from an authorized Avaya distributor, Reseller and its End-User shall direct all complaints, make all claims and seek all remedies against such distributor arising out of or relating to the Products, including but not limited to any delays, errors or omissions in filling any orders or defects in the Products, whether in contract, tort, strict liability or otherwise.

13.3 No suit, action or proceeding (including a claim for arbitration under Section 17.1) may be commenced against Avaya or any of its Affiliates or suppliers more than one (1) year after the cause of action arises.

13.4 THE PARTIES AGREE THAT THE PRICES FOR PRODUCTS REFLECT THE ALLOCATION OF RISKS IN THIS AGREEMENT AND THE PRODUCT GROUP ATTACHMENTS.

14.1 Reseller agrees to indemnify and save harmless Avaya from and against losses, damages, claims, demands, suits and liabilities (including court costs and reasonable attorney’s fees) that arise out of or result from injuries or death to persons or damage to tangible property caused by Reseller’s acts or omissions, or those of persons furnished by Reseller or in any way arising out of Reseller’s performance or failure of performance of this Agreement; or assertions made by persons furnished by Reseller under Workers’ Compensation or similar acts;. At Avaya’s request, Reseller agrees to defend Avaya against any such claims, demands or suits at Reseller’s expense. Avaya agrees to notify Reseller in writing within a reasonable time of any written claims or demands against Avaya for which Reseller is responsible under this Section and agrees to cooperate with Reseller in connection with the defense of such action, but Avaya shall have the right to be represented in such action at its expense with advisory counsel of its choice.

14.2 Avaya agrees to indemnify and save harmless Reseller from and against losses, damages, claims, demands, suits and liabilities (including court costs and reasonable attorney’s fees) that arise out of or result from injuries or death to persons or damage to tangible property caused by Avaya’s acts or omissions, or those of persons furnished by Avaya or in any way arising from Avaya’s performance or failure of performance of this Agreement; or assertions made by persons furnished by Avaya under Workers Compensation or similar acts. At Reseller’s request, Avaya agrees to defend Reseller against any such claims, demands or suits at Avaya’s expense. Reseller agrees to notify Avaya in writing within a reasonable time of any written claims or demands against Reseller for which Avaya is responsible under this Section and agrees to cooperate with Avaya in connection with the defense of such action, but Reseller shall have the right to be

14.2 This provision shall survive the expiration or termination of this Agreement.

15.1 Other than for the payment of money, neither party shall be held responsible for any delay or failure in performance to the extent caused by events beyond such party’s reasonable control, such as fire, flood, explosion, war or the engagement of hostilities, strike, embargo, labor dispute, government requirement, civil disturbances, civil or military authority, and inability to secure materials or transportation facilities. Each party shall endeavor to give the other reasonable notice of any such delay or failure.

16.1 Reseller acknowledges that Avaya has appointed it as a Reseller in reliance upon the qualifications, business reputation, and financial soundness of itself and its controlling persons and management. Reseller may not assign the Agreement, or assign or delegate any right or obligation arising under the Agreement, without the prior written consent of Avaya.

16.2 Avaya may subcontract any or all of the work to be performed by it under the Agreement, but shall retain the responsibility for the subcontracted work. Avaya may assign the Agreement, in whole or in part, to any of its Affiliates or to any entity to which Avaya may sell, transfer, convey, assign or lease all or substantially all of its rights with respect to the Products subject to an applicable Product Group Contract.

17.1 Either party may terminate the Agreement at any time without cause by giving the other party one hundred eighty (180) days written notice of the termination. During said one-hundred-eighty (180) day period, Avaya will complete any pending orders for Product and Product Components upon receipt of pre-payment from Reseller for any such orders unless the parties agree otherwise. Reseller shall not submit any orders for Product or Product Components on or after the date of notice of termination and Avaya has no obligation to process any orders or deliver Product or Product Components pursuant to any order that violates this Section.

17.2 Either party may terminate this Agreement for material breach or default of any term or condition of this Agreement (other than payment to Avaya) if such breach or default is not cured within thirty (30) days of written notice of such breach or default from the non-breaching party.

17.3 Avaya may terminate the Agreement on twenty-four (24) hours notice upon the occurrence of any of the following:


	(a) if Reseller breaches or otherwise violates any of the provisions of Sections 3.1, 4.13, 7.0, or 9.7 hereof; or

	(b) if Reseller materially breaches or violates any other provision of the Agreement and the breach or violation is not capable of cure; or

	(c) if Reseller breaches or violates any provision of the Agreement, including the failure to pay Avaya under this Agreement or to pay an Avaya distributor, and Reseller fails to cure such breach or violation within five (5) days after notice of such breach or violation is given to Reseller; or

	(d) if there is a 50% or more change of direct or indirect ownership of Reseller or a change of direct or indirect control of Reseller (excluding a change of ownership of the shares of a publicly traded company which does not result in a change of control).

17.4 The termination of the Agreement shall automatically accelerate the due date of all invoices to the effective date of termination.


	(a) discontinue all use of Licensed Trademarks, except that Reseller may continue using such Licensed Marks as authorized in the Agreement for an additional one hundred eighty (180) days exclusively in connection with Reseller’s efforts to sell remaining inventory; and

	(b) cease holding itself out, in any manner, as an authorized Reseller of Avaya and notify and arrange for all persons who may identify, list or publish Reseller’s name as an Avaya authorized Reseller to discontinue the same; and

	(c) return to Avaya, or destroy at Avaya’s request, all Confidential Information and all promotional materials supplied by Avaya; and

17.6 Neither party shall be liable to the other on account of the termination of the Agreement pursuant to this Section or otherwise pursuant to the Agreement, either for compensation or for damages of any kind or character whatsoever, or on account of the loss of present or prospective profits, good will, or expenditures, investments or commitments made in contemplation of, or in the performance of, the Agreement, provided, however that the termination of the Agreement shall not prejudice or otherwise affect (a) the rights or liabilities of the parties with respect to Products already sold under the Agreement, (b) any indebtedness then owing by either party to the other, and (c) any other obligations of the parties, such as those arising under Sections 5, 7, 8, 9, 10, 11, 12, 13, 14, 17, 18, 19 and 20, which by their nature continue beyond termination of the Agreement and which shall survive such termination.

18.1 Unless otherwise stated in the Product Group Attachment, the Agreement shall be governed by and construed in accordance with the laws of the State of New York, USA, excluding its choice of law principles.

18.2 Any suit or other action arising out of the Agreement, whether commenced in conformity with or contrary to Section 19, shall only be brought, if by Avaya, in the federal courts of the State of Oklahoma, and if by Reseller, in the federal courts of the State of New York, with the sole exception that any party may commence a suit in any jurisdiction to enforce an arbitration award or judgment obtained pursuant to Section 19. In the event of any suit in the federal courts of either New York or Oklahoma, as the case may be as provided herein, (a) the parties hereby consent to personal jurisdiction therefore and waive any defense based on a lack of personal jurisdiction, improper venue, or the inconvenience of the forum, and (b) the parties agree that delivery of any process in the manner provided for in Section 20.8 shall constitute lawful and valid service of process.

19.1 Except as otherwise expressly provided in the Agreement, any dispute, controversy or claim arising out of or relating to the Agreement, its interpretation or enforcement shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association conducted by one arbitrator. The arbitration shall be conducted at Avaya’s offices at 211 Mt. Airy Road, Basking Ridge, New Jersey unless otherwise agreed by the parties. Any ruling by the arbitrator shall be final and binding on the parties and may be entered in any court of competent jurisdiction. The arbitrator shall have no authority to modify or expand the Agreement or any of the provisions of this Agreement. The arbitrator is specifically authorized to render partial or summary judgment. Each party will bear its own attorneys’ fees associated with the arbitration, and each party shall bear an equal share of all fees, costs and expenses of the arbitrator. The arbitration proceeding and all testimony, filings, documents, and other information produced or given in connection with the arbitration shall be treated as Confidential Information, except as may be necessary to enter any arbitration ruling in a court of competent jurisdiction or as otherwise may be required by law.

19.2 Nothing in the Agreement shall preclude either party from specific performance or other equitable relief, including but not limited to temporary restraining orders and preliminary injunctions, from any court of competent jurisdiction, in order to protect its rights or prevent harm pending the obtaining of an arbitration ruling, nor shall anything herein prevent Avaya from seeking monetary damages from any court of competent jurisdiction for monies owed to it hereunder. Without limiting the foregoing provisions of this Section, Reseller acknowledges that remedies at law, including by means of an arbitration for a breach or threatened breach of any of the covenants contained in Sections 4, 7, 8, 9, 16 and 17 will be inadequate and in the event of a breach or threatened breach of any such covenants, Avaya shall be entitled to an injunction specifically enforcing Reseller’s compliance with such.

19.3 The prevailing party in any dispute relating to the Agreement resulting in a final judgment by any court or arbitration panel, including but not limited to actions to collect money owed to Avaya by Reseller, shall be entitled to the payment of all attorneys fees and costs incurred.

20.1 No failure to exercise and no delay or partial exercise of a right or power conferred upon a party under the terms of the Agreement shall operate as a waiver of such right or power.

20.2 If any paragraph or clause in the Agreement shall be held to be invalid or unenforceable in any jurisdiction in which the Agreement is being performed, then the meaning of such paragraph or clause shall be construed so as to render it enforceable, to the extent practicable; and if no such interpretation would save such paragraph or clause, it shall be severed from the Agreement and the remainder shall remain in full force and effect. However, in the event such section or clause is considered an essential element of this Agreement by either Avaya or Reseller, the parties shall promptly negotiate a replacement therefore.

20.3 The Agreement has been signed in the English language. In case of conflict between the Agreement and any translation from English, the English language Agreement shall control.

20.4 In the event of a conflict between provisions of the Agreement and the Product Group Attachments, priority shall be given to provisions of the Product Group Attachments over a provision of the Agreement, unless such priority is expressly overridden in the Agreement; and in the event of a conflict between the provisions of the Product Group Attachment and a Product Appendix, priority shall be given to provisions of the Product Appendix over a provision of the Product Group Attachment, unless such priority is expressly overridden in the Product Group Attachment or the Agreement

20.5 The terms and conditions contained in the Agreement supersede all prior oral or written understandings between the parties and shall constitute the entire agreement between them concerning the subject matter of the Agreement and shall not be contradicted, explained or supplemented by any course of dealing or course of performance between Avaya and Reseller. The Agreement may only be amended by a writing signed by both parties.

20.6 The headings contained in the Agreement are for convenience only and are not intended to affect the meaning or interpretation of the Agreement.

20.7 Words importing a particular gender shall include every other gender and words importing the singular shall include the plural and vice-versa, unless the context clearly indicates otherwise.

20.8 Except as expressly provided in the Agreement, all notices, consents, waivers, requests or other instruments or communications given pursuant to the Agreement shall be in writing and shall be delivered by hand or sent by registered or certified United States mail, return receipt requested, postage prepaid, or by a recognized overnight delivery service, addressed to Avaya at its principal place of business, Attention: General Counsel and to the Reseller at the address set forth at the beginning of these Master Terms and Conditions. Any party may, by notice to the other party, specify any other address for the receipt of such notices, instruments or communications. Except as expressly provided in the Agreement, any notice, instrument or other communication shall be deemed properly given when hand delivered, one business day after being sent by overnight courier service and three days after being sent by United States mail in the manner prescribed in this Section.

IN WITNESS WHEREOF the parties have caused this Master Terms and Conditions to be signed by their duly authorized representatives.

RESELLER PRODUCT GROUP ATTACHMENT
TO AVAYA INC RESELLER MASTER TERMS AND CONDITIONS
For
ENTERPRISE COMMUNICATION
AND INTERNETWORKING SOLUTIONS PRODUCT

This Product Group Attachment (“Product Group Attachment”) shall be effective as of 08/06/03 (“Effective Date”) between Avaya, Inc. (“Avaya”), and XETA Technologies, Inc. (“Reseller”). This Product Group Attachment hereby incorporates by reference the Reseller Master Terms and Conditions entered into between Avaya and Reseller. The terms set forth in this Product Group Attachment shall be applicable to Avaya Enterprise Communications (“EC”) and Internetworking Solutions (“IS”) Products as defined in Product Appendices attached.

In addition to the terms of the Reseller Master Terms and Conditions specifying the relationship of the parties and their responsibilities, the parties agree as follows:

Unless otherwise specified herein, terms which are defined in the Reseller Master Terms and Conditions shall have the meanings specified therein. The following terms shall have the meanings specified below:

1.1 “Area” means the specific geographic area or market segment in which Reseller has agreed to market Avaya Products in accordance with this Agreement. The agreed upon Area for Reseller is set forth in Appendix 1.

1.2 “Distributor” means the authorized Avaya distributor of Avaya Product from whom Reseller will purchase product and who are listed or referred to in Appendix 1, to this Product Group Attachment.

1.3 “Reseller Service” means one or more of those services Reseller may choose to perform itself for Avaya Products in the Area. Reseller Services include system configuration to the End User, installation, warranty, and provision of post-warranty on-site maintenance.

1.4 “Avaya Service” means one or more of those services provided by Avaya that Reseller may choose to offer, including system configuration, installation, provision of post-warranty on-site and post-warranty remote maintenance service, and professional services. Avaya Service also includes remote maintenance service separate from post-warranty on-site maintenance service, which Reseller may offer in conjunction with Reseller Service.

1.5 Territory” means the fifty states of the United States of America and the District of Columbia, excluding the Cincinnati Bell Telephone Company operating area in the states of Ohio, Kentucky and Indiana with respect only to DEFINITY® ECS and Prologix® products.

2.0

APPOINTMENT FOR ENTERPRISE COMMUNICATION AND INTERNETWORKING SOLUTIONS PRODUCT

2.1 For Resale of EC Products Only: Avaya hereby authorizes Reseller to purchase Avaya EC Products from EC Products Distributor, for resale to End User customers only who are within Reseller’s Area.

For Resale of IS Products Only: Avaya hereby authorizes Reseller to purchase from Avaya IS Products from IS Products Distributor(s), for resale to End User customers only who are within Reseller’s Area.

Reseller’s authorized marketing location(s) are set forth in the Appendix 1. If End User to which Reseller has sold Avaya EC Products within the Area has locations outside the Area but within the Territory, then Reseller may sell limited quantities of Avaya EC Products for use by that End User outside the Area but in the Territory. With that exception, reseller shall not market or sell Avaya EC Products outside Reseller’s Area. Avaya’s authorization is predicated on Reseller’s agreement to market the Avaya Products in the Area and to achieve the Area forecast submitted pursuant to Section 4.3 of the Master Terms and Conditions. Avaya EC Products installed outside the Area will not be considered by Avaya when determining whether Reseller has achieved its annual commitment submitted pursuant to Section 4.3 of the Master Terms and Conditions. Reseller’s sales of Avaya EC Products outside the Area (unless specifically permitted by this Section 2.1), Reseller’s failure to achieve levels of sales acceptable to Avaya in the Area shall, among others, be grounds for termination or non-renewal of the Agreement.

2.2 Unless expressly provided elsewhere within this Agreement, Reseller may not market or sell Avaya Products to any office, department, agency, or defense installation of the United States Government except that Reseller may respond to a request for competitive bids, proposals, or quotations even if Avaya is also responding. Reseller is not appointed or authorized to market or sell Avaya Products to the United States Government by reason of the fact that Reseller has, in the past, sold used or unused products manufactured by Avaya to the United States Government.

3.0

SUPPLEMENTAL RESPONSIBILITIES OF RESELLER FOR AVAYA ENTERPRISE COMMUNICATION AND INTERNETWORKING SOLUTIONS PRODUCT

3.1 All services training that Avaya requires Reseller personnel to undergo, or other services training requested by the Reseller and offered by Avaya, will be furnished to Reseller at Avaya’s standard rates, terms and conditions. If Reseller has subcontracted with Avaya to perform all or part of Reseller Service to an End User and Reseller installs unused product (s) manufactured by Avaya but not purchased from the BusinessPartner Sales Organization (“BPSO”) as part of that End User’s system, in addition to any other remedies available to Avaya, Avaya may terminate any Reseller licenses to use Avaya maintenance software and also terminate its subcontracts with Reseller to perform Reseller Service. If Reseller has sold an Avaya Product system and an Avaya Post-Warranty Maintenance service contract to an End User, Reseller will advise such End User that addition of used and unused product (s) to the Avaya Product system may void Avaya’s warranty and cause Avaya to terminate the service contract.

3.2 Except when requested by the End-User customer within ninety (90) days prior to expiration of its Avaya Service agreement, without any prior solicitation from Reseller, Reseller may not seek to or assist any third party in replacing, interfering with or substituting any pre-existing Avaya Service agreement entered into with an End-User customer. Any act of interference by a Reseller with an existing Avaya Service agreement shall be a material breach of this Agreement. Reseller will not market or resell a third party’s services in support of an Avaya Product where Avaya has a preexisting Services agreement during the term of this Agreement.

3.3 Reseller shall offer to train those End Users who elect to install their own systems in the effective use of the Avaya Products, including providing any instructional material furnished to Reseller by Avaya. Reseller shall specifically describe to those End Users who elect to install their own systems the sections of such material, including brochures and manuals packaged with the Avaya Products, that describe toll fraud and the precautions an End User can take to prevent toll fraud.

3.4 If Avaya is to install the Products, Reseller shall give requested information, to the Avaya services organization where the End User is located, in the agreed format, as soon as Reseller’s order process is completed. This will enable the customer to receive the Avaya Warranty on the new Avaya Products and Software, and if the customer has an Avaya post warranty service maintenance contract and has like products, the new Avaya Products will automatically be added to that contract when the Warranty expires.

4.0

INSTALLATION, WARRANTY AND POST-WARRANTY SERVICES (for EC Products only)

This section 4.0 applies only to EC Products authorized by Product Appendix or Addendum to this Product Group Attachment:

4.1 Avaya agrees to furnish any Avaya Services required by End Users purchasing Avaya Products from Reseller, as Reseller requests, until Reseller’s installation and maintenance personnel have completed training required under Section 4.2 of the Master Terms and Conditions, to the satisfaction of Avaya. During such interim period, Reseller agrees to propose only Avaya Services or those of an Authorized Avaya Service provider in connection with each End User purchase of Avaya Products under this Agreement. Once Reseller has completed the necessary training, any installation, warranty or post-warranty Services required by End Users may be furnished by Reseller. To ensure the provision of high quality installation and post-warranty Services to End Users, Reseller shall: (i) perform Services directly and not, unless expressly authorized in writing by Avaya, through a non-Avaya authorized independent contractor or agent; (ii) be adequately trained; and (iii) perform such Services competently and in accordance with any applicable Avaya standards. The indemnity obligations of Reseller under Section 14.1 of the Master Terms and Conditions shall apply to any Services furnished by Reseller to End Users. Reseller may offer Avaya’s installation and post warranty Services to Reseller’s End Users at Avaya’s then current rates terms and conditions.

4.2 Replacement, spare or maintenance Product Components required by Reseller, to the extent that Avaya in its sole discretion makes such Product Components available, can be purchased either directly from Distributor pursuant to this Agreement or through Avaya’s National Parts Sales Center (NPSC). In the event Reseller elects to purchase such Product Components from the NPSC, such purchases shall be at the prices, terms and conditions established by the NPSC. Replacement, spare and maintenance Product Components provided to Reseller or purchased by Reseller under this Agreement may, at Avaya’s option, be either new or refurbished.

4.3 Avaya’s appointment of Reseller to market Avaya Products hereunder is predicated on Reseller’s agreement that it will hold itself out as authorized by Avaya to provide Services only as to Avaya Products hereunder and will, to the sole satisfaction of Avaya, clearly distinguish its authorization to provide Services for such Avaya Products and its lack of authorization to provide Services for other Avaya-manufactured equipment. Reseller also agrees to inform End Users of such distinction in Reseller’s marketing (including brochures or other printed or written materials) of Avaya Products and of any other Avaya equipment. In addition to any other events of termination set forth in this Agreement, Reseller’s failure to distinguish between its authorization to offer Services as to Avaya Products and its lack of authorization to offer Services as to other Avaya equipment or to inform End Users of such distinction shall entitle Avaya to terminate this Agreement upon written notice to Reseller.

4.4 Reseller may incorporate Avaya Services support features in its Reseller Service Offers to End Users. Avaya will serve as Reseller’s subcontractor for such Avaya Services. No license is granted, and no title or other ownership rights in Avaya’s intellectual property related to Avaya’s provision of Avaya Services support shall pass to Reseller under this Agreement or as a result of any performance hereunder. Reseller agrees to provide Avaya with accurate information on End User port capacity, software attachments, and other information required in order for Avaya to invoice Reseller accurately for such remote support. Failure to provide such accurate information or to update it on a timely basis shall entitle Avaya to terminate this Agreement upon written notice to Reseller. Connection of unused product(s) manufactured by Avaya but not purchased from BPSO as part of an End User’s system may, in addition to any other remedies available to Avaya, permit Avaya to terminate any Reseller licenses to use Avaya maintenance software and also to terminate all its subcontract (s) with Reseller to perform Reseller Service.

5.1 Avaya may without the consent of Reseller, but with thirty (30) days advance written notice to Reseller, delete any Avaya Product or Product Component from any Product Appendix.

6.1 Upon execution of this Agreement and annually thereafter, Reseller shall submit to Avaya a monthly and quarterly forecast of total Avaya Product orders to be placed by Reseller during the next twelve months, the “annual commitment”. The annual commitment must specify, for each month and quarter, the total unit quantities of each Avaya Product construct (i.e., average configuration of Avaya Product Components in an initial End User installation of an Avaya Product model) to be ordered.

6.2 Avaya may reject any annual commitment submitted by Reseller if, in Avaya’s sole judgment, such commitment does not project either: (1) the level of Avaya Product orders Avaya reasonably requires of Reseller to achieve its marketing objectives in the Area; or (2) a realistic assessment of Reseller’s potential successful marketing opportunities in the Area during the forecast period. Avaya shall notify Reseller in writing within thirty (30) days of receipt of Reseller’s forecast if Avaya has rejected such forecast or it will be deemed to have been accepted by Avaya.

6.3 Reseller shall submit the annual commitment of Avaya Product orders as specified in Section 6.1 of this Attachment, and actual Avaya Product installation data specified in Section 3.4 of this Attachment and Sections 4.10.1 and 4.10.2 of the Master Terms and Conditions, in a format specified by Avaya.

7.1 In addition to the termination conditions in the Reseller Master Terms and Conditions, Avaya may terminate this Attachment or the Agreement upon twenty-four (24) hours upon the occurrence of any of the following:

(a) if Reseller breaches or otherwise violates any of the provisions under Sections 2.1, 3.2, 4.3, and 4.4 of this Attachment, and Reseller fails to cure such breach or violation within five (5) days after notice of such breach or violation is given to Reseller; or

(b) if Reseller has remotely accessed PBX locations maintained by Avaya directly.

Reseller agrees that by executing this Product Group Attachment, it is bound by the terms and conditions of the Master Terms and Conditions, the terms and conditions contained in the Product Group Attachment, and any additional terms and conditions set forth in a Product Appendix associated with those Products, which Reseller has been authorized to sell.

IN WITNESS WHEREOF the parties have caused this Product Group Attachment to be signed by their duly authorized representatives.

This Reseller Product Group Attachment to the Reseller Master Terms and Conditions (“Product Group Attachment”), which shall be effective as of SEP 2 5 2002 (“Effective Date”) between Avaya Inc. (“Avaya”) and XETA Technologies, Inc. (“Reseller”) governs Reseller’s resale of the voice processing equipment principally embodied by the products listed in Appendix 2 (the “Systems”) and the replacement parts, hardware and software upgrades, expansions and conversions for such Systems, which together with the Systems shall be referred to as the “Products” in this Product Group Attachment. Except as explicitly modified herein, all terms, conditions and provisions of the Reseller Master Terms and Conditions (“Master Reseller Agreement”) between Avaya and Reseller and all previous Amendments to that agreement, which are collectively incorporated herein by reference, shall continue in full force and effect, In the event of any inconsistency or conflict between the Master Reseller Agreement and any Amendment and the terms of this Product Group Attachment with respect to Reseller’s resale of the Products, the terms, conditions and provisions of this Product Group Attachment shall govern and control. Capitalized terms used but not defined herein shall have the same meaning as that set forth in the Master Reseller Agreement.

	1.1		This Product Group Attachment applies to the customer premises voice information processing Products identified in Appendix 2 hereto that Reseller is authorized to purchase from Avaya and no others..

	1.2		Reseller also is authorized to purchase from Avaya and no others replacement parts, software upgrades, hardware upgrades, expansions and conversions for the Products set forth in Appendix 2 and for Avaya’s discontinued Products, provided that such parts are available and subject to the terms of any announced plan by Avaya to cease support for such discontinued products (“Sunset Policy). An “expansion” is an increase in the capacity of an installed system without a change in the type of system. A “conversion” is the migration from one type of installed system to another and may include database transfer.

	1.3		The items falling into the following categories shall not be considered Products for any purpose:

	1.3.1		Integrated versions of the Products the development of which requires information from an OEM vendor that OEM will provide only when it or its designated Reseller(s) will be the sole source of distribution of such an integrated version.

	1.3.2		Any of Avaya’s discontinued products.

	2.1		“Applicable Price” means the national list price in effect on the date of Avaya’s receipt of Reseller’s order, subject to any Avaya discount schedule or price plan or policy that may serve to modify the list price.

	2.2		“Authorized Territory” means the Territory set forth in Appendix 1 to this Product Group Attachment, which may be changed only by mutual, written agreement by the parties.

2.3

“COD Software” means remotely enabled incremental software capacity or features.

	3.1		During the term of this Product Group Attachment, and subject to the terms and conditions herein, Avaya appoints Reseller as a non-exclusive reseller authorized to purchase Products from Avaya directly for redistribution only directly to End-Users in the Authorized Territory. This Product Group Attachment shall remain in effect during the term of the Master Reseller Agreement, unless this Product Group Attachment is terminated as provided herein or the Products are discontinued pursuant to Section 6 of the Master Reseller Agreement.

	3.2		The Products covered by this Product Group Attachment may include both hardware and software. Although the terms “purchase” and “sale” may be used throughout this Product Group Attachment for convenience, Reseller understands and agrees that it is being granted the right to use (and further sublicense the use of) but will not obtain title to, or any proprietary rights in, such software. Reseller will comply strictly with all restrictions on the use of software licensed by Avaya to Reseller and will require such compliance by Reseller’s customers.

	3.3		Unless expressly provided elsewhere within this Product Group Attachment, Reseller may not market or sell Products to any office, department, agency, or defense installation of the United States Government except that Reseller may respond to a request for competitive bids, proposals, or quotations even if Avaya is also responding. Reseller is not appointed or authorized to market or sell Avaya Products to the United States Government by reason of the fact that Reseller has, in the past, sold used or unused products manufactured by Avaya to the United States Government.

	3.4		Avaya will not be required to accept any orders for Products until Reseller has completed all requirements of the then current Avaya BusinessPartner authorization or certification program for the Products (the “Certification Program”). In the event that Reseller has not commenced or has not completed the Certification Program as of the Effective Date, it must commence the Certification Program no later than sixty (60) days after the Effective Date and must complete the Program within ninety (90) days thereafter. In addition, if Reseller fails to maintain its authorization status as set forth in the Certification Program, Avaya will not be required to accept any orders for Products until Reseller regains its authorization status. Failure to regain the authorization status within 60 days of notice of such failure to maintain is grounds for immediate termination of this Product Group Attachment.

4.1

Orders for Products (including Product Components) submitted by Reseller shall refer to the identification number of this Product Group Attachment and shall contain the information necessary for proper delivery and invoicing, including without limitation, the date of the order, a description of and the Avaya order code (currently referred to as Material Code) for Products and Product Components to be furnished and any shipping instructions, All orders submitted by Reseller shall be

			deemed to incorporate and be subject to the terms and conditions of the Master Reseller Agreement and this Product Group Attachment as well as any supplemental terms and conditions agreed to in a writing signed by the authorized representatives of both parties. All other terms and conditions, including any pre-printed terms and conditions contained on any order form or correspondence originated by Reseller are rejected and shall have no effect. All orders are subject to acceptance in writing by Avaya through delivery of an order acknowledgment. Avaya shall have no liability to Reseller with respect to orders that are not accepted. Avaya may require that Products and Product Components be ordered only in factory-packed quantities or in minimum order amounts.

	4.2		Reseller warrants that all orders submitted to Avaya will conform completely to Reseller’s own internal policies and procedures regarding such orders. Reseller’s failure to comply with such internal policies will not excuse Reseller’s payment obligations under this Product Group Attachment.

	4.3		Cancellation of Order by Avaya. Avaya shall have the right to cancel an order under any of The following circumstances: Reseller fails to perform its obligations under any of the material terms and conditions hereunder; Reseller’s delay directly causes material delay to Avaya’s performance; in the event that any bankruptcy, insolvency or similar proceedings are commenced by or against Reseller under laws now or hereafter in effect; or in the event of the appointment of any assignee for the benefit of creditors or of a receiver of Reseller or its properties. No such cancellation shall prejudice any of the rights of Avaya arising prior to such cancellation or shall limit in any way other remedies available to Avaya.

	4.4		Cancellation of Order by Reseller. Reseller may, upon written notice to Avaya, cancel any order or portion thereof in accordance with the then applicable Avaya returns policy, a copy of which will be provided to Reseller upon execution of this Product Group Attachment, and which Avaya may, in its sole discretion, change from time to time.

	4.5		Withholding Shipment for Credit Reasons - Avaya may withhold shipment of Products under any purchase order (including one accepted by Avaya) if Reseller’s account is not current, excepting those invoiced amounts reasonably disputed in a writing by Reseller that includes a specific reason for such reasonable dispute; provided, however, that if such disputed amounts become more than 60 days past due, Reseller’s account shall be deemed not current for purposes of this Section.

5.0

RESELLER PRICES, DISCOUNTS AND REBATES - The prices applicable to Reseller orders requesting shipment within Avaya’s then current Product shipment intervals shall be the then current Applicable Price. Avaya’s current national list price and Reseller discount and rebate schedules will be provided to Reseller upon execution of this Agreement. The current discount schedule is set forth at Appendix 4. Reseller orders requesting delayed shipment (i.e., shipment on dates beyond Avaya’s then current Avaya Product shipment intervals) shall be subject to price increases and discount decreases that become effective before shipment.

	6.1		Avaya may decrease the national list price or increase discounts or rebates in the Reseller discount or rebate schedules without advance notice to or the prior consent of Reseller. Avaya agrees to provide written notice of any such price or discount changes and the effective date thereof and a re-computation of pricing on Reseller inventory as set forth in the BusinessPartner Policy and Process Handbook (Resellers). The difference between the re-computed amounts and previously invoiced amounts will be reflected as a credit to Reseller’s account. Avaya will make reasonable commercial efforts to advise Reseller 30 days in advance of any price decreases.

	6.2		Avaya also may institute promotional price decreases or discount increases at any time under such terms and conditions as Avaya in its sole discretion shall determine are appropriate. Promotional prices and discounts shall apply only during the period specified by Avaya and there shall be no re-computation of amounts payable by Reseller for orders placed before such period. Promotional prices and discounts shall not be in excess of 120 days. Such promotional events will not be run in consecutive periods. Avaya will make reasonable efforts to provide Reseller with thirty (30) days advance notice of promotional programs to Resellers.

	6.3		Avaya may, without the prior consent of Reseller, increase the national list price as published by Avaya from time to time or decrease discount levels, including those set forth in Appendix 4, provided Avaya furnishes Reseller written notice of any such changes sixty (60) days in advance of the effective date. All other components of the Reseller compensation plan are variable and dependent on Reseller performance and commitment,

	6.4		Unless expressly stated to the contrary, Applicable prices do not include taxes or Avaya’s charges for related domestic transportation or storage services. Avaya’s national price list prices do include its standard packing for domestic shipment. All Product prices are F.O.B. Avaya’s shipping point. Unless Reseller furnishes Avaya a valid tax exemption certificate, Reseller shall pay all applicable taxes, however designated, resulting from this Product Group Attachment or any activities hereunder (exclusive of any tax based on or measured by net income).

7.0

BILLING AND PAYMENT - Invoices for Products will be sent by Avaya upon shipment of the Product or as soon thereafter as practicable. Unless Avaya otherwise notifies Reseller in writing, Reseller shall pay the invoiced amount in full, within thirty (30) days of the invoice date. Payments not received within thirty (30) days of the invoice date shall incur a late payment charge that shall be computed at the rate of one and one-half percent (1-1/2%) of the overdue amount per month. The amount of Reseller credit or terms of payment may be changed or credit withdrawn by Avaya at any time upon notice to Reseller in writing, unless Reseller provides Avaya with adequate assurance of performance, as that phrase is used in Section 2-609 of the Uniform Commercial Code as adopted in New York, within ten days of any such written notice.

	8.1		Avaya reserves and Reseller hereby grants to Avaya a purchase money security interest in all Products sold to Reseller by Avaya under this Product Group Attachment, and any proceeds thereof or there from, including, but not limited to, accounts receivable, installment contracts, chattel paper and instruments arising there from (the “Collateral”), until any and all payments and charges due Avaya under this Product Group Attachment are paid in full. Avaya shall have the right, at any time and without notice to Reseller, to file in any state or local jurisdiction such financing statements (e.g., UCC-1 financing statements) as Avaya deems necessary to perfect its purchase money security interest hereunder. Reseller hereby irrevocably appoints Avaya as its attorney-in-fact for purposes of executing and filing such financing statements and such other documents prepared by Avaya or its designated agent for the purpose of perfecting Avaya’s security interest hereunder, Reseller also agrees that this Product Group Attachment may be filed by Avaya in any state or local jurisdiction as a financing statement (or as to evidence of the Avaya’s purchase money security interest). Reseller shall be permitted to sell Products in the ordinary course of business free of Avaya’s security interest, subject to the provisions of Section 8.2 below.

	8.2		If Reseller defaults in the payment of any amount due to Avaya and such default continues for a period of ten (10) days after notice of such default has been given to Reseller, in addition to all of its other rights and remedies, with respect to the Collateral Avaya shall have all of the rights and remedies of a secured creditor after a default by a debtor under the Uniform Commercial Code (“UCC”). In addition to any other remedy available to Avaya as provided herein, by common law and by statute, Avaya may exercise its right to reclaim all Products sold to Reseller pursuant to UCC Section 2-702 or such other applicable provision, as it may exist from state to state.

	9.1		SHIPPING. Avaya will ship Products, including Product Components ordered by Reseller, only to Reseller’s authorized shipping locations(s), unless the parties mutually agree to the shipment of the Products to the End User’s location. Avaya will use its reasonable commercial efforts to fill promptly Reseller’s written orders for Products or Product Components, insofar as practical and consistent with Avaya’s then-current lead-time schedule, access to supplies on acceptable terms and allocation of available products and capacity from among Avaya’s customers.

	9.2		TITLE AND RISK OF LOSS. Title (except for firmware and software) and risk of loss or damage to Products shall pass to Reseller: (i) at the time Avaya or its supplier delivers possession of the Products to a carrier; or (ii) if there is no carrier, at the time Reseller takes possession of the Products at Avaya’s or its supplier’s plant or warehouse or other facility. If, however, turnover has been delayed at the written request of Reseller, Reseller shall nevertheless accept title to such Products and risk of loss on the date of shipment to Avaya’s or a third party’s storage facility. Reseller will pay reasonable storage costs for such delayed material upon receipt of an invoice from Avaya.

	9.3		DELIVERY OF COD SOFTWARE - Delivery of COD Software will be deemed to have occurred on the date on which Avaya or its authorized agent enables such software capacity or feature. As a condition of Avaya’s enablement of COD Software features and capabilities, Reseller agrees to require its customer to make available to Avaya or its authorized agent a remote system level access to customer’s equipment at a time mutually agreeable to both customer and Avaya. Reseller will be solely responsible for ensuring that any hardware necessary to support the incremental software capacity or feature is ordered, sold and installed in Reseller’s customer’s Systems prior to Avaya’s enablement of COD Software features and capabilities.

	9.4		Shipment - In the absence of specific shipping instructions from Reseller, Avaya will ship by the method it deems most advantageous to both parties. Transportation charges will be collect or, if prepaid by Avaya, will be subsequently invoiced to Reseller. Unless otherwise specified, Products shall be shipped in Avaya standard commercial packaging. When special packaging is requested or, in the opinion of Avaya, required under the circumstances, the cost of the same will be separately invoiced. If Avaya ships by a method other than that specified by Reseller on the purchase order, then Avaya shall be liable for the difference, if any, between the cost of freight incurred and the cost of freight which would have been incurred had Avaya complied with Reseller’s shipping instructions.

	10.1.1		Reseller will maintain a minimum of two (2) technical persons who meet the technical training and skill requirements set forth in the then current Certification Program for the Products.

	10.1.2		Reseller will maintain a minimum of two (2) sales persons who have completed the training requirements set forth in the then current Certification Program for the Products.

	10.1.3		Reseller may obtain the training required under 10.1.1 and 10.1.2 through Avaya University at then applicable rates, terms and conditions.

	10.1.4		Avaya may at its sole discretion revise the training and skill requirements set forth in the Certification Program. In addition, the technical and sales personnel described in 10.1.1 and 10.1.2 above will be required to attend refresher-training courses and/or renew their certification credentials prior to expiration. The Reseller should refer to the BusinessPartner web site for up-to-date information on the Certification Program and related training requirements.

10.2.1

Softwaremanuals (e.g., System Manager, Service, et al.) and support materials, such as user guides, implementation guides, training documentation, applications write-ups, seminar kits and other materials that

			are useful as training or support tools, for all Products identified in this Attachment are available on the Avaya Support web site. Reseller is prohibited from duplicating such support and training material.

	10.2.2		The formats used for technical documentation and updates are within the sole discretion of Avaya.

	11.1		Provision of Qualified Personnel - Reseller will provide at least two technical persons trained in accordance with Section 10.1.1 by an Avaya authorized education provider to install and maintain Products within four (4) hours of each location in Reseller’s Territory where a Product is installed, but less than four hours if necessary to meet the response time targets contracted between Reseller and customer.

	11.2		Implementation Services - In accordance with Avaya published implementation procedures, Reseller will perform user surveys, product installation, initial configuration, customer support, software and configuration changes, and other customer implementation services, to ensure quality implementation. Reseller, at its option and at Reseller’s prevailing rates, may perform implementation services for any Product within the Territory, no matter who sold the product.

	11.3		Enforcement of Software Licenses - Reseller recognizes that only End-Users who have been properly licensed by Avaya or one of its authorized Resellers may use Avaya software, and that such use must be in accordance with Avaya’s software license terms and restrictions. In addition to the provisions of Section 7 (Licensed Materials) of the Master Reseller Agreement, Reseller agrees to assist Avaya in the enforcement of its software rights by; (1) providing Avaya with any information that it may have about the unauthorized use or access to Avaya software by third parties; (2) instructing any user of Avaya software which Reseller has reason to believe may not be licensed for such use that it must obtain a software license from Avaya; and (3) agreeing to provide support only to End-Users who have been properly licensed to use such Avaya software and are using such software in accordance with the applicable software License. Any violation of this Section 11.3 shall entitle Avaya to terminate this Product Group Attachment and the Master Reseller Agreement as set forth in Section 17.3 of the Master Reseller Agreement.

	11.4		Support Standards - Reseller’s support of Products located in Reseller’s Territory will conform to the following standards:

11.4.1

Field Failures - Reseller will respond to Product failures within the period contracted between Reseller and its customers.

	11.4.2		Upgrades, Training and Other Support - Reseller will acknowledge customer requests for configuration changes, training or other requests for support within a reasonable time by scheduling such work or training at a time acceptable to the customer and Reseller.

	11.4.3		Customer Dissatisfaction - Avaya reserves the right to perform Reseller’s field service obligations in any case where a customer has notified Avaya of dissatisfaction with Reseller’s service and Reseller has failed to remedy the problem following notification by Avaya.

	11.4.4		Remote Support Capabilities - All Avaya System installations supported by Reseller must be equipped with a remote access device approved by Avaya.

	11.4.5		Spare Parts Inventory - Reseller agrees to maintain test equipment and carry an inventory of critical spares, a list of which is available on the Avaya support web site. Reseller must maintain spare parts sufficient to provide Tier I support to its End User customers.

	11.4.6		Response Time - When it is determined by Reseller that service is required on-site due to a major malfunction, as defined by Avaya, on-site response time with anticipated repair parts needed (based on remote diagnosis of system trouble) will not exceed four hours for those sites within a 100 mile radius of Reseller’s facility or the period contracted between customer and Reseller, whichever is less, after such determination is made, On-site response time with anticipated spare parts needed for sites within a 101-200 mile radius will not exceed S hours or the period contracted between customer and Reseller, whichever is less, and for sites more than 200 miles distant will not exceed 16 hours or the period contracted between customer and Reseller, whichever is less.

	11.4.7		Escalation - Reseller will escalate service troubles to Avaya’s Technical Service Organization (“TSO”) in accordance with Avaya’s then current published escalation policies. Avaya shall provide such TSO support at its then-current rates, terms and conditions, subject to the conditions set forth in this Section 11 and Section 12 of the Product Group Attachment.

	11.4.8		Technical Certification - Service of Products will only be performed by Reseller employees with current Avaya technical certifications set forth in the Certification Program.

	11.4.9		Acknowledgment and Scheduling - Reseller will acknowledge customer requests for configuration changes, training or other requests for support by the next business day and will schedule such work or training at a time acceptable to the customer and Reseller.

12.0.		TECHNICAL SUPPORT - Avaya will make available technical consulting assistance to Reseller’s Avaya certified technicians by telephone from its support center 24 hours per day, seven days per week. Avaya may refuse to provide technical consulting assistance to Reseller employees who have not met the training and skill requirements set forth in the Certification Program. Avaya shall provide such technical consulting assistance at Avaya’s then-current rates, terms and conditions,

13.0		SPARE PARTS

	13.1		Avaya’s National Parts Service Center provides information to Reseller regarding the spares programs and services available to Reseller and Avaya’s pricing for such programs and services.

	13.2		Reseller agrees that for repairs to or expansions of the Products, to use only parts supplied or approved by Avaya. Reseller’s use of any Avaya parts provided by noncertified third-party vendors will void the System warranty. Avaya may, in its discretion, refuse technical support of Products or Systems containing parts provided by noncertified third-party vendors,

	13.3		Avaya shall make available new or factory recertified parts for discontinued products no longer sold under this Product Group Attachment as long as supplies of such parts last and subject to the terms of any announced Sunset Policy. Avaya shall provide reasonable notice to Reseller in advance of the depletion of such parts.

	13.4		Reseller must use the original shipping package when returning parts. Reseller may order -additional packaging may be available through the National Parts Center. Avaya will not accept parts damaged by improper handling or shipping. Replacement parts, at Avaya’s sole discretion, may be either new or factory recertified parts. Replacement parts will be shipped to Reseller, freight prepaid. Replaced parts are to be returned to Avaya using Avaya’s then current Avaya returns policy.

14.0

WARRANTIES - Except as set forth below, there are no different or additional warranty terms, restrictions or exclusions than those set forth in Sections 11 and 12 of the Master Reseller Agreement, which are incorporated herein by reference.

14.1

Product Warranty - Avaya warrants that the Products sold hereunder will be free from material defects in manufacturing and materials and will meet all of Avaya’s specifications for such Products in effect at the time of shipment or enablement. The applicable warranty periods shall be as follows:

	14.1.1		New Systems and migrations to New Systems are warranted for a period of 12 months following shipment from Avaya;

	14.1.2		All other Products, excluding COD Software, software upgrades, hardware upgrades, expansions, and replacement parts are warranted for 90 days following shipment from Avaya or the remainder of the applicable System warranty if the Product is installed in a System, whichever is longer; and

	14.1.3		COD Software is warranted for 90 days following the date of enablement.

	14.1.4		Avaya’s sole obligation and Reseller’s sole remedy under this warranty shall be the furnishing to Reseller of replacement parts for any parts of any System that are defective and repair or replacement at Avaya’s option of any material that is defective under the terms of this warranty without charge by Avaya. Reseller shall ship defective material to Avaya at the destination Avaya designates with transportation and packaging prepaid by Reseller. The above warranty is subject to Reseller’s full compliance and fulfillment of its obligations under Section 11 .2 above (Implementation Services) and Section 15.4 below (Required Changes).

	14.1.5		Reseller shall warrant to its customers that any System sold to them will perform in accordance with Avaya’s then currently published specifications for at least six months following delivery of such System to a customer. Reseller will provide repair or replacement (at Reseller’s option) of defective parts in connection with such warranty. Any labor required to effect such repair or replacement shall be provided by Reseller at Reseller’s expense and will not be reimbursed by Avaya, except as provided in Section 15.4.

	14.1.6		Some Products purchased by Reseller or used to provide support may contain selected used or refurbished parts that are warranted as new,

	15.1		Software Updates - A Software Update is defined as a change within a major release that typically provides a maintenance correction only, but may introduce new optional features. A Software Update is designated with a non-zero decimal as its version number, such as “3.1.” Avaya will make Software Updates available to Product Authorized Resellers free of charge for five years from the date of sale of Product in the form of Hardware/Software Modifications.

	15.2		Software Upgrades - A Software Upgrade is defined as change to the software that moves a System to a new major release designated with a whole number as its version number, such as “3.0.” A Software Upgrade introduces new software features, which may or may not require additional hardware, to enhance the functionality of the System. Upon release of any Software Upgrade to the Product, Avaya will make such Software Upgrade available to Reseller at its then-current published prices for that Software Upgrade, less applicable discounts.

	15.3		Hardware and Software Modifications - A Hardware/Software Modification is defined as a change to hardware and/or software that improves the safety or reliability of the System. A Hardware/Software Modification is a mandatory change.

	15.4		Required Changes - Reseller shall perform a Hardware/Software Modification or install Software Updates within a reasonable time after having received written notification from Avaya of such Hardware/Software Modification or Software Update. Reseller will send Avaya written confirmation upon completion, utilizing Avaya pre-addressed forms. If Avaya elects to have its own personnel perform a

			Hardware/Software Modification or install a Software Update, Reseller will cooperate fully. At Avaya’s sole discretion, it may elect to pay Reseller an amount to be determined by Avaya for performing a Hardware/Software Modification, such as a retrofit.

	15.5		System Operation - Reseller will use its reasonable efforts to ensure that its installed base of Systems are operating:

	15.5.1		Using the last Software Upgrade or the immediately preceding major release; and

	15.5.2		With all required hardware modifications installed.

15.6

For a transition period of six months after the introduction of a Software Upgrade, Avaya will continue to support the major release that preceded the immediately preceding major release, if any. Following such transition period, if any, Avaya will support only the current Software Upgrade and the immediately preceding major release; provided, however, that Avaya will not provide support after the support termination date for any Software Upgrade or initial major release for which Avaya has announced the end of support pursuant to an Avaya Sunset Policy.

16.0		AVAYA WEB CITE - Avaya will provide Reseller with Product information, including marketing, technical, and support information and information regarding Avaya’s current Sunset Policies (as defined herein), through Avaya’s Web Site. Reseller shall be responsible for accessing the information on the Avaya Web Site, including pricing.

17.0		SOFTWARE LICENSE AND RESTRICTIONS - The Products delivered to Reseller or its customers pursuant to this Product Group Attachment may embody and include certain software programs in object code (machine-readable but not human-readable form). The software may be contained on disk drives, erasable, programmable, read-only memories (EPROM’s), programmable array logic devices (PALs), disk cartridges, or in other electronic or mechanical forms including in the form of unlicensed incremental software capacity or feature in licensed software which will become subject to this license only when enabled by Avaya. Additionally, use of the software can result in the production of human-readable features such as documentation, report formats, menus, and audible prompts. Such software and features constitute either the copyrighted property of Avaya and/or its suppliers or the proprietary trade secret information of Avaya and/or its suppliers, or both. Unless Reseller is granted greater rights by written amendment to this Product Group Attachment executed by Avaya, Reseller is hereby granted a license to use only the number of copies of the software that are provided by Avaya, and to use such copies only on the hardware on which it is originally mounted by Avaya. Without Avaya’s prior written consent, Reseller may not copy the software or the human-readable features referred to above for any purpose, nor may Reseller remove the software or attempt to execute the software on any hardware other than the hardware on which the software was originally mounted. Reseller may sublicense the software licensed hereunder to its customer who purchases the hardware subject to applicable fees, if any, but only upon the conditions that: (a) such customer executes an understanding in the form of Appendix 3 attached hereto, to comply with the conditions stated herein regarding use of the software and features, and (b) Avaya is given a copy of the executed form with the purchase order submitted by Reseller to Avaya. Reseller shall not, whether through use of disassemblers

		or any other means whatsoever (including but not limited to manual, mechanical or electrical means), reverse engineer, decompile, disassemble, or derive source code from the software, or attempt to or permit any third party to do any of the foregoing. Reseller expressly agrees that it shall not enable, or permit or assist any third party to enable, features or capabilities inherent in any licensed software that may be remotely enabled. Any attempt to do any of these things shall be a material breach of this Product Group Attachment which shall immediately entitle Avaya and/or its suppliers to exercise any remedy set forth herein, as well as any remedy that may exist at law or in equity including causing the software to be destroyed or disabled. This Software License shall survive this Product Group Attachment and shall terminate with respect to particular software at the end of the operational life of the hardware on which such software is mounted.

		Reseller agrees that Avaya or its authorized agent may, at its discretion, electronically inspect and audit the configuration of Avaya Systems for compliance with the terms of this software license at the following times: (i) at the time of enablement of any separately licensed software feature or capability, such as incremental capacity for Avaya’s Products, and (ii) in addition to (i) above, once each calendar year upon three (3) business days notice to Reseller from Avaya. Reseller agrees to cooperate with Avaya or its authorized agent in conducting such audits including providing remote system level access to Reseller’s and/or Reseller’s customer’s hardware and software available to Avaya for such purpose. On the condition that Reseller’s customer has given Avaya permission to disclose the results of any such audit, or excused Avaya from any confidentiality obligations, Avaya will provide prompt notification to Reseller of the results of any such audit.

		Any breach of this Software License will entitle Avaya and/or its suppliers to exercise immediately any remedy set forth in this Product Group Attachment as amended, as well as any remedy that may exist at law or equity.

RESELLER PRODUCT GROUP ATTACHMENT
TO AVAYA INC. RESELLER MASTER TERMS AND CONDITIONS
FOR SERVICES

This Product Group Attachment for Services (this “Product Group Attachment”) is effective SEPT 22, 2003 (the “Effective Date”) between Avaya Inc. (“Avaya”) and XETA TECHNOLOGIES (“Reseller”). This Product Group Attachment is being executed pursuant to the Reseller Master Terms and Conditions (the “Reseller Master Terms and Conditions”), Agreement No. AVNERA1-T030905, entered into between Avaya and Reseller, and shall be a part of the “Agreement” as defined in the Reseller Master Terms and Conditions.

In addition to the terms of the Reseller Master Terms and Conditions, the parties agree as set forth below. This Product Group Attachment covers Services and Service deliverables for use only in the United States.

1.1 Authorization as Reseller. Subject to the terms and conditions herein, Avaya authorizes Reseller as a non-exclusive reseller to purchase Services directly from Avaya in the “One-Tier Model” (and, if the “Two-Tier Model” column is checked with an “X” in Appendix 1, from a Distributor) and resell such Services to End Users in the Territory. “Services” refers to those Avaya services to be performed by Avaya (excluding any services to be performed by Reseller) which Reseller is authorized to resell under this Product Group Attachment, as indicated in Appendix 1 (Services), and as further defined in this Product Group Attachment and any Avaya service description documents. The term ‘Distributor” means any Avaya distributor authorized to resell Services to resellers in the Territory. if the “Commission Model” column is checked with an “X” in Appendix I, Reseller is authorized to offer Avaya Services in accordance with the provisions of the then in effect Avaya services commission policy.

1.2 Appendices and Order of Precedence. Incorporated into this Product Group Attachment are the following Appendices: Appendix 1 (Services), Appendix 2 (Maintenance Services Terms), Appendix 2A (End User Maintenance Services Terms), Appendix 3 (Milestone Services Terms), Appendix 4 (Time & Materials Services Terms), Appendix 5 (Management Services Terms), Appendix 6 (Installation Services Terms), and Appendix 6A (End User Responsibilities For Installation Services). Appendix 1 shall indicate which of the other Appendices shall apply to the provision of Services under this Product Group Attachment. Reseller shall also indicate applicable Appendices by initialing each such Appendix. The terms set forth in Appendices 2 through 6A shall only apply if and to the extent that Reseller purchases Services directly from Avaya for resale to an End User in the One-Tier Model. In the event of any conflict or inconsistency between the terms in this Product Group Attachment and the terms in the Reseller Master Terms and Conditions, this Product Group Attachment shall prevail with regard to any Services and Service deliverables.

2.1 Orders. Reseller may order Services for resale under this Product Group Attachment by placing written, signed orders in substantially the form as may be designated by Avaya, or by placing orders via order-entry tools on Avaya websites, or by any other mutually agreeable method (each, an “Order”).

2.2 Acceptance of Orders. All Orders are subject to acceptance by Avaya. Avaya may accept an order by commencing to perform Services. Orders relating to the One-Tier Model will be governed by the terms of this Product Group Attachment and the Reseller Master Terms and Conditions, even when they lack an express reference to either document. No pre-printed terms (or any other terms beyond the scope of the Order form, or any purchase orders other than the Order form) set forth in any Order submitted by Reseller shall be binding on Avaya. When Avaya accepts an Order, Avaya may notify Reseller of Avaya’s estimated service commencement dates applicable to the Order.

2.3 Cancellations. Reseller may cancel accepted Orders subject to the restrictions and payment of the cancellation and termination charges indicated in the applicable Appendix.

3.1 Two-Tier and Commission Models. The terms set forth in this Section 3 are not applicable to either the Two-Tier Model or the Commission Model.

3.2 Prices, Invoicing and Payment. The prices to be charged by Avaya to Reseller for Services will be equal to the Avaya list prices for Services in effect on the date of Avaya’s acceptance of an Order, minus any applicable discounts, rebates, or credits pursuant to the Avaya discount schedule or price policy for Services in effect on the date of Avaya’s acceptance of an Order. Except as agreed otherwise in writing, Avaya will invoice Reseller all amounts due as provided in the applicable Appendix. Payment of all amounts invoiced by Avaya to Reseller is due within thirty (30) days from the date of Avaya’s invoice. Notwithstanding anything to the contrary in this Product Group Attachment, any Channel Policy (as defined below), or any Avaya discount schedule or price policy, Reseller will have sole discretion to set prices to be charged by Reseller to End Users for Services.

3.3 Late Charges. Any overdue and unpaid portion of an invoice will bear interest, compounded at one and one-half percent (1.5%) per month or the maximum rate allowed by applicable law, whichever is less. Avaya may suspend licenses and performance of Orders for which payment is overdue until the overdue amounts are paid in full. Reseller will reimburse Avaya for reasonable attorneys’ fees and any other costs associated with collecting delinquent payments.

3.4 Taxes. All prices, fees, and other amounts quoted and payable for Services exclude taxes. Reseller will pay or reimburse Avaya for all applicable sales, services and other taxes (excluding taxes on Avaya’s net income) levied upon the sale and/or license of Service deliverables and performance of Services, unless Reseller is exempt and provides Avaya with a valid tax exemption certificate prior to Avaya’s invoice date.

4.1 End User Agreement Obligations. Reseller shall comply with the following obligations (the “End User Agreement Obligations”) with regard to each End User to whom Reseller resells Services:

(i) Reseller shall obtain the End User’s written agreement to the following document(s) or provisions, either at the time when End User orders the Services from Reseller or prior to the time when End User can cancel the order without any cancellation charges and with a full refund:

•

Appendix 2A (End User Maintenance Services Terms), with regard to any “Maintenance Services” (as defined in Appendix 2A) resold to an End User. Reseller shall add a copy of the

			“Service Agreement Supplement” (as defined in Appendix 2A), as well as any order-specific information (such as service options and supported products), to each Appendix 2A to be agreed to by End Users, and shall ensure that such order-specific information is identical to, and does not exceed, the scope of the Order placed by Reseller with Avaya for the applicable End User order. Avaya can modify the template Service Agreement Supplement at any time without Reseller’s consent, but shall notify Reseller of any modifications at least sixty (60) days prior to the effective date of the modification;

	•		Section 4 (Intellectual Property Rights; Software License), Section 7 (No Solicitation), and Section 8 (Reseller and End User Responsibilities) of Appendix 3 (Milestone Services Terms), with regard to any “Milestone Services” (as defined in Appendix 3) resold to an End User;

	•		Section 3 (Intellectual Property Rights; Software License), Section 6 (No Solicitation), and Section 7 (Reseller and End User Responsibilities) of Appendix 4 (Time and Materials Services Terms), with regard to any “T&M Services” (as defined in Appendix 4) resold to an End User;

	•		Section 4 (Reseller and End User Responsibilities), Section 8 (Intellectual Property Rights; Software License), Section 11 (Non-Solicitation) of Appendix 5 (Management Services Terms), with regard to any “Management Services” (as defined in Appendix 5) resold to an End User; and

	•		Appendix 6A (End User Responsibilities for Installation Services) with regard to any “Installation Services” (as defined in Appendix 6) resold to an End User.

(ii) Reseller shall not agree to any contractual limitations on the End User’s liability for violations of Avaya’s intellectual property rights, including through breaches of a software license or reverse engineering.

Reseller shall indemnify Avaya for all claims, actions, costs, expenses, and damages (including the purchase price of any. service options or other coverage resold to an End User in excess of the service options or coverage purchased by Reseller from Avaya) suffered by Avaya as a result of Reseller’s failure to comply with this Section 4.1, or as a result of End User’s failure to comply with Appendix 2A or any software license restrictions and other terms required to be passed by Reseller to End Users.

4.2 Avaya Warranty and Software License. Avaya will extend the warranty and software license as set forth in Appendix 2A (End User Maintenance Services Terms), Appendix 3 (Milestone Services Terms) and Appendix 4 (Time & Materials Services Terms), as applicable, to End Users purchasing Services from Reseller, subject to Reseller complying with the End User Agreement Obligations for the applicable End User and Services.

4.3 Services Warranty Support. Unless otherwise designated by Avaya for a specific Service, Reseller will be responsible for providing support to End Users with regard to any Services warranty or license issues or questions, including telephone support, troubleshooting, accepting the return of nonconforming Service deliverables and obtaining replacement deliverables, and filing Services warranty claims with Avaya. If Avaya elects to provide a refund for a nonconforming Service or Service deliverable, Reseller shall be required to refund to End User the full purchase price, license fee and/or service fees paid by End User to Reseller for the nonconforming Service or Service deliverable, regardless of whether Reseller was in any manner at fault or negligent.

4.4 Maya Leads or Referrals; End User Specification of Avaya. If Avaya provides a lead or referral to Reseller or if an End User specifies Avaya, Reseller shall market, offer, and sell only Avaya Services (and not the services of Reseller or any other entity) on that opportunity, except to the extent no

Avaya Service would meet the End User’s requirements. Failure to provide Avaya Services without prior written consent from Avaya for those leads or referrals provided by Avaya may result in the cessation of any future leads or referrals.

4.5 Compliance with Channel Policies; Separate from ECG/SMBS BusinessPartner Programs. Reseller agrees to abide by all applicable training, technical support capabilities, sales forecasting, and other service authorization requirements and policies (the “Channel Policies”) that may be required by Avaya of its resellers of Services. The Channel Policies will be available online on the Avaya website and will include the then current available benefits including commissions and discounts according to the requirement levels reached by each respective Reseller. Unless expressly provided otherwise in the Channel Policies, Avaya reserves the right to cancel or modify any Channel Policy at any time without notice to or consent from Reseller. Purchases and resales of Services will not count or be credited in any manner toward earning benefits or certification under the Avaya BusinessPartner programs for Enterprise Communications Group (ECG) and Small & Medium Business Solutions (SMBS) products, except as may be expressly stated otherwise in either of those programs.

(a) Where provision of Services is dependant on remote access to the Products being serviced, Avaya will provide and maintain any necessary connection equipment and Reseller or End User will provide, maintain and pay for, the dedicated telephone connection. Reseller also agrees to allow Avaya to connect other items of equipment to the Products being serviced, such as a tracker, for diagnostic purposes.

(b) Avaya may establish password protection for remote access with passwords being changed by Avaya at random times to maintain security, and also immediately after an engineer or other Avaya employee who knows such passwords leaves the employ of Avaya. On written request from Reseller, Reseller may take full responsibility for the allocation, management and control of access passwords and changes thereto, provided that Avaya is promptly advised in writing of the procedures to be used and passwords so issued so as to ensure Avaya has uninterrupted, continuous remote access to the Products being serviced.

(c) Reseller will not disconnect any facilities or equipment for remote access, or otherwise impede or prevent such remote access without the prior written consent of Avaya. Upon mutual written agreement of the parties, Reseller may disable the remote access or items of diagnostic equipment, or the tracker may be disabled until remote access is required by Avaya for Services activities. In such case, Reseller will ensure that remote access is enabled by the times agreed in writing by the parties, and that remote access remains enabled for the duration of the Services activity. Any Avaya response times specified by the parties in the applicable Order will be extended by the period Avaya is, or was, unable to remotely access the Product(s) for any reason including, but not limited to, delays caused by the unavailability of passwords issued by Reseller.

4.7 Expiration of Services. Reseller will notify End User, upon notification from Avaya, of the expiration of Services sixty (60) days prior to the expiration date. If Reseller does not renew its agreement with the End User by the expiration date, Avaya may contact and negotiate directly to sell Services to such End User, either directly or through another reseller.

4.8 Termination. In the event Reseller violates the restrictions set forth in Section 3.2 of the Reseller Product Group Attachment To Avaya Inc. Reseller Master Terms and Conditions For Enterprise

Communication and Internetworking Solutions Product, Avaya may terminate this Product Group Attachment upon twenty-four (24) hours notice, and may immediately deny Reseller access to certain Avaya technical Product support resources.

IN WITNESS WHEREOF, the parties have executed this Product Group Attachment effective the date first written above.

This Addendum to the Reseller Master Terms and Conditions (“the Agreement”) between Avaya Inc. (“Avaya”) and XETA Technologies, Inc. (“Reseller”) shall be effective as of 08/06/03 (“Effective Date”).

In addition to the rights granted by Avaya to Reseller under the Agreement, Reseller now wishes to sell certain Avaya commercial Products and/or Services that are specifically authorized under the Agreement to certain departments, agencies or instrumentalities of the Federal Government as an authorized agent under the terms and conditions of Avaya’s current GSA Federal Supply Schedule. Avaya grants to Reseller, and Reseller accepts, the non-exclusive right to sell such Products and/or Services as an authorized agent to the extent outlined below.

All terms and conditions of the Agreement not specifically addressed in this Addendum remain in full force and effect with respect to Reseller’s marketing and sales to any End User. The terms and conditions contained in this Addendum supersede all prior addenda that specifically address Avaya’s GSA Schedule.

Unless otherwise specified herein, terms which are defined in the Reseller Master Agreement Terms and Conditions shall have the meanings specified therein. The following terms shall have the meanings specified below:

1.5 “End-User” means departments, agencies and instrumentalities of the United States Federal Government to which Reseller may sell Avaya Products and/or Services.

1.16 “Territory” means the specific geographic area or market segment in which Reseller has agreed to market Avaya Products and/or Services in accordance with the Agreement, except that, the territory shall not extend beyond that area permitted for sales as defined in the GSA Schedule to include the 48 contiguous states and the District of Columbia.

1.20 “GSA Schedule” or “Schedule” means Avaya’s current General Services Administration (GSA) Federal Supply Schedule, Contract Number GS-35F-4321D.

1.22 “Order” means a delivery order or purchase order for specific products and/or services issued by the End User under the terms and conditions of the Schedule.

1.23 “Products and/or Services” means Avaya products, Avaya-delivered services (installation, maintenance, professional services, training), and/or Reseller-rendered installation that are specifically authorized to be sold by Reseller under the Agreement and available under the GSA Schedule. Sales for all of the above Products and/or Services shall be reported in accordance with Section 4 herein.

2.2 This Addendum shall become effective when both parties execute the Agreement and this Addendum. It shall remain effective for a period of one year and shall automatically renew year to

year on the Effective Date for additional one-year terms until expiration of the GSA Schedule unless Avaya gives written notice of its intent not to renew thirty (30) days in advance of the anniversary of the Effective Date or unless the Addendum is otherwise terminated as hereinafter provided.

3.5 Avaya is a GSA Schedule holder for certain Products and/or Services. Reseller wishes to purchase Avaya Products and/or Services from a source other than Avaya, and resell them to certain End Users in the Territory, as an authorized Avaya agent under the terms and conditions of Avaya’s current GSA Schedule.

3.6 Avaya hereby grants to Reseller and Reseller accepts, the non-exclusive right to resell the Products and/or Services that are authorized under the Agreement and listed in the GSA Schedule to End Users solely as an authorized Avaya agent and solely within the Territory. Reseller agrees that the provisions of this Agreement, including this Addendum, will govern Reseller’s role as an Avaya agent in the sale of Products and/or Services to End Users.

4.10.3 Reseller agrees that it will maintain a system for reporting sales under this Addendum to Avaya on a monthly basis. The report for Avaya shall be submitted to Avaya Inc., Government Solutions, Finance Department, 1450 G Street, N.W., 4^th Floor, Washington, D.C. 20005, C/O: Carolyn Calvert no later than the seventh (7th) calendar day of each month. The report to Avaya shall include

(g) Copies of all quotes, proposals issued to the End User in the reporting period;

(h) Copies of all delivery orders and modifications received and invoices and/or credits issued in the reporting period; and

4.15 Reseller agrees that it will, in any quote, offer, and/or proposal which it submits to the End User and in all discussions with the End User, identify Avaya as the GSA Schedule holder and Reseller as the sales agent

4.15.1 Reseller shall only bid or propose to perform contracts on a “fixed price basis.” Reseller shall not agree to perform on any procurement other than fixed price contracts as defined in FAR 16.201 and 16.202-1.

4.15.2 Reseller may submit bids or proposals on solicitations which satisfy End User’s set-aside obligations, as set forth in the Small Business Act, regulations promulgated thereunder, and FAR 52.219-5, 52.219-6, 52.219-7, 52.219-8 and 52.219-9.

5.2 Authorized orders for Products and/or Services under this Addendum shall be issued “To Avaya care of Reseller”, referencing Avaya’s GSA Schedule contract number, Reseller’s mailing address, Reseller’s remittance address, and shall only contain the information consistent with the terms and conditions of Avaya’s GSA Schedule, including GSA part numbers (Avaya Material Codes).

5.3 When accepting and filling Order(s), the Government buying entities should place the Order(s) with Reseller in Avaya’s name as noted in Item 5.2 above. Reseller shall bill the Government and accept payment in Avaya’s name, in care of the Reseller.

5.4 All Orders received from End Users shall be governed by and may only include terms and conditions that are consistent with the terms and conditions of Avaya’s GSA Schedule, unless expressly authorized in writing by an Avaya Government Solutions Contract Manager. Reseller will not accept any GSA Schedule order that contains terms and conditions that are not consistent with Avaya’s GSA Schedule or that have not been authorized. Any order negotiated by Reseller with an End User containing unauthorized terms and conditions shall be considered to have been made by Reseller outside of its authority as granted by Avaya pursuant to this Addendum.

5.5 Reseller shall advise Avaya’s Authorized Representative, as identified in this Addendum, immediately upon receipt of any notice from an End User of a termination (actual or contemplated, in whole or in part, for convenience or default) of an Order, directly related to Avaya’s Products and/or Services. Reseller further agrees to submit a copy of the written termination order to Avaya’s Authorized Representative within one business day of receipt of an End User’s written termination order.

5.6 In the event that an End User requires Reseller, in writing, to stop all, or any part of the work called for by an Order, directly related to Avaya’s Products and/or Services, Reseller agrees to submit a written stop work order to Avaya’s Authorized Representative within one business day of receipt of an End User’s written stop work order.

6.3 Avaya may without consent of Reseller, but with modification of the GSA Schedule, delete or modify any Products and/or Services on the Schedule. Such deletion or modification will be reflected on the Avaya GSA website, http://www.avaya.com/gov/gsa. In addition, Avaya may consider written modification requests from Reseller, and if supported, Avaya will process such requests within a timely manner.

17.7 Either party may terminate the Addendum at any time without cause by giving the other party thirty (30) days written notice of termination.

21.1 RESELLER ACKNOWLEDGES AND AGREES THAT ITS MARKETING AND SALES TO END USERS ARE SUBJECT TO, AND RESELLER SHALL COMPLY WITH, ALL OF THE TERMS AND CONDITIONS SET FORTH IN THE GSA SCHEDULE AS THOSE TERMS APPLY TO THE GSA SCHEDULE CONTRACTOR. RESELLER AGREES TO FAMILIARIZE ITSELF AND KEEP CURRENT

WITH ALL THE TERMS AND CONDITIONS (INCLUDING BUT NOT LIMITED TO PRICES) OF AVAYA’S GSA SCHEDULE AND TO PERFORM ITS DUTIES IN FULL ACCORDANCE WITH ALL TERMS AND CONDITIONS OF AVAYA’S GSA SCHEDULE (INCLUDING, BUT NOT LIMITED TO TERMS RELATED TO PRICE, PRODUCT DELIVERY, SERVICE/WARRANTY DELIVERY, INVOICING/PAYMENT TERMS, AND RECORD RETENTION).

21.2 Reseller agrees that any deviation from Avaya’s GSA Schedule terms, including departure from pricing, except as expressly authorized pursuant to this Addendum or in writing by an Avaya Government Solutions Sales Operations Manager, will be solely at Reseller’s risk.

21.3 Reseller understands and agrees that, as a function of its appointment under this Addendum, Reseller is subject to all laws, regulations and obligations associated with being a Federal Government contractor. Reseller agrees to fully comply with all laws and regulations applicable to contracting with the Federal Government, including, but not limited to, the FAR, GSAR, and other provisions included in the Schedule.

21.4 Reseller agrees that an Avaya Government Solutions Sales Operations Manager will have the right to review and provide approval to documentation, including but not limited to quotes, offers, proposals prior to submission to the End Users for the purpose of assuring compliance with the terms and conditions of Avaya’s GSA Schedule and to offer Reseller its advice and aid in preparing the quote, offer or proposal.

21.5 Reseller agrees that it may market and submit quotes, offers, and proposals for Products and/or Services only at the prices, terms and conditions that are set forth in Avaya’s GSA Schedule, except as expressly authorized within this Addendum. Reseller is not authorized to offer greater discounts than those currently offered under Avaya’s GSA Schedule without prior written approval by the Avaya Federal Channel Sales Director (or designee).

21.6 ANY ORDER NEGOTIATED BY RESELLER WITH AN END USER CONTAINING UNAUTHORIZED DISCOUNTS SHALL BE CONSIDERED TO HAVE BEEN MADE BY RESELLER OUTSIDE OF ITS AUTHORITY AS GRANTED BY AVAYA PURSUANT TO THIS ADDENDUM.

21.7 RESELLER SHALL OBTAIN WRITTEN APPROVAL FROM THE AVAYA FEDERAL CHANNEL SALES DIRECTOR (OR DESIGNEE) PRIOR TO SUBMITTING A PROPOSAL AND/OR PRICING TO THE GOVERNMENT FOR THE FOLLOWING SALES:

(a) proposals containing terms and conditions that vary from those contained in the Schedule;

21.8 The Government Contracting Officer or other buying entity making a purchase from the Schedule must be located within the Territory.

21.9 Reseller shall be subject to audit by the Government or by Avaya, with respect to sales under this Addendum.

22.1 Avaya will provide its GSA Schedule prices to Reseller regularly, via Avaya’s GSA Schedule website, http://www.avaya.com/gov/gsa.

22.2 Avaya shall be responsible for paying the GSA Federal Supply Services one percent (1%) Industrial Funding Fee to the General Services Administration on orders Reseller receives for Avaya Products and/or Services under this Addendum.

22.3 Avaya will ensure the availability of management personnel to participate in any necessary discussions and negotiations with the End User directed toward obtaining a Government delivery order.

23.1 Reseller is prohibited from entering into any partnering, teaming, BPAs, or other such arrangements, other than this Addendum, relating to Avaya’s GSA Schedule unless requested by Reseller and authorized in writing by an Avaya Government Solutions Sales Operations Manager, for any such partnering arrangements. Such requests will be considered and, if supported, acted upon in a timely manner by Avaya, and support will not be unreasonably withheld.

23.2 Reseller agrees that in the event it becomes aware of an actual or contemplated dispute between the End User and either Avaya or Reseller, regarding the marketing, sale, or performance of Products and/or Services under this Addendum, Reseller shall notify Avaya orally and in writing within one business day of Reseller acquiring such knowledge. Reseller further agrees that it has no direct contractual privity with the End Users and/or GSA under this Addendum, and that it shall discuss with the Authorized Avaya Representative any claim for money or other damages before filing such claim against the Government. In the event Avaya chooses not to file the claim on Reseller’s behalf, Avaya shall allow Reseller to file such claim in Avaya’s name after such discussions.

24.1 All notices, certificates, acknowledgments, and modifications under this Addendum shall be in writing and shall be given in person, or by U.S. mail, or by a recognized overnight delivery service, addressed to the addresses set forth in this Section or to such other address as either party may designate by written notice to the other:

24.2 All written notices sent by mail shall be sent first class or better, postage prepaid. All notices shall be deemed to have been given on the earlier of the date actually received or the third day after mailing.

25.1 In the event of a conflict between the provisions of the foregoing documents, the following order of precedence shall govern:

26.1 The respective obligations of Reseller and Avaya under this Addendum which by their nature would continue beyond the termination, cancellation or expiration hereof, shall survive termination, cancellation or expiration hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed by their duly authorized representatives on the date(s) set forth below.

EX-10.7 5 d11884exv10w7.htm EX-10.7 REVOLVING CREDIT AND TERM LOAN AGREEMENT exv10w7

This Revolving Credit and Term Loan Agreement is dated as of October 1, 2003, between XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Borrower”), and BANK OF OKLAHOMA, N.A. (“Bank”).

A. Subject to the terms and conditions set forth below, Bank has agreed to make the following loans to Borrower: (i) a three million three hundred seventy-four thousand seven hundred thirty-four and 33/100 dollar term loan ($3,374,734.33) (“Term Loan”), (ii) a two million two hundred thirty-eight thousand three hundred thirty-three and 48/100 dollar term loan ($2,238,333.48) (“Real Estate Loan”), and (iii) a seven million five hundred thousand and no/100 dollar revolving line of credit ($7,500,000) (“Revolving Line”).

1. DEFINED TERMS. As used in this Agreement, the following terms have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa).

1.1. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with those applied in the preparation of the financial statements referred to in Section 6.8. All financial data submitted pursuant to Section 6.8 shall be prepared in accordance with such principles. From time-to-time or as requested by the Bank, the Borrower may provide the Bank with financial or operating information about the Borrower which has been prepared primarily for the Borrower’s internal use or in direct response to a request from the Bank. Borrower will use its best efforts to ensure that such information is prepared consistently with previous versions of such information and is not misleading, but does not represent that such information will be consistent with GAAP.

1.2. “Acquisition Term Deduction” means the amount to be deducted from Borrower’s availability under the Borrowing Base to support the Term Loan; provided, however, that, so long as no Event of Default exists at the time of the request, the Acquisition Term Deduction may be temporarily waived by Borrower, in Borrower’s sole discretion, for a period not to exceed ninety (90) days during any fiscal year of the Borrower, upon the written request of Borrower to Bank, to cover working capital needs. The amount of the Acquisition Term Deduction is $1,000,000 at inception of this Agreement and shall be reduced dollar-for-dollar as the Term Loan is reduced through principal payments.

1.3. “Affiliate” means any Person: (i) which directly or indirectly controls, or is controlled by, or is under common control with, Borrower; (ii) which directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of either Borrower; or (iii) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by either Borrower. The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and


	policies of a Person, whether through the ownership of voting securities, by contract, or otherwise.

	1.4. “Agreement” means this Revolving Credit and Term Loan Agreement, as amended, supplemented, or modified from time to time.


	1.5. “Borrowing Base” means, at any date of determination thereof, the sum of eighty percent (80%) of Borrower’s Qualified Receivables at such date, plus forty percent (40%) of Borrower’s Qualified Inventory at such date, minus the Acquisition Term Deduction, as determined by Bank based upon the most recent information relating thereto provided to Bank pursuant to Section 2.2.


	1.6. “Borrowing Base Certificate” means each certificate from Borrower to Bank relating to the Borrowing Base, substantially in the form of Schedule “1.6” hereto.


	1.7. “Borrowing Resolutions” means certified Resolutions from the Secretary of Borrower, in form and content as set forth on Schedule “1.7” attached hereto.


	1.8. “Business Day” means any day other than a Saturday, Sunday, or other day on which commercial banks in Oklahoma are authorized or required to close under the laws of the State of Oklahoma.


	1.9. “Capital Lease” means all leases which have been or should be capitalized on the books of the lessee in accordance with GAAP.


	1.10. “Cash Taxes” means taxes which are paid each year as required by the Internal Revenue Service, as shown on the tax returns of Borrower.


	1.11. “Certificates of Good Standing” means a Certificate of Good Standing issued by the Secretary of State of incorporation for the Borrower and each Guarantor and such other states in which Borrower and each Guarantor does business and is required to domesticate or otherwise register, indicating that Borrower and each Guarantor is in good standing with the laws of such state(s).


	1.12. “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations and published interpretations thereof.


	1.13. “Collateral” means all property in which Bank is intended to have a security interest, as described in Section 3.


	1.14. “Commitment” means the Bank’s obligation to make loans to the Borrower pursuant to this Agreement.

1.15. “Commitment Fee” means the amount payable by the Borrower to the Bank from the date hereof to the Termination Date, computed at a rate equal to one-quarter of one percent (.25%) per annum on the average daily amount of the unused portion of the Revolving Line payable quarterly on the 1^st day of each January, April, July and October and on the Termination Date or such earlier date as the Revolving Line shall terminate as provided herein, commencing October 1, 2003.


	1.16. “Commonly Controlled Entity” means an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 414(b) or 414(c) of the Code.

	1.17. “Debt” means, including but not limited to: (i) indebtedness or liability for borrowed money; (ii) obligations evidenced by bonds, debentures, notes, or other similar instruments; (iii) obligations for the deferred purchase price of property or services (including trade obligations); (iv) obligations under letters of credit; (v) obligations under acceptance facilities; (vi) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person or entity, or otherwise to assure a creditor against loss; and (vii) obligations secured by any Liens, whether or not the obligations have been assumed.


	1.18. “Debt Service Coverage Ratio” shall mean the ratio of (i) EBITDA for the preceding four (4) consecutive fiscal quarters of Borrower, to (ii) Borrower’s Debt Service Requirement for the same period.

1.19. “Debt Service Requirement” shall mean, on any given date, the sum of (i) interest expense (whether paid or accrued and including interest attributable to Capital Leases) for the immediately preceding four (4) consecutive quarters, (ii) scheduled principal payments on borrowed money for (a) during the first year of the Loan, the immediately following four (4) consecutive quarters, and (b) thereafter for the immediately preceding four (4) consecutive quarters, and (iii) scheduled capitalized lease expenditures for (a) during the first year of the Loan, the immediately following four (4) consecutive quarters, and (b) thereafter for the immediately preceding four (4) consecutive quarters, all determined without duplication and in accordance with GAAP, consistently applied. For purposes of computing the scheduled principal payments on borrowed money, the entire principal balance of the Revolving Line shall be excluded.


	1.20. “EBITDA” shall mean net income plus (i) interest expense, (ii) depreciation, depletion, obsolescence, amortization of property, and tax amortization of goodwill (iii) capitalized lease expense, and (iv) tax expense, all determined in accordance with generally accepted accounting principles, consistently applied, and for a particular period.


	1.21. ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof.

1.22. “Funded Debt” means any obligations of the Borrower and its Subsidiaries which are considered to constitute debt in accordance with GAAP, including indebtedness for borrowed money, interest bearing liabilities, subordinated debt, and indebtedness secured by purchase-money security interests; but excluding accounts payable and other short term non-interest bearing liabilities, future income taxes (both current and long-term), obligations under covenants not to compete and accrued liabilities.


	1.23. “Funded Debt to EBITDA Ratio” means, on any date of determination, the ratio of (i) Funded Debt on the last day of the most recently completed fiscal quarter of the Borrower to (ii) EBITDA for the period of four (4) consecutive fiscal quarters most recently ended on or prior to such date.


	1.24. “GAAP” means generally accepted accounting principles in the United States, applied on a consistent basis.

	1.25. “Initial Default” means any of the events specified in Section 9, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition has been satisfied.


	1.26. “Letter of Credit” means any letter of credit issued pursuant to Sections 2.2 and 2.3, for which, when issued, a Letter of Credit Fee should be paid.


	1.27. “Letter of Credit Fee” means a fee of one and seventy-five hundredths percent (1.75%) per annum on the face amount of any Letter of Credit issued or renewed after the date hereof.

1.28. “Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing.)


	1.29. “Loan” means advances under the Revolving Line, the Term Loan, or the Real Estate Loan.


	1.30. “Loan Documents” means this Agreement, the Notes, the Security Agreement, the Mortgage, the UCC-1 Financing Statement and all other instruments, documents or agreements required under this Agreement.


	1.31. “Matured Default” means any of the events specified in Section 9, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition has been satisfied.


	1.32. “Mortgage” means a first and prior real estate Mortgage, Assignment of Rents and Leases, Security Agreement and Financing Statement in favor of Bank on the Mortgaged Property, in form and content substantially as set forth on Schedule “1.32” hereto.


	1.33. “Mortgaged Property” means the property set forth on Schedule “1.33” hereto.


	1.34. “Mortgage Related Documents” means, with regard to the Mortgaged Property:


	(i) the Title Insurance Binder prior to closing, and Title Insurance Policy within twenty (20) days of the Closing to Bank, evidencing only those exceptions acceptable to Bank;


	(ii) an appraisal on the Mortgaged Property, in form and content satisfactory to Bank, evidencing an aggregate minimum value reasonably acceptable to Bank;


	(iii) if required by Bank, a Phase I Environmental Audit from an auditor and in form and content acceptable to Bank; and


	1.35. “Multiemployer Plan” means a Plan described in Section 4001(a)(3) of ERISA.


	1.36. “Notes” means, separately and collectively, the Term Note, the Real Estate Note, and the Revolving Line Note.


	1.38. “Opinion of Borrower’s Counsel” means a legal opinion from Borrower’s legal counsel including, without limitation, the opinions relating to Borrower and this loan transaction as set forth on Schedule “1.38” attached hereto.


	1.39. “PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.


	(2) Liens for taxes or assessments or other government charges or levies if not yet due and payable or, if due and payable or, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained;


	(3) Liens imposed by law, such as mechanics’, materialmen’s, landlords’, warehousemen’s, and carriers’ liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established;


	(4) Liens under workers’ compensation, unemployment insurance, Social Security, or similar legislation;


	(5) Liens, deposits, or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business;


	(7) Judgment and other similar liens arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively bonded, stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;


	(8) Easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by the Borrower of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; and

	(9) Purchase-money liens on any property hereafter acquired or the assumption of any lien on property existing at the time of such acquisition (and not created in contemplation of such acquisition), or a lien incurred in connection with any conditional sale or other title retention agreement or a Capital Lease; provided that:


	(a) Any property subject to any of the foregoing is acquired by the Borrower or any subsidiary in the ordinary course of its business; and


	(b) Each such lien shall attach only to the property so acquired and fixed improvements thereon.


	1.41. “Person” means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority, or other entity of whatever nature.


	1.42. “Plan” means any pension plan which is covered by Title IV of ERISA and in respect of which the Borrower or a Commonly Controlled Entity is an “employer” as defined in Section 3(5) of ERISA.


	1.43. “Principal Office” means the Bank’s main office located at Seven East Second Street, BOk Tower-8th Floor, Tulsa, Oklahoma 74102.


	1.44. “Prohibited Transaction” means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code.

1.45. “Qualified Inventory” means the amount of inventory of Borrower located in the United States of America or Canada that is not subject to any Lien or adverse claim and that conforms to the representations and warranties contained in this Agreement and that is acceptable to the Bank in its sole discretion, less any packaging materials and supplies, damaged or unsalvageable goods returned or rejected by its customers, goods to be returned to its suppliers, goods in transit to third parties (other than its agent or warehouses) and goods out at contractors, and less any reserves required by the Bank in its sole discretion for special order goods, market value declines and bill and hold (deferred shipment) sales. Qualified Inventory includes spare parts owned by the Borrower for use in supporting its customers.


	1.46. “Qualified Receivables” means and includes only accounts receivable of Borrower which meet the following specifications at the time they came into existence and continue to meet the same until collected in full.


	1.46.1. The account is due and payable. No account shall be outstanding for more than ninety (90) days from the date of the applicable invoice.


	1.46.2. The account arose from a bona fide outright sale of goods previously made or from the performance of services, but not from leasing, and the applicable Borrower has possession of or has delivered to Bank shipping and delivery receipts evidencing shipment of the goods or, if representing services, the services have been fully performed for the respective account debtor.

	1.46.3. The account is not subject to any assignment, claim, lien or security interest of any character or subject to any attachment, levy, garnishment or other judicial process, except the security interest of Bank.


	1.46.4. The account is not subject to any claim for credit, setoff, allowance, adjustment by the account debtor or counterclaim, and no Borrower has received any notice of any such claim for credit, setoff, allowance, adjustment or counterclaim from or on behalf of the account debtor.


	1.46.5. The account arose in the ordinary course of each Borrower’s business and no notice of the bankruptcy, insolvency or adverse change in the financial condition of the account debtor has been received by any Borrower or Bank.


	1.46.6. Bank has not previously notified any Borrower that the account or the account debtor is or has become unsatisfactory, based upon reasonable credit standards, or the account debtor has been adjudicated bankrupt or is subject to a similar proceeding.


	1.46.7. The account is not evidenced by a judgment, an instrument or chattel paper.


	1.46.8. The account debtor is not a governmental entity except that up to $1,000,000 of the total Qualified Receivables may be from governmental entities.

1.46.9. The account debtor is not a foreign (i.e., residing or incorporated in or organized under a jurisdiction outside the United States) person or company and is not a parent, subsidiary, officer, employee, director, agent or Affiliate of Borrower, and the account debtor and Borrower do not have common shareholders, officers or directors; provided that Bank specifically excludes any Bank Approved Account Debtor (defined below) from this subsection.


	1.46.10. All receivables of one account debtor shall become ineligible if more than 10% of such receivables are over ninety (90) days past due from the invoice.


	1.46.11. The account debtor (excluding any Bank Approved Account Debtor) cannot exceed 25% of the total accounts receivable, and any amounts over 25% will be excluded from the Borrowing Base unless specifically waived in writing in each instance by Bank in its sole discretion.


	1.46.12. With regard only to Sections 1.46.10 and 1.46.11, the term “Bank Approved Account Debtor” means an express written designation given by Bank in its discretion as to an account debtor on a semi-annual basis, effective January and

July of each calendar year. Borrower shall submit a proposed list of account debtors to Bank at least ten (10) days prior to the semi-annual designation date, which list must be accompanied by such information relating to the proposed account debtor as Bank may reasonably require. Bank shall advise Borrower on or before the applicable semi-annual effective date whether any or all of the proposed account debtors has been designated as a Bank Approved Account Debtor. Any such designation shall be effective only for the ensuing six (6) month period, and any designation by Bank shall have no relevance with regard to subsequent designations. The initially approved Bank Approved Account Debtors are Host Marriott Corporation, Marriott International, Hilton Hotels Corporation, Avaya Financial Leasing, Time Warner, Texas Cable Partners, and Union Electric Company (Ameren).


	1.46.13. Qualified Receivables also include accrued accounts receivable that represent the Borrower’s legally billable, but not yet billed materials which have been shipped to its customer(s).


	1.47. “Real Estate Note” shall mean the $2,238,333.48 Promissory Note in form and content as set forth on Schedule “1.47” attached hereto.


	1.48. “Reportable Event” means any of the events set forth in Section 4043 of ERISA.


	1.49. Revolving Line Note” shall mean the $7,500,000 Promissory Note in form and content as set forth on Schedule “1.49” attached hereto.


	1.50. “Security Agreement” means the Security Agreement and other Collateral documents described in Section 3.

1.51. “Subsidiaries” means, separately and collectively, any corporation of which shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by the Borrower.

1.52. “Tangible Net Worth” means, without duplication, as at any time of determination thereof, net worth less (a) all intangible items, including without limitation, goodwill, licenses, organizational expense, unamortized debt discount and expense carried as an asset, all reserves and any write-up in the book value of assets, and (b) all reserves for depreciation and other asset valuation reserves (but excluding reserves for federal, state, and other income taxes), net of accumulated amortization.


	1.54. “Term Note” shall mean the $3,374,734.33 Promissory Note in form and content as set forth on Schedule “1.53” attached hereto.


	1.55. “Title Insurance Binder” means an original mortgagee’s title guaranty binder or commitment in favor of Bank issued by a title insurer and agent satisfactory to Bank,


	committing to issue an ALTA mortgagee’s title guaranty policy insuring the Mortgage to be a first and prior lien on the Mortgaged Property and improvements, containing only such exceptions which are acceptable to Bank.

1.56. “Title Insurance Policy” means an original fully paid ALTA mortgage title insurance policy issued pursuant to the Title Insurance Binder in an amount acceptable to Bank and insuring the Mortgage to be a first and prior lien on Borrower’s fee simple ownership interests (or leasehold, as applicable) in the Mortgaged Property and improvements, with no exceptions from coverage as to mechanics’ and materialmen’s liens, matters shown by a current survey, right of parties in possession, or such other exceptions as Bank shall approve.


	1.57. “UCC” shall mean the Uniform Commercial Code of the State of Oklahoma.


	1.58. “UCC-1 Chattel Check” means a UCC Information and/or Copy Request as to Borrower from the Chattel Records Division of the Oklahoma County Clerk, and from any other office deemed necessary or advisable by Bank, which chattel checks must evidence no conflicting security interests, except the Permitted Liens.


	1.59. “UCC-1 Financing Statement” means a financing statement in form and content substantially as set forth on Schedule “1.59” attached hereto, which will be filed with the appropriate office and shall evidence perfection of a first and prior security interest in the collateral described in the Security Agreements in favor of Bank, except for the Permitted Liens.


	2.1. Term Loan. Subject to the terms and conditions of this Agreement, the Bank agrees to loan Borrower $3,374,734.33, to be further evidenced by the Term Note. The purpose of the advance under the Term Note is to enable Borrower to refinance Borrower’s debt with Bank One.


	2.2. Real Estate Loan. Subject to the terms and conditions of this Agreement, the Bank agrees to loan Borrower $2,238,333.48, to be further evidenced by the Real Estate Note. The purpose of the advance under the Real Estate Note is to enable Borrower to refinance Borrower’s debt with Bank One.

2.3. Revolving Line. Subject to the terms and conditions of this Agreement, and so long as no Initial Default or Matured Default has occurred, Bank agrees to loan to Borrower (by advancing funds or issuing Letters of Credit in amounts not to exceed $7,500,000 in the aggregate), such amounts up to $7,500,000 as Borrower may request from time to time on or before the maturity of the Revolving Line Note, provided that the aggregate principal amount of advances at any time outstanding shall not exceed the lesser of (i) $7,500,000 or (ii) the Borrowing Base. Such Borrowing Base shall be computed on a monthly basis, and Borrower agrees to provide Bank on the 10th day of each month with regard to the immediately preceding month all information requested in connection therewith, including without limitation a Borrowing Base Certificate. In the event Bank shall make advances in excess of the formula set forth above, any such advance shall, nevertheless, be secured by all Collateral. In the event outstanding advances with respect to Qualified Receivables or Qualified Inventory fail to comply with such formula, by reason of any


	accounts receivable or inventory ceasing to be so qualified, for whatever reason, then Borrower shall immediately notify Bank of such situation and shall, within five (5) Business Days of the imbalance, either (i) reduce the amount of the outstanding balances to bring such amounts within the formulas prescribed, or (ii) provide additional Qualified Receivable or Qualified Inventory, without any additional advance being made by Bank with respect thereto, necessary to comply with the formulas required herein. Within the limits set forth in this Section 2.2, Borrower may borrow, repay and reborrow at any one time and from time to time.

	2.4. Notice and Manner of Borrowing. The Borrower shall give the Bank at least one (1) Business Day’s notice of any Loans under this Agreement, specifying the date and amount thereof. Such notice shall be in writing or via telephone (with voice verification by the appropriate officer), no later than 10:00 a.m. (Tulsa time) on the date of such Loan and upon fulfillment of the applicable conditions, the Bank will make such Loan available to the Borrower in immediately available funds by crediting the amount thereof to the following account with the Bank: Account styled Xeta Corporation, No. 209909011.

3. SECURITY. As security for any and all indebtedness, obligations or liabilities of every kind and description of Borrower to Bank, including, without limitation, all advances and Loans evidenced by the Notes, and any other advances or loans made pursuant to this Agreement or any other instrument, document, agreement executed and/or delivered by Borrower to Bank in connection herewith, including any extensions, renewals or changes in form of any of the Notes, and any other obligations or liabilities now existing or hereafter arising, direct or indirect, absolute or contingent, joint and/or several, howsoever created or obtained (separately and collectively, the “Obligations”), Borrower grants to Bank the following liens and security interests and also agrees as follows:


	3.1. A first and prior security interest in all assets of Borrower including, without limitation, accounts, inventory, equipment, software, general intangibles and chattel paper of Borrower, whether now owned or hereafter acquired, howsoever arising or wheresoever located, all as evidenced by the Security Agreement set forth on Schedule “3.1” attached hereto.


	3.2. A first and prior mortgage lien against the Mortgaged Property, as evidenced by the Mortgage.


	3.4. Borrower also agrees to execute and deliver all financing statements or other instruments, documents or agreements required by Bank in order to effectuate the intent of the parties in connection herewith, including without limitation documents necessary for proper perfection as deemed necessary and/or advisable by Bank and legal counsel.


	4.1. Closing. The commitment of Bank to advance funds under the Notes shall be conditioned upon the following being satisfied:


	4.1.1.14. Any other instruments, documents or agreements reasonably requested by Bank in connection herewith.


	A. The representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct; and


	B. No Initial Default or Matured Default has occurred and is continuing or will occur as a result of the execution, delivery and/or performance by Borrower under any of the Loan Documents.


	4.1.3. The Bank shall have received such other approvals, opinions, instruments, documents and/or agreements which it may reasonably request.

5. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank that:

5.1. Incorporation, Good Standing, and Due Qualification. Borrower is a corporation duly incorporated, validly existing, and in good standing under the laws of the State in which it is incorporated; has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged; and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required.

5.2. Corporate Power and Authority. The execution, delivery, and performance by Borrower of the Loan Documents have been duly authorized by all necessary corporate action and do not and will not (1) require any consent or approval of the stockholders which has not been given; (2) contravene Borrower’s charter or bylaws; (3) violate any provision of any law, rule, regulation (including, without limitation, Regulations U and X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to Borrower; (4) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease, or instrument to which Borrower is a party or by which it or its properties may be bound or affected; (5) result in, or require, the creation or imposition of any lien, upon or with respect to any of the properties now owned or hereafter acquired by Borrower; or (6) cause Borrower to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award or any such indenture, agreement, lease, or instrument.

5.3. Legally Enforceable Agreement. This Agreement is, and each of the other Loan documents when delivered under this Agreement will be, legal, valid, and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors’ rights generally.

5.4. Financial Statements. The balance sheet of Borrower as of July 31, 2003, the related statements of income and retained earnings of Borrower for the nine (9) months then ended, are complete and correct and fairly present the financial condition of Borrower at such dates and the results of the operations of Borrower for the periods covered by such statements, all in accordance with GAAP consistently applied (subject to year-end adjustments in the case of the interim financial statements), and since July 31, 2003, there has been no material adverse change in the condition (financial or otherwise), business or operations of Borrower. There are no liabilities of Borrower, fixed or contingent, which are material but not reflected in such financial statements or in the notes thereto, other than liabilities arising in the ordinary course of business since July 31, 2003. No information, exhibit, or report furnished by the Borrower to the Bank in connection with the negotiation of this Agreement contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statement contained therein not materially misleading.


	5.5. Labor Disputes and Acts of God. Neither the business nor the properties of Borrower is affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty (whether or not covered by insurance), materially adversely affecting such business or the operation of Borrower.

5.6. Other Agreements. Borrower is not a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction, which could have a material adverse effect on the business, properties, assets, operations, or condition, financial or otherwise, of Borrower or the ability of Borrower to carry out its obligations under the Loan Documents. Borrower is not in material default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party.

5.7. Litigation. There is no pending or threatened action or proceeding against or affecting Borrower before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties, or business of Borrower or the ability of Borrower to perform its obligations under the Loan Documents. Any litigation which does exist is set forth in detail satisfactory to Bank on Schedule “5.7” hereto, but Borrower represents to Bank that such litigation does not violate this Section 5.7.

5.8. Ownership and Liens. Borrower has title to, or valid leasehold interests in, all of its properties and assets, real and personal, including the properties and assets and leasehold interest reflected in the financial statements referred to in Section 5.4, and none of the properties and assets owned by Borrower, and none of its leasehold interests, are subject to any lien, except the Permitted Liens.

5.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed, nor has any Plan been terminated; no circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings; neither Borrower nor any Commonly Controlled Entity has completely or partially withdrawn from a Multiemployer Plan; Borrower and each Commonly Controlled Entity have met their minimum funding requirements under ERISA with respect to all of their Plans and the present value of all vested benefits under each Plan exceeds the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA; and neither Borrower nor any Commonly Controlled Entity has incurred any liability to the PBGC under ERISA.


	5.10. Operation of Business. To the best of its knowledge, Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted, and Borrower is not in violation of any valid rights of others with respect to any of the foregoing.


	5.11. Taxes. Borrower has filed all tax returns (federal, state and local) required to be filed and have paid all taxes, assessments, and governmental charges and levies thereon to be due, including interest and penalties.

5.12. Debt. Schedule “5.12” is a complete and correct list of all credit agreements, indentures, purchase agreements, guaranties, Capital Leases, and other investments, agreements, and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which Borrower is in any manner directly or contingently obligated; and the maximum principal or face amounts of the debt in question, which are outstanding and which can be outstanding, are correctly stated, and all liens of any nature given or agreed to be given as security therefor are correctly described or indicated in such Schedule. With regard to any guaranty or other contingent obligation of Borrower, Borrower shall promptly notify Bank in the event any such obligation becomes non-contingent.

5.13. Environment. Borrower has duly complied with, and its business, operations, assets, equipment, property, leaseholds, or other facilities are in compliance with, the provisions of all federal, state, and local environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder. Borrower has been issued and will maintain all required federal, state, and local permits, licenses, certificates and approvals relating to (1) air emissions; (2) discharges to surface or groundwater; (3) noise emissions; (4) solid or liquid waste disposal; (5) the use, generation, storage, transportation or disposal or toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such materials listed in any federal, state, or local law, code or ordinance, and all rules and regulations promulgated thereunder as hazardous or potentially hazardous); or (6) other environmental, health or safety matters. Borrower has not received notice of, nor to its best knowledge knows of or suspects, facts which might constitute any violations of any federal, state or local environmental, health, or safety laws, codes or ordinances, and any rules or regulations promulgated thereunder with respect to its business, operations, assets, equipment, property, leaseholds, or other facilities. To Borrower’s best knowledge, there has been no emission, spill, release, or discharge into or upon (1) the air; (2) soils, or any improvements located thereon; (3) surface water or groundwater; or (4) the sewer, septic system or waste treatment, storage or disposal system servicing the premises, of any toxic or hazardous substances or wastes at or from the premises; and accordingly the premises of the Borrower is free of all such toxic or hazardous substances or wastes. Except as disclosed in writing to Bank, there has been no complaint, order, directive, claim, citation, or notice by any governmental authority or any person or entity with respect to (1) air emissions; (2) spills, releases, or discharges to soils or improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing the premises; (3) noise emissions; (4) solid or liquid waste disposal; (5) the use, generation, storage, transportation, or disposal of toxic or hazardous substances or waste; or (6) other environmental, health, or safety matters affecting Borrower or its business, operations, assets, equipment, property, leaseholds, or other facilities. Borrower has no indebtedness, obligation, or liability, absolute or contingent, matured or not matured, with respect to the storage, treatment, cleanup or disposal of any solid wastes, hazardous wastes or other toxic or hazardous substances (including without limitation any such indebtedness, obligation, or liability with respect to any current regulation, law, or statute regarding such storage, treatment, cleanup or disposal).

6. AFFIRMATIVE COVENANTS. So long as any Note shall remain unpaid or the Bank shall have any Commitment under this Agreement, Borrower will comply with the following:


	6.1. Maintenance of Existence. Preserve and maintain its corporate existence and good standing in the states in which it does business, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required.


	6.2. Maintenance of Records. Keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions.


	6.3. Maintenance of Properties. Maintain, keep, and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted.


	6.4. Conduct of Business. Continue to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Agreement.

6.5. Maintenance of Insurance. Borrower will keep or cause to be kept adequately insured by financially sound and reputable insurers its plant, equipment, motor vehicles, and all other property of a character usually insured by businesses engaged in the same or similar businesses. Upon demand by the Bank, any insurance policies covering the Collateral shall be endorsed to provide for payment of losses to the Bank as its interest may appear, to provide that such policies may not be canceled, reduced or affected in any manner for any reason without thirty days prior notice to the Bank, and to provide for any other matters which the Bank may reasonably require; and such insurance shall be against fire, casualty and any other hazards normally insured against and shall be in the amount of the full value (less a reasonable deductible not to exceed amounts customary in the industry for similarly situated businesses and properties) of the property insured. The Borrower shall at all times maintain adequate insurance against damage to persons or property, which insurance shall be by financially sound and reputable insurers and shall, without limitation, provide the following coverages: comprehensive general liability (including, without limitation, coverage, where applicable, damage caused by explosion, broad form property damage coverage, broad form coverage for contractually independent contractors), worker’s compensation, products liability and automobile liability.


	6.6. Compliance with Laws. Comply in all material respects with all applicable laws, rules, regulations, and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments, and governmental charges imposed upon it or upon its property.

6.7. Right of Inspection. At any reasonable time and from time to time, and following reasonable prior written notice, permit the Bank or any agent or representative thereof, to reasonably examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Borrower, and to discuss the affairs, finances, and accounts of Borrower with any of its officers and directors and Borrower’s independent accountants. Bank contemplates conducting at least semi-annual field audits of the Borrower’s property. Such inspections and field audits shall be conducted at the Bank’s expense.


	6.8.1. Quarterly Financial Statements. As soon as available and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower, Borrower shall deliver to Bank a copy of its Form 10Q that has been or will be filed with the Securities and Exchange Commission.

6.8.2. Annual Financial Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, commencing with the fiscal year ending October 31, 2003, a copy of its Form 10K that has been or will be filed with the Securities and Exchange Commission. Such filing shall include an unqualified opinion on the Borrower’s financial statements acceptable to the Bank by independent accountants selected by Borrower and acceptable to the Bank;


	6.8.3. Management Letters. Promptly upon receipt thereof, copies of any reports submitted to Borrower by independent certified public accountants in connection with examination of the financial statements of Borrower made by such accountants;

6.8.4. Certificate of No Default. Within twenty (20) days after the end of each of the quarters of each fiscal year of Borrower a certificate of the chief financial officer of Borrower (a) certifying that to the best of his knowledge no Initial Default or Matured Default has occurred and is continuing, or if an Initial Default or Matured Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (b) with computations demonstrating compliance with the covenants contained in Section 8.;

6.8.5. Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Borrower, which, if determined adversely to Borrower, could have a material adverse effect on the financial condition, properties, or operations of Borrower;


	6.8.6. Notice of Initial Defaults and Matured Defaults. As soon as possible and in any event within five (5) days after the occurrence of each Initial Default or Matured Default, a written notice setting forth the details of such Initial Default or Matured Default and the action which is proposed to be taken by the Borrower with respect thereto;

6.8.7. ERISA Reports. As soon as possible, and in any event within thirty (30) days after Borrower knows or has reason to know that any circumstances exist that constitute grounds entitling the PBGC to institute proceedings to terminate a Plan subject to ERISA with respect to Borrower or any commonly controlled Entity, and promptly but in any event within two (2) Business Days of receipt by the Borrower or any Commonly Controlled Entity of notice that the PBGC intends to terminate a Plan or appoint a trustee to administer the same, and promptly but in any event within five (5) Business Days of the receipt of notice concerning the imposition of withdrawal liability with respect to Borrower or any Commonly Controlled Entity, the Borrower will deliver to the Bank a certificate of the chief financial officer of the Borrower setting forth all relevant details and the action which the Borrower proposes to take with respect thereto;


	6.8.8. Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, credit, or similar agreement and not otherwise required to be furnished to the Bank pursuant to any other clause of this Section 6.;

6.8.9. Proxy Statements, etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements, and reports which each Borrower sends to its stockholders, and copies of all regular, periodic, and special reports, and all registration statements which Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; and


	6.8.10. General Information. Such other information respecting the condition or operations, financial or otherwise, of Borrower as the Bank may from time to time reasonably request.


	6.9. Environment. Be and remain in material compliance with the provisions of all federal, state, and local environmental, health and safety laws, codes and ordinances, and all rules and regulations issued thereunder; notify the Bank immediately of any notice of a hazardous discharge or environmental complaint received from any governmental agency or any other party; notify the Bank immediately of any hazardous discharge from or affecting its premises; promptly contain and remove the same, in compliance with all applicable laws; promptly pay any fine or penalty assessed in connection therewith; permit the Bank to inspect the premises, to conduct tests thereon, and to inspect all books, correspondence, and records pertaining thereto; and at the Bank’s request, and at Borrower’s expense, provide a report of a qualified environmental engineer, satisfactory in scope, form, and content to the Bank, and such other and further assurances reasonably satisfactory to the Bank that the condition has been corrected.

	6.10. Operating Accounts. Maintain its primary operating accounts at Bank.


	6.11. Guarantee of Subsidiaries. Cause any future Subsidiaries of Borrower to guarantee the Loan, and to execute any and all documentation required by Bank to evidence same.

7. NEGATIVE COVENANTS. So long as any Notes shall remain unpaid or the Bank shall have any Commitment under this Agreement or any letter of credit issued in connection herewith, Borrower will not:


	7.1. Negative Pledge. Create, incur, permit or suffer to exist any Liens upon any of its assets or properties, now owned or hereafter acquired, except for the Permitted Liens.


	(2) Purchase money indebtedness not to exceed $500,000 in the aggregate for any given fiscal year;


	(3) Current liabilities for taxes and assessments incurred in the ordinary course of business;


	(4) Indebtedness in respect of current accounts payable or accrued (other than for borrowed funds or purchase money obligations) and incurred in the ordinary course of business, provided that all such liabilities, accounts and claims shall be promptly paid and discharged when due or in conformity with customary trade terms;


	(5) Debt described in Schedule “5.12” but no voluntary prepayment, renewals, extensions, or refinancings thereof;


	(6) Unsecured non-Bank Debt in addition to the debt described in Schedule “5.12” not to exceed $100,000 for the Borrower in the aggregate in any given fiscal year; and


	(7) Accounts payable to trade creditors for goods or services which are not past due more than ninety (90) days from the billing date, in each case incurred in the ordinary course of business, as presently conducted, and paid within the specified time, unless contested in good faith and by appropriate proceedings.


	7.3. Mergers, etc. Wind up, liquidate or dissolve itself, reorganize, merge or consolidate with or into, or convey, sell, assign, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person.

7.4. Leases. Without Bank’s prior written consent, create, incur, assume, or suffer to exist, any obligation as lessee for the rental or hire of any real or personal property, except (1) leases existing on the date of this Agreement and any extensions or renewals thereof and (2) leases (other than Capital Leases) which do not in the aggregate require Borrower to make payments (including taxes, insurance, maintenance, and similar expenses which the Borrower is required to pay under the terms of any lease) in any fiscal year of Borrower in excess of One Hundred Thousand and no/100ths Dollars ($100,000). Bank agrees not to unreasonably withhold its consent and will endeavor to respond within ten (10) days to Borrower’s request therefor.


	7.5. Sale and Leaseback. Sell, transfer, or otherwise dispose of any real or personal property to any Person and thereafter directly or indirectly lease back the same or similar property.

7.6. Dividends. Declare or pay any dividends; or purchase, redeem, retire, or otherwise acquire for value any of its capital stock now or hereafter outstanding; or make any distribution of assets to its stockholders as such whether in cash, assets, or in obligations of the Borrower; or allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption, or retirement of any shares of its capital stock; or make any distribution by reduction of capital or otherwise in respect of any shares of its capital stock.

7.7. Sale of Assets. Sell, lease, assign, transfer, or otherwise dispose of, any of its now owned or hereafter acquired assets (including, without limitation, shares of stock, receivables, and leasehold interests), except: (1) inventory disposed of or leased in the ordinary course of business; (2) the sale or other disposition of assets no longer used or useful in the conduct of its business; and (3) treasury stock.

7.8. Guaranties, etc. Assume, guaranty, endorse, or otherwise be or become directly or contingently responsible or liable (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods, or services, or to supply or advance any funds, assets, goods, or services, or an agreement to maintain or cause such Person to maintain a minimum working capital net worth, or otherwise to assure the creditors of any Person against loss), for obligations of any Person, except 1) guaranties by endorsement of negotiable instruments for deposits or collection or similar transactions in the ordinary course of business, and 2) aggregate guarantees less than $100,000.

7.9. Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of each Borrower’s business and upon fair and reasonable terms no less favorable to the Borrower than would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.

8. FINANCIAL COVENANTS. So long as any Notes shall remain unpaid or the Bank shall have any Commitment under this Agreement, Borrower shall comply with the following on a consolidated basis:


	8.1. Funded Debt to EBITDA Ratio. Maintain at all times a Funded Debt to EBITDA Ratio of not greater than 3.5 to 1.


	8.2. Minimum Tangible Net Worth. Maintain at all times a Tangible Net Worth of not less than Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000).


	8.3. Debt Service Coverage Ratio. Maintain at all times a Debt Service Coverage Ratio not less than 1.25 to 1.


	8.4. Capital Expenditures. Not make expenditures for fixed or capital assets if, after giving effect thereto, the aggregate of all such expenditures would exceed $900,000 during any fiscal year of the Borrower.


	9.1. Events of Default. For purposes of this Agreement, the occurrence of any of the following events shall constitute an “Event of Default”:


	(1) Borrower’s failure to pay the principal of, or interest on, the Notes, or any amount of a commitment or other fee within five (5) days after the date on which any such payment is due and payable;


	(2) Borrower’s failure, inability or admission in writing of its inability generally to pay, its debts as such debts become due; or;

(3) Borrower’s making of an assignment for the benefit of creditors, or its filing of an application for the appointment by any tribunal of a custodian, receiver, or trustee for it or a substantial part of its assets or the commencement of any proceeding by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect in which an order for relief is entered or an adjudication or appointment is made, and which remains undismissed for a period of thirty (30) days or more, or the taking by Borrower of any corporate action indicating its consent to, approval of, or acquiescence in any such petition, application, proceeding, or order for relief or the appointment of a custodian, receiver, or trustee for all or any substantial part of its properties; or its sufferance of


	such custodianship, receivership, or trusteeship to continue undischarged for a period of thirty (30) days or more.


	(4) The rendering against Borrower of one or more judgments, decrees, or orders for the payment of money in excess of Five Hundred Thousand and no/100ths Dollars ($500,000.00) in the aggregate, and the continuance of such judgments, decrees, or order in effect for a period of thirty (30) consecutive days without being vacated, discharged, satisfied, or stayed or bonded pending appeal;


	(5) The occurrence of any of the following events and the Borrower’s failure to cure same to the Bank’s reasonable satisfaction within forty-five (45) Business Days after receiving from the Bank written notice of the occurrence of such event and a demand for its cure:


	(a) Any representation or warranty made by Borrower in this Agreement or the Security Agreement or which is contained in any certificate, document, opinion, or financial or other statement furnished at any time under or in connection with any Loan Document shall prove to have been incorrect, incomplete, or misleading in any material respect on or as of the date made or deemed made;

	(b) Borrower’s failure to perform or observe any term, covenant, or agreement contained in this Agreement or any Loan Documents;

(c) Borrower’s failure (i) to pay any indebtedness for borrowed money (other than the Notes) or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise); or (ii) to perform or observe any term, covenant, or condition on its part required to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of any applicable notice or passage of time, or both, the maturity of such indebtedness, whether or not such failure to perform or observe shall be waived by the holder of such indebtedness, or any such indebtedness shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof;


	(d) The Borrower shall (i) contest the validity or enforceability of the Collateral documents (ii) deny that it has any further liability or obligation thereunder, or (iii) fail to perform any of its obligations thereunder;


	(e) The Collateral documents shall cease, at any time after their execution and delivery and for any reason, (i) to create a valid and perfected first priority security interest in and to the property purported to be subject to such Collateral documents; or (ii) to be in full force and effect; or shall be declared null and void;;

(f) With respect to the Borrower and any commonly Controlled Entity under ERISA, there shall occur or exist (i) any Reportable Event or a complete or partial withdrawal from any Multiemployer Plans; (ii) any Prohibited Transaction; (iii) the filing of a notice of intent to terminate a Plan or a Plan is terminated; or (iv) circumstances which constitute grounds entitling the PBGC to institute proceedings to terminate a Plan, or the PBGC’s institution of such proceedings; and in each case above, such event or condition, together with all other events or conditions, if any, could subject Borrower to any tax, penalty, or other liability which in the aggregate may exceed Two Hundred Fifty Thousand and no/100ths Dollars ($250,000.00); or

(g) The Bank receives notice of a hazardous discharge or an environmental complaint; or any federal, state, or local agency asserts or creates a Lien upon any or all of the assets, equipment, property, leaseholds, or other facilities of the Borrower by reason of the occurrence of a hazardous discharge or an environmental complaint; or any federal, state, or local agency asserts a claim against Borrower and/or its assets, equipment, property, leaseholds, or other facilities for damages or cleanup costs relating to a hazardous discharge or an environmental complaint; unless, within five (5) Business Days of the occurrence giving rise to the claim, (i) the Borrower can prove to the Bank’s satisfaction that the Borrower has commenced and is diligently pursuing either: (x) a cure or correction of the event which constitutes the basis for the claim, and continues diligently to pursue such cure or correction to completion or (y) proceedings for an injunction, a restraining order, or other appropriate relief preventing such agency or agencies from asserting such claim, which relief is granted within ten (10) Business Days of the occurrence giving rise to the claim and the injunction, order, or relief is not thereafter resolved or reversed on appeal; and (ii) in either of the foregoing events, the Borrower has posted a bond, letter of credit, or other security satisfactory in form, substance, and amount to both the Bank and the agency or entity asserting the claim to secure the proper and complete cure or correction of the event which constitutes the basis for the claim;


	provided, however, that immediately upon the occurrence of any such event the Bank may suspend its commitment to make advances under the Revolving Line pending satisfactory cure of the default that said event will constitute upon expiration of the time provided for cure.

Upon the occurrence of any of the foregoing Events of Default under Section 9.1(1), 9.1(2), 9.1(3) and 9.1(4) or 9.1(5), which is not cured within the time provided for cure (if any), the Bank may exercise any or all of the following remedies: (a) declare its obligation to make loans to be terminated, whereupon the same shall forthwith terminate; (b) declare the outstanding Notes, all interest thereon, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest, and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Borrower. Additionally, the Bank is hereby authorized at any time and from time to time, without further notice to

Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or the Notes or other Loan Documents, irrespective of whether or not the Bank shall have made any demand under this Agreement or the Notes or such other Loan document and although such obligations may be unmatured. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Bank may have, in this Agreement, any other loan document or at law or equity, including without limitation the right to accelerate the Notes upon the occurrence of a Matured Default.

10.1. Material Information: The Bank acknowledges that the Borrower is a public company subject to state and federal securities laws and regulations regarding the dissemination of material, non-public information. The Bank also acknowledges that it will, from time-to-time be in possession of material information about the Borrower’s financial condition or financial results which has not been disclosed publicly by the Borrower; that the deliberate or inadvertent dissemination of such information could cause irreparable harm to the Borrower; and it shall use all reasonable care to safeguard such information from unauthorized disclosure. Furthermore, to facilitate the Borrower’s compliance with Regulation FD, in the event that such information is disclosed, the Bank agrees to notify Borrower of any disclosure of such information within 24 hours of the Bank’s knowledge that such disclosure has occurred.

10.2. Amendments, etc. No amendment, modification, termination, or waiver of any provision of any Loan Document to which the Borrower is a party, nor consent to any departure by the Borrower from any Loan Document to which it is a party, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

10.3. Notices, etc. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):


	XETA TECHNOLOGIES, INC. 1814 W. Tacoma Broken Arrow, OK 74012 ATTN: Robert Wagner, Chief Financial Officer Facsimile No.: 918.664.6876


	BANK OF OKLAHOMA, N.A. P.O. Box 2300 Tulsa, Oklahoma 74192 Attn: Stephen R. Wright, Senior Vice President Facsimile No.: (918) 295-0400

or at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 10.2. Except as is otherwise provided in this Agreement, all such notices and communications shall be effective when deposited in the mails addressed as aforesaid, except that notices for advances to the Bank pursuant to the provisions of § 2.4 shall not be effective until received by the Bank.

10.4. No Waiver. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy hereunder. The rights and remedies provided herein are cumulative, and are not exclusive of any other rights, powers, privileges, or remedies, now or hereafter existing, at law or in equity or otherwise.


	10.5. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights under any Loan Document to which the Borrower is a party without the prior written consent of the Bank.

10.6. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all costs and expenses incurred by the Bank in connection with the preparation, execution, delivery, filing, and initial administration of the Loan Documents, including without limitation the fees of Riggs, Abney, Neal, Turpen, Orbison & Lewis, and of any amendment, modification, or supplement to the Loan Documents, including, without limitation, the fees and out-of-pocket expenses of counsel for the Bank, incurred in connection with advising the Bank as to its rights and responsibilities hereunder. If Bank is required to pursue enforcement action to collect the Obligations due to a default by Borrower hereunder or under any of the Loan Documents, Borrower also agrees to pay all costs, expenses and fees, including court costs, incurred in connection with such enforcement action, whether by negotiation, legal proceedings, or otherwise. In addition, the Borrower shall pay any and all stamp and other taxes (but not mortgage registration taxes where local law prohibits Borrower from doing so) and fees payable or determined to be payable in connection with the execution, delivery, filing, and recording of any of the Loan Documents and the other documents to be delivered under any such Loan Documents, and agrees to hold the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. This provision shall survive termination of this Agreement.


	10.7. Integration. This Agreement and the Loan Documents contain the entire agreement between the parties relating to the subject matter hereof and supersede all prior and contemporaneous oral statements and writings with respect thereto.

	10.8. Indemnity. The Borrower hereby agrees to defend, indemnify, and hold the Bank harmless from and against any and all claims, damages, judgments, penalties, costs, and expenses (including attorney fees and court costs now or hereafter arising from the aforesaid enforcement of this clause) arising directly or indirectly from the activities of the Borrower, its predecessors in interest, or third parties with whom they have a contractual relationship, or arising directly or indirectly from the violation of any environmental protection, health or safety law, whether such claims are asserted by any governmental agency or any other Person. This indemnity shall survive termination of this Agreement.

10.9. Governing Law, Jurisdiction and Venue. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of Oklahoma applicable to agreements made and to be performed entirely within the State of Oklahoma, without giving effect to its conflicts of laws provisions. The parties agree that, in any dispute between them relating to this Agreement or the Notes, exclusive jurisdiction shall be in the trial courts, Federal or State, sitting in the City of Tulsa, Oklahoma, or in Tulsa County, Oklahoma, and that venue shall lie only in such courts; and any and all objections as to such jurisdiction and venue are hereby expressly waived by each party.


	10.10. Severability of Provisions. Any provision of any Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction.


	10.11. Headings. Article and Section headings in the Loan Documents are included in such Loan Documents for the convenience of reference only and shall not constitute a part of the applicable Loan Documents for any other purpose.


	10.12. Conflicts. To the extent any conflict exists under any of the Loan Documents, this Credit Agreement shall be controlling.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

Part of Lot One (1), Block One (1), GREENWAY BUSINESS PARK III, an Addition to the City of Broken Arrow, Tulsa County, State of Oklahoma, according to the Recorded Plat No. 4796, being more particularly described as follows:

Beginning at a point 466 feet East of the Northwest corner of said Lot 1; thence S 89°53’46” E 643.85 feet; thence N 35°58’48” E 170 feet; thence Southeasterly 52.65 feet along a curve to the left with a radius of 717.36 feet and a tangent bearing of S 54°01“12” E; thence S 58°13’32” E 156.16 feet; thence Southeasterly 161.88 feet along a curve to the left with a radius of 441.39 feet; thence S 41°03’02” W 393.26 feet; thence South 60.20 feet; thence S 00°02’00” W 263.30 feet; to a point on the North right-of-way line of West Tacoma Street; thence continuing along said right-of-way the following: N 89°55’59” W 155.22 feet; Northwesterly 118.36 feet along a curve to the right with a radius of 276.21 feet; N 65°20’27” W 14.17 feet; Westerly 137.44 feet along a curve to the left with a radius of 320.21 feet; N 89°55’59” W 260 feet; Southwesterly 140.56 feet along a curve to the left with a radius of 540.65 feet; thence N 00°18’14: E 610.86 feet to the point of beginning.

General Electric Credit Corporation, under that certain Business Lease Agreement No. 4185891-001, evidenced by UCC Financing Statement no. 2003004178732, filed April 9, 2003, in the UCC records of the County Clerk of Oklahoma County, Oklahoma.

(i) Renewal Term Note – May 1, 2003, with U.S. Bank National Association for $1,986,381.24 due December 31, 2003

(ii) Renewal Term Note – May 1, 2003, with Bank One, Oklahoma, NA for $2,427,799.30 due December 31, 2003


	(These two term notes are being replaced by the Term Loan with BOk in the amount of $3,374,734.33)

(iii) Renewal Real Estate Term Note – May 1, 2003, with Bank One, Oklahoma, NA for $1,262,250.12 due December 31, 2003

(iv) Renewal Real Estate Term Note – May 1, 2003, with U.S. Bank National Association for $1,032,750.00 due December 31, 2003


	(These two real estate notes are being replaced by the Real Estate Note with BOk in the amount of $2,238,333.48)

(v) Renewal Revolving Note – May 1, 2003, with Bank One, Oklahoma, NA for $4,125,000.00 due December 31, 2003

(vi) Renewal Revolving Note – May 1, 2003, with U.S. Bank National Association for $3,375,000.00 due December 31, 2003


	(These two revolving notes are being replaced by the Revolving Note with BOk in the amount of $7,500,000.00)

(vii) Lease Agreement with Avaya Financial Services, 1 CIT Drive, Livingston, NJ 07039; Lease #X562270, Schedule #00030; 12 monthly lease payments of $21,416.26 secured by equipment installed at GMAC, One National General, Hazelwood, MO 63045 (Xeta Customer location).

EX-10.8 6 d11884exv10w8.htm EX-10.8 MORTGAGE, ASSIGNMENT OF LEASES AND RENTS exv10w8

Riggs, Abney, Neal, Turpen, Orbison & Lewis
Attention: Wendy Walls
502 West Sixth Street
Tulsa, OK 74119-1010

MORTGAGE, ASSIGNMENT OF LEASES AND RENTS,
SECURITY AGREEMENT AND FINANCING STATEMENT
[Oklahoma]

A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.

THIS MORTGAGE is made on October 1, 2003 from XETA TECHNOLOGIES, INC., f/k/a XETA Corporation, an Oklahoma corporation, whose address is 1814 W. Tacoma, Broken Arrow, Oklahoma 74012 (the “Mortgagor”), and BANK OF OKLAHOMA, N.A., whose address is P.O. Box 2300, Tulsa, Oklahoma 74192, and its successors and assigns (the “Mortgagee”).

1. Specific Definitions. In this Mortgage, the following terms shall have the meanings given below:

1.2 “Liabilities” means all obligations, indebtedness and liabilities of the Borrower to any one or more of the Mortgagee, and any of its subsidiaries, affiliates or successors, now existing or later arising, including, without limitation, all loans, advances, interest, costs, overdraft indebtedness, credit card indebtedness, lease obligations, or obligations relating to any Rate Management Transaction, all monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether the Borrower may be liable jointly with others or individually liable as a debtor, maker, co-maker, drawer, endorser, guarantor, surety or otherwise, and whether voluntarily or involuntarily incurred, due or not due, absolute or contingent, direct or indirect, liquidated or unliquidated. The term “Liabilities” includes, without limitation, the following:


	(i) Separately and collectively, those certain Promissory Notes, dated October 1, 2003 in the original principal amounts of $7,500,000 (maturing September 30, 2004), and $3,374,734.33 and $2,238,333.48 (both maturing


	September 30, 2006), each executed and delivered by the Borrower to the Mortgagee;


	(ii) The performance of all of the promises and agreements contained in the Mortgage and all Related Documents.


	(i) The real property, and all the existing or subsequently affixed or erected buildings, structures and improvements on it, described as set forth on Exhibit “A” attached hereto and made a part hereof for all purposes intended, commonly known as 1814 W. Tacoma, Broken Arrow, OK;

	(ii) All easements, rights-of-way, licenses, privileges and hereditaments appurtenant to or used in connection with the Premises;

	(iii) All land lying in the bed of any road, street, alley or the like, opened, proposed or vacated, public or private, or any strip or gore, adjoining the Premises;

	(v) All mineral, coal, oil, gas and water rights, royalties, water courses, ditch rights, water and water stock, timber and timber rights, if any;

	(vi) All insurance, condemnation and other awards or payments, including interest, made as a result of: (a) the exercise of the right of eminent domain, (b) the alteration of the grade of any street, (c) any loss of or damage to any building or other improvement on the Premises, (d) any other injury to or decrease in the value of the Premises, (e) any refund due on account of the payment of real estate taxes, assessments or other charges levied against or imposed upon the Premises and (f) the reasonable attorneys’ and fees and court costs;

	(vii) All present and future (a) leases, subleases, licenses and other agreements for the use and/or occupancy of the Premises, oral or written, including, without limitation, all extensions, renewals, replacements and holdovers (collectively, the “Leases”) and (b) rents, revenues, income, issues, royalties, profits, bonuses, accounts, cash, security deposits, advance rents and other payments and/or benefits, of every kind or nature, derived from the Leases and/or the Premises, including, without limitation, the Mortgagor’s right to enforce the Leases and to receive and collect all payments and proceeds under the Leases (collectively, the “Rents”);

	(viii) All rights to make divisions of the real estate comprising the Premises that are exempt from the platting requirements of all applicable land division or platting acts, as amended from time to time; and

	(ix) All licenses, contracts, permits and agreements required or used in connection with the ownership, maintenance or operation of the Premises.


	1.4. “Rate Management Transaction” means any transaction, (including an agreement with respect thereto) now existing or hereafter entered into by the Borrower,

and the Mortgagee, or any of its subsidiaries or affiliates or their successors, which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.


	1.5. “Related Documents” means all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, or any other instrument or document executed in connection with any of the Liabilities.

2. Grant. To secure payment of the Liabilities, and for other good and valuable consideration, Mortgagor hereby GRANTS, BARGAINS, SELLS, CONVEYS AND MORTGAGES to the Mortgagee all of the Mortgagor’s right, title and interest, now owned or hereafter acquired, in the “Premises”, and warrants title to the same.

3. Secured Indebtedness. The maximum principal sum secured by this Mortgage shall not exceed two million two hundred thirty-eight thousand three hundred thirty-three and 48/100 dollar ($2,238,333.48) at any one time outstanding. This Mortgage shall not apply to any obligation or debt incurred for personal, household or family purposes unless the note or guaranty evidencing such personal, household or family debt expressly states that it is secured by this Mortgage.


	4.1 Payment of Liabilities; Performance of Obligations. The Mortgagor shall promptly pay when due, whether by acceleration or otherwise, the Liabilities for which the Mortgagor is liable, and shall promptly perform all obligations to which the Mortgagor has agreed under the terms of this Mortgage and any of the other Related Documents.

4.2 Taxes and Liens. The Mortgagor shall pay, when due, before any interest, collection fees or penalties shall accrue, all taxes, assessments, fines, impositions, and other charges which may become a lien prior to this Mortgage. Should the Mortgagor fail to make those payments, the Mortgagee may at its option and at the expense of the Mortgagor, pay the amounts due for the account of the Mortgagor. Upon the request of the Mortgagee, the Mortgagor shall immediately furnish to the Mortgagee all notices of amounts due and receipts evidencing payment. The Mortgagor shall promptly notify’ the Mortgagee of any lien on all or any part of the Premises and shall promptly discharge any unpermitted lien or encumbrance.


	4.3 Change in Taxes. In the event of the passage of any law or regulation, state, federal or municipal, subsequent to the date of this Mortgage, which changes or modifies the laws now in force governing the taxation of mortgages or debts secured by mortgages, or the manner of collecting those taxes, the Liabilities shall become due and payable immediately at the option of the Mortgagee.

4.4 Insurance. Until the Liabilities are fully paid, the Mortgagor shall keep the Premises and the present and future buildings and other improvements on the Premises constantly insured for the benefit of the Mortgagee, at replacement cost for the full insurable value, without any reduction based upon the Mortgagor’s acts, against fire and such other hazards and risks customarily covered by the standard form of extended coverage endorsement available in the state where the Premises is located, including risks of vandalism and malicious mischief, and shall further provide flood insurance (if the Premises are situated in an area designated as a flood risk area by the Director of the Federal Emergency Management Agency or as otherwise required by the Flood Disaster Protection Act of 1973 and regulations issued under it), and such other appropriate insurance as the Mortgagee may require from time to time. All insurance policies and renewals must be acceptable to the Mortgagee, must provide for payment to the Mortgagee in the event of loss, regardless of any act or omission by the Mortgagor, must require thirty (30) days notice to the Mortgagee in the event of nonrenewal or cancellation and must be delivered to the Mortgagee within thirty (30) days prior to their respective effective dates. Should the Mortgagor fail to insure or fail to pay the premiums on any insurance or fail to deliver the policies or certificates or renewals to the Mortgagee, then the Mortgagee, at its option, may have the insurance written or renewed, and may pay the premiums, for the account of the Mortgagor. In the event of loss or damage, the proceeds of the insurance shall be paid to the Mortgagee alone. No loss or damage shall itself reduce the Liabilities. The Mortgagee is authorized to adjust and compromise a loss without the consent of the Mortgagor, to collect, receive and receipt for any proceeds in the name of the Mortgagee and the Mortgagor and to endorse the Mortgagor’s name upon any check in payment of proceeds. The proceeds shall be applied first toward reimbursement of all costs and expenses of the Mortgagee in collecting the proceeds and then toward payment of the Liabilities or any portion of it, whether or not then due or payable, or the Mortgagee, at its option, may apply the proceeds, or any part of the proceeds, to the repair or rebuilding of the Premises provided that the Mortgagor (a) is not then or at any time during the course of restoration of the Premises in default under this Mortgage and (b) has complied with all requirements for application of the proceeds to restoration of the Premises as the Mortgagee, in its sole discretion may establish. The Mortgagor shall also provide and maintain comprehensive general liability insurance in such coverage amounts as the Mortgagee may request, with the Mortgagee being named as an additional insured on such policies. Evidence of the renewal of such liability insurance shall be delivered to the Mortgagee at the same time as evidence of the renewal of the property insurance required above must be delivered to the Mortgagee. If the Mortgagor fails to provide such liability insurance, and/or the renewals thereof, or fails to pay the premiums on such liability insurance when such premiums are due, then the Mortgagee may have such liability insurance written or renewed, and may pay the premiums, for the account of the Mortgagor.

4.6 Waste, Abandonment. The Mortgagor shall not abandon the Premises, commit or permit waste on the Premises, or do any other act causing the Premises to become less valuable. The Mortgagor will keep the Premises in good order and repair and in compliance in all material respects with any law, regulation, ordinance or contract affecting the Premises and, from time to time, will make all needful and proper replacements so that all fixtures, improvements and Equipment will at all times be in good condition, fit and proper for their respective purposes. Without limitation of the foregoing, nonpayment of the Charges shall constitute waste. Should the Mortgagor fail to effect any necessary repairs, the Mortgagee may, at its option and at the expense of

the Mortgagor, make the repairs for the account of the Mortgagor. The Mortgagor shall use and maintain the Premises in conformance with all applicable laws, ordinances and regulations. The Mortgagee or its authorized agent shall have the right to enter upon and inspect the Premises at all reasonable times. The Mortgagor unconditionally agrees to pay timely all fees with respect to inspections of the Premises.


	4.7 Alterations, Removal. No building, structure, improvement, fixture, personal property or Equipment constituting any part of the Premises shall be removed, demolished or substantially altered without the prior written consent of the Mortgagee.

4.8 Payment of Other Obligations. The Mortgagor shall also pay all other obligations which may become liens or charges against the Premises for any present or future repairs or improvements made on the Premises, or for any other goods, services, or utilities furnished to the Premises and shall not permit any lien or charge of any kind securing the repayment of borrowed funds (including the deferred purchase price for any property) to accrue and remain outstanding against the Premises.

5. Assignment of Leases and Rents. As additional security for the Liabilities, the Mortgagor assigns to the Mortgagee all the Leases and the Rents of, from or in connection with the Premises and the buildings and improvements thereon and such assignment is effective immediately upon the execution of this Mortgage. This assignment includes an assignment of the right, but not the obligation, to collect, receive, demand, sue for and recover the Rents when due and payable. The Mortgagee shall not exercise any of its rights and remedies under this section until the occurrence of any default under the Liabilities. This assignment shall be operative during any foreclosure or other proceeding taken to enforce this Mortgage and during any redemption period. The Mortgagor will comply with all terms of all the Leases. Upon request of the Mortgagee, the Mortgagor shall deliver to the Mortgagee copies of all the Leases and similar agreements assigned to the Mortgagee pursuant to this section, including all renewals and amendments thereof.

6. Assignment of Interest as Tenant or Purchaser. If the Mortgagor’s interest in the Premises is that of a tenant or a purchaser, the Mortgagor also assigns, mortgages and warrants to the Mortgagee, as additional security for the Liabilities, all of the Mortgagor’s right, title and interest in and to any Leases, land contracts or other agreements by which the Mortgagor is leasing or purchasing all or any part of the Premises, including all modifications, renewals and extensions, and all of the Mortgagor’s right, title and interest in and to any purchase options contained in any such Leases or other agreements. The Mortgagor agrees to pay each installment of rent, principal and interest required to be paid by it under any such Lease, land contract or other agreement when each installment becomes due and payable, whether by acceleration or otherwise. The Mortgagor further agrees to pay and perform all of its other obligations under any such Lease, land contract or other agreement.

If the Mortgagor defaults in the payment of any installment of rent, principal or interest, or in the payment or performance of any other obligation, under any such Lease, land contract or other agreement, the Mortgagee shall have the right, but not the obligation, to pay the installment or installments and to pay or perform the other obligations on behalf of and at the expense of the Mortgagor. If the Mortgagee receives a written notice of the Mortgagor’s default under any such Lease, land contract or other agreement, the Mortgagee may rely on that notice as cause to take any action it deems necessary or reasonable to cure the default, even if the Mortgagor questions or denies the existence or nature of the default.

7. Security Agreement. This Mortgage also constitutes a security agreement within the meaning of the Uniform Commercial Code as in effect from time to time in the state in which the Premises is located (the “UCC”) and the Mortgagor grants to the Mortgagee a security interest in any Equipment or other personal property included within the definition of the Premises, and all proceeds, products and supporting obligations of any of the foregoing (the “Collateral”). Accordingly, the Mortgagee shall have all of the rights and remedies available to a secured party under the UCC. Upon the occurrence of any default under this Mortgage, the Mortgagee shall have, in addition to the remedies provided by this Mortgage, the right to use any method of disposition of collateral authorized by the UCC with respect to any portion of the Premises subject to the UCC. The Mortgagee shall have the right to require the Mortgagor to assemble the Collateral and make it available to the Mortgagee at a place designated by the Mortgagee which is reasonably convenient to both parties, the right to take possession of the Collateral with or without demand and with or without process of law, and the right to sell and dispose of the Collateral and distribute the proceeds according to law. Should a default occur, the Mortgagor will pay to the Mortgagee all costs reasonably incurred by the Mortgagee for the purpose of enforcing its rights hereunder, to the extent not prohibited by law, including, without limitation: costs of foreclosure; costs of obtaining money damages; and a reasonable fee for the services of internal and outside attorneys employed or engaged by the Mortgagee for any purpose related to this security agreement, including, without limitation, consultation, drafting documents, sending notices or instituting, prosecuting or defending litigation or any proceeding. The Mortgagor agrees that upon default the Mortgagee may dispose of any of the Collateral in its then present condition, that the Mortgagee has no duty to repair or clean the Collateral prior to sale, and that the disposal of the Collateral in its present condition or without repair or clean-up shall not affect the commercial reasonableness of such sale or disposition. The Mortgagee’s compliance with any applicable state or federal law requirements in connection with the disposition of the Collateral will not adversely affect the commercial reasonableness of any sale of the Collateral. In connection with the right of the Mortgagee to take possession of the Collateral, the Mortgagee may, without liability on the part of the Mortgagee, take possession of any other items of property in or on the Collateral at the time of taking possession and hold them for the Mortgagor. If there is any statutory requirement for notice, that requirement shall be met if the Mortgagee sends notice to the Mortgagor at least ten (10) days prior to the date of the sale, disposition, or other event giving rise to the required notice. Upon the request of the Mortgagee, the Mortgagor shall execute and file such financing statements and shall take any other action requested by the Mortgagee to perfect and continue as perfected the Mortgagee’s security interests in the Equipment and other personal property included in the definition of the Premises. The Mortgagor shall pay (and shall reimburse the Mortgagee for) all costs, including attorneys’ fees and court costs, of the preparation and filing of any financing statements and the taking of any such other actions. A carbon, photographic or other reproduction of this Mortgage is sufficient as, and can be filed as, a financing statement. The Mortgagee is irrevocably appointed the Mortgagor’s attorney-in-fact to execute any financing statement on the Mortgagor’s behalf covering the Equipment and other personal property, tangible or intangible, that is included within the definition of Premises. Additionally, if permitted by applicable law, the Mortgagor authorizes the Mortgagee to file one or more financing statements related to the security interests created by this Mortgage and further authorizes the Mortgagee, instead of the Mortgagor, to sign such financing statements. The Mortgagor shall execute and deliver, or cause to be executed and delivered, such other documents as the Mortgagee may from time to time request to perfect or to further evidence the security interest created in the Collateral by this Mortgage. The Mortgagor further represents and warrants to the Mortgagee that (a) its principal residence or chief executive office is at the address shown above and (b) the Mortgagor’s name as it appears in this Mortgage is identical to the name of the Mortgagor appearing in the Mortgagor’s organizational documents, as amended, including trust

documents. The Mortgagor will not, without the Mortgagee’s prior written consent, change (a) the Mortgagor’s name, (b) the Mortgagor’s business organization, (c) the jurisdiction under which the Mortgagor’s business organization is formed or organized, or (d) the address of the Mortgagor’s chief executive office or principal residence or of any additional places of the Mortgagor’s business.

8. Fixture Financing Statement. A part of the Premises constitutes goods which are or are to become fixtures related to the Premises, and it is intended that, as to those goods, this Mortgage shall be effective as a financing statement filed as a fixture filing from the date of its filing for record in the real estate records of the county in which the Premises is situated. Information concerning the security interest created by this instrument may be obtained from Mortgagee, as secured party, at the address of Mortgagee stated above. The mailing address of Mortgagor, as debtor, is as stated above.

9. Reimbursement of Advances. If the Mortgagor fails to perform any of its obligations under this Mortgage, or if any action or proceeding is commenced which materially affects the Mortgagee’s interest in the Premises (including but not limited to a lien priority dispute, eminent domain, code enforcement, insolvency, bankruptcy or probate proceedings), then the Mortgagee at its sole option may make appearances, disburse sums and take any action it deems necessary to protect its interest (including but not limited to disbursement of reasonable attorneys’ fees and court costs and entry upon the Premises to make repairs). Any amounts disbursed shall become additional Liabilities, shall be immediately due and payable upon notice from the Mortgagee to the Mortgagor, and shall bear interest at the highest rate permitted under any of the instruments evidencing any of the Liabilities. The Mortgagee’s rights under this section shall be in addition to all other rights and remedies of the Mortgagee under this Mortgage and the other Related Documents. Any action taken by the Mortgagee under this section shall not be construed as curing any default that gave rise to such action by the Mortgagee.

10. Due on Transfer. If all or any part of the Premises or any interest in the Premises is transferred without the Mortgagee’s prior written consent, the Mortgagee may, at its sole option, declare the Liabilities to be immediately due and payable.

11. No Additional Lien. The Mortgagor covenants not to execute any mortgage, security agreement, assignment of leases and rentals or other agreement granting a lien against the interest of the Mortgagor in the Premises without the prior written consent of the Mortgagee, and then only when the document granting that lien expressly provides that it shall be subject to the lien of this Mortgage for the full amount secured by this Mortgage and shall also be subject and subordinate to all present and future leases affecting the Premises.

12. Eminent Domain. Notwithstanding any taking under the power of eminent domain, alteration of the grade of any road, alley, or the like, or other injury or damage to or decrease in value of the Premises by any public or quasi-public authority or corporation, the Mortgagor shall continue to pay the Liabilities in accordance with the terms of the Related Documents. By executing this Mortgage, the Mortgagor assigns the entire proceeds of any award or payment and any interest to the Mortgagee. The Mortgagor will notify the Mortgagee of any action or proceeding related to any taking of all or any part of the Premises, shall defend that action or proceeding in consultation with the Mortgagee and shall, if requested by the Mortgagee, deliver to the Mortgagee all documents and instruments that may be required to allow the Mortgagee to directly participate in or control such action or proceeding. The proceeds of any taking or grant in lieu of any taking shall be applied first toward reimbursement of all

costs and expenses of the Mortgagee in collecting the proceeds, including reasonable attorneys’ fees and court costs, and then toward payment of the Liabilities, whether or not then due or payable, or the Mortgagee, at its option, may apply the proceeds, or any part, to the alteration, restoration or rebuilding of the Premises.

13. Environmental Provisions. As used herein: the term “Hazardous Substance” shall mean any substance, material, or waste that is (a) included within the definitions of “hazardous substances,” “hazardous materials,” “hazardous waste,” “toxic substances,” “toxic materials,” “toxic waste,” or words of similar import in any Environmental Law, (b) listed as hazardous substances by the United States Department of Transportation or by the Environmental Protection Agency, or (c) petroleum, petroleum-related, or a petroleum by-product, asbestos or asbestos-containing material, polychlorinated biphenyls, flammable, explosive, radioactive, freon gas, radon, or a pesticide, herbicide, or any other agricultural chemical; and the term “Environmental Law” shall mean any federal, state or local law, rule, regulation, decision, policy or guideline, pertaining to Hazardous Substances, or protection of the environment, and all present and future amendments thereto. Except as disclosed in writing by the Mortgagor to the Mortgagee, the Mortgagor represents and warrants to the Mortgagee that (i) neither the Premises nor the Mortgagor are in violation of any Environmental Law applicable to the Premises, or are subject to any existing, pending or threatened governmental investigation pertaining to the Premises, or are subject to any remedial obligation or lien under or in connection with any Environmental Law, (ii) the Mortgagor has no actual knowledge or notice of the presence or release of Hazardous Substances in, on or around any part of the Premises or the soil, groundwater or soil vapor on or under the Premises, or the migration of any Hazardous Substance, from or to any other property in the vicinity of the Premises; and (iii) the Mortgagor’s intended future use of the Premises will not result in the release of any Hazardous Substance in, on or around any part of the Premises or in the soil, groundwater or soil vapor on or under the Premises, or the migration of any Hazardous Substance from or to any other property in the vicinity of the Premises.

The Mortgagor shall neither use nor permit any third party to use, generate, manufacture, produce, store, or release, on, under or about the Premises, or transfer to or from the Premises, any Hazardous Substance, except in compliance with all Environmental Laws, and shall otherwise comply, at the Mortgagor’s sole expense and responsibility, with all Environmental Laws, provided that if any such occurrence shall nevertheless happen, the Mortgagor shall promptly remedy such condition, at its sole expense and responsibility. The Mortgagor shall not permit any environmental liens to be placed on any portion of the Premises. The Mortgagor shall promptly notify the Mortgagee in writing if (a) any of the representations and warranties herein are no longer accurate, (b) there may be any Hazardous Substance in, on or around the Premises or the soil, groundwater or soil vapor on or under the Premises, or (c) any violation of any Environmental Law on or affecting or otherwise in respect of the Premises has occurred. The Mortgagee and its agents shall have the right, and are hereby authorized, at any reasonable time to enter upon the Premises for the purposes of observing the Premises, taking and removing soil or groundwater samples, and conducting tests and/or site assessments on the Premises, or taking such other actions as the Mortgagee deems necessary or advisable to clean up, remove, resolve, or minimize the impact of, or otherwise deal with, any Hazardous Substances on or affecting the Premises following receipt of any notice from any person or entity asserting the existence or possible existence of any Hazardous Substances pertaining to the Premises, that, if true, could jeopardize the Mortgagee’s security for the Liabilities. All reasonable costs and expenses paid or incurred by the Mortgagee in the exercise of any such rights shall be secured hereby and shall be payable by the Mortgagor upon demand.

The Mortgagor shall indemnify and hold the Mortgagee harmless from, for and against any and all actions, causes of action, claims, liabilities, damages (including foreseeable and unforeseeable consequential damages), losses, fines, penalties, judgments, awards, settlements, and costs and expenses (including, without limitation, reasonable attorneys’ fees, experts’, engineers’ and consultants’ fees, and costs and expenses of investigation, testing, remediation and dispute resolution) (collectively referred to as “Environmental Costs”) that directly or indirectly arise out of or relate in any way to: (a) Any investigation, cleanup, removal, remediation, or restoration work of site conditions of the Premises relating to Hazardous Substances; (b) Any resulting damages, harm, or injuries to the person or property of any third parties or to any natural resources involving Hazardous Substances relating to the Premises; (c) Any actual or alleged past or present disposal, generation, manufacture, presence, processing, production, release, storage, transportation, treatment, or use of any Hazardous Substance on, under, or about the Premises; (d) Any actual or alleged past or present violation of any Environmental Law relating to the Premises; (e) Any lien on any part of the Premises under any Environmental Law; or (f) Breach of any representation or warranty by or covenant of the Mortgagor herein. Notwithstanding anything contained herein to the contrary, the foregoing indemnity shall not apply to (i) matters resulting from the gross negligence or willful misconduct of the Mortgagee, or (ii) matters resulting solely from the actions of the Mortgagee taken after the Mortgagee has taken title to, or exclusive possession of the Premises, provided that, in both cases, such matters shall not arise from or be accumulated with any condition of the Premises, which condition was not caused by the Mortgagee. The foregoing indemnity is expressly intended to include, and does include, any Environmental Costs arising as a result of any strict liability imposed or threatened to be imposed on the Mortgagee in connection with any of the indemnified matters described in this Section or arising as a result of the negligence of the Mortgagee in connection with such matters. This indemnity shall continue in full force and effect and shall survive the payment and performance of the Liabilities, the release of record of the lien, or any foreclosure (or action in lieu thereof), of this Mortgage, the exercise by the Mortgagee of any other remedy under this Mortgage or any other document or instrument evidencing or securing the Liabilities, and any suit, proceeding or judgment against the Mortgagor by the Mortgagee hereon.

14. Events of Default; Remedies. If any of the Liabilities are not paid at maturity, whether by acceleration or otherwise, or if a default occurs by anyone under the terms of this Mortgage or any Related Document, then the Mortgagee may exercise all of the rights, powers and remedies expressly or impliedly conferred on or reserved to it under this Mortgage or any other Related Document, or now or later existing at law or in equity, including without limitation the following: (i) the Mortgagee may declare the Liabilities to be immediately due, (ii) the Mortgagee may proceed at law or in equity to collect the Liabilities, foreclose this Mortgage or otherwise pursue any of its rights or remedies available at law, in equity, pursuant to this Mortgage or pursuant to any of the other Related Documents and (iii) the Mortgagee may exercise any of its rights, powers or remedies pursuant to the 13CC.

14.1 Power of Sale. The Mortgagor hereby confers on the Mortgagee the power to sell the Premises described in this Mortgage and the interests of persons therein in the manner provided in the Oklahoma Power of Sale Mortgage Foreclosure Act [Title 46, Okla. Stat. (1991), § 40, et seq.] as the same may be amended from time to time (the “Act”) or other applicable statutory authority. Such power of sale shall be exercised by giving the Mortgagor Notice of Intent to Foreclose by Power of Sale and setting forth, among other things, the nature of the breach(es) or default(s) and the action required to effect a cure thereof and the time period within which such cure may

be effected, all in compliance with and as may be required by the Act or other applicable statutory authority. If no cure is effected within the statutory time limits, the Mortgagee may accelerate the indebtedness secured hereby without further notice (the aforementioned statutory cure period shall run concurrently with any contractual provisions for notice and opportunity to cure), and the Mortgagee may then proceed in the manner and subject to and as required by the conditions of the Act or other applicable statutory authority to send to the Mortgagor and other necessary parties a Notice of Sale and to sell and convey the Premises in accordance with the Act or other applicable statutory authority. The sale shall be made at one or more sales, as an entirety or in parcels, upon such notice, at such time and places, subject to all conditions and with the proceeds thereof to be applied all as provided in said Act or other applicable statutory authority. No action of the Mortgagee based upon the provisions contained herein or contained in the Act, including, without limitation, the giving of the Notice of Intent to Foreclose by Power of Sale or the Notice of Sale, shall constitute an election of remedies which would preclude the Mortgagee from pursuing judicial foreclosure before or at any time after commencement of the power of sale foreclosure procedure.

14.2 Judicial Foreclosure. Whether or not proceedings have been commenced by the exercise of the power of sale above given, the Mortgagee, in lieu of proceeding with the power of sale, may at its option declare the whole amount of the indebtedness secured by this Mortgage remaining unpaid, immediately due and payable without notice, and the Mortgagee may then proceed by suit or suits in equity or at law to foreclose this Mortgage remaining unpaid, immediately due and payable without notice, and the Mortgagee may then proceed by suit or suits in equity or at law to foreclose this Mortgage. Appraisement of the Premises is hereby waived or not waived at the option of the Mortgagee, such option to be exercised at or prior to the time judgment is rendered in such judicial foreclosure.

14.3 Appointment of Receiver. The Mortgagee shall have the immediate and continuing right to appointment of a receiver for the Mortgaged Property as provided by law [Title 12, Okla. Stat. (1991), § 1551, et seq.] as amended, and the Mortgagor specifically consents and agrees to appointment of a receiver for the Premises after any default hereunder. Without limitation, the receiver shall have the power to protect and preserve the Premises, operate the Premises prior to and during any foreclosure proceedings, to collect the Rents and apply the proceeds, over and above the costs of the receivership, to the Liabilities. The receiver shall serve without bond, if permitted by law.

14.4 Foreclosure of Security Interest. In addition to all other remedies described or referenced in this Mortgage, the Mortgagee, at its sole subjective discretion, may have all or any part of the personal property combined with the Premises covered hereby and sold together with such Premises as an entirety at any foreclosure sale, or the Mortgagee, at its option, may proceed solely or separately against the personal property or any part thereof and have the same sold separately as provided by the Uniform Commercial Code of the State of Oklahoma, either in one parcel or in such parcels, manner or order as the Mortgagee, in its sole subjective discretion may elect; the Mortgagee shall have the right to take immediate and exclusive possession of the personal property or any part thereof and for that purpose may, with or without judicial process, enter upon any premises on which the personal property or any part thereof may be situated and remove the same therefrom; the Mortgagee shall be entitled to

hold, maintain, preserve and prepare the personal property for sale until disposed of, or may propose to retain the personal property subject to the Mortgagor’s right of redemption in partial or total satisfaction of the Mortgagor’s obligations as provided in the Uniform Commercial Code of the State of Oklahoma; the Mortgagee without removal may render the personal property unusable and dispose of the personal property on the Mortgagor’s premises; the Mortgagee may require the Mortgagor to assemble the personal property and make it available to the Mortgagee for its possession at a place to be designated by the Mortgagee which is reasonably convenient to both parties; unless the personal property is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Mortgagee shall give the Mortgagor at least ten (10) days notice of the time and place of any public sale or any personal property or of the time after which any private sale or other intended dispositions thereof is to be made, by United States registered or certified mail, postage prepaid, addressed to the Mortgagor at the address provided in this Mortgage, which provisions for notice the Mortgagor and the Mortgagee agree are reasonable; the Mortgagee may buy all or part of the personal property at any public sale, and if the personal property is of a type which is subject to widely distributed standard price quotations. The Mortgagee may buy at private sale; and further, the Mortgagee shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code of the State of Oklahoma. The Mortgagee shall be entitled to exercise any and all other rights and remedies available by applicable laws and judicial decisions.

14.5 No Waiver. In the event the Mortgagee shall elect to selectively and successfully enforce its rights under this Mortgage or any other documents or instruments securing payment of the Liabilities, such action shall not be deemed a waiver or discharge of any other lien, encumbrance or security interest securing payment of the Liabilities. The foreclosure of any lien provided pursuant to this Mortgage without the simultaneous foreclosure of all such liens shall not merge the liens granted which are not foreclosed with any interest which the Mortgagee might obtain as a result of such selective and successive foreclosure.


	14.6 Sale of Parcels. In case of any sale under this Mortgage, by virtue of judicial proceedings or otherwise, the Premises may be sold in one parcel and as an entity or in such parcels, manner or order as the Mortgagee in its sole discretion may elect.

By executing this Mortgage, the Mortgagor waives, in the event of a foreclosure of this Mortgage or the enforcement by the Mortgagee of any other rights and remedies in this Mortgage, any right otherwise available in respect to marshalling of assets which secure the Liabilities or to require the Mortgagee to pursue its remedies against any other such assets. The Mortgagor waives all errors and imperfections in any proceedings instituted by the Mortgagee to enforce any of its rights and remedies. The exercise of any one right or remedy by the Mortgagee under this Mortgage or any of the other Related Documents shall not impair or waive the Mortgagee’s right to exercise any other rights or remedies available to it at law, in equity, under this Mortgage or under any of the other Related Documents, all such rights and remedies being cumulative. All fees, costs and expenses incurred by the Mortgagee in pursuing or enforcing its rights and remedies at law, in equity, under this Mortgage or under any of the other Related Documents, whether or not a lawsuit or legal action is filed, including attorneys’ fees and court costs, shall be payable by the Mortgagor to the Mortgagee on demand and shall be secured by this Mortgage.

15. Pledge. If the Mortgagor is not liable for all or any part of the Liabilities, then the Mortgagor agrees that:


	15.1 If any moneys become available from any source other than the Premises that the Mortgagee can apply to the Liabilities, the Mortgagee may apply them in any manner it chooses, including but not limited to applying them against obligations, indebtedness or liabilities which are not secured by this Mortgage.

	15.2 The Mortgagee may take any action against the Borrower, the Premises or any other collateral for the Liabilities, or any other person liable for any of the Liabilities.

	15.3 The Mortgagee may release the Borrower or anyone else from the Liabilities, either in whole or in part, or release the Premises in whole or in part or any other collateral for the Liabilities, and need not perfect a security interest in the Premises or any other collateral for the Liabilities.

	15.4 The Mortgagee does not have to exercise any rights that it has against the Borrower or anyone else, or make any effort to realize on the Premises or any other collateral for the Liabilities, or exercise any right of setoff.

	15.5 Without notice or demand and without affecting the Mortgagor’s obligations hereunder, from time to time, the Mortgagee is authorized to: (a) renew, modify, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Liabilities or any part thereof, including increasing or decreasing the rate of interest thereon; (b) release, substitute or add any one or more sureties, endorsers, or guarantors; (c) take and hold other collateral for the payment of the Liabilities, and enforce, exchange, substitute, subordinate, waive or release any such collateral; (d) proceed against the Premises or any other collateral for the Liabilities and direct the order or manner of sale as the Mortgagee in its discretion may determine; and (e) apply any and all payments received by the Mortgagee in connection with the Liabilities, or recoveries from the Premises or any other collateral for the Liabilities, in such order or manner as the Mortgagee in its discretion may determine.

	15.6 The Mortgagor’s obligations hereunder shall not be released, diminished or affected by (a) any act or omission of the Mortgagee, (b) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of the Borrower, or any receivership, insolvency, bankruptcy, reorganization, or other similar proceedings affecting the Borrower or any of its assets, (c) any change in the composition or structure of the Borrower, including a merger or consolidation with any other person or entity, or (d) any payments made upon the Liabilities.

	15.7 The Mortgagor expressly consents to any impairment of any other collateral for the Liabilities, including, but not limited to, failure to perfect a security interest and release of any other collateral for the Liabilities and any such impairment or release shall not affect the Mortgagor’s obligations hereunder.

	15.8 The Mortgagor waives and agrees not to enforce any rights of subrogation, contribution or indemnification that it may have against the Borrower, any person liable on the Liabilities, or the Premises, until the Borrower and the Mortgagor


	have fully performed all their obligations to the Mortgagee, even if those obligations are not covered by this Mortgage.

	15.9 The Mortgagor waives (a) to the extent permitted by law, all rights and benefits under any laws or statutes regarding sureties, as may be amended, (b) any right the Mortgagor may have to receive notice of the following matters before the Mortgagee enforces any of its rights: (i) the Mortgagee’s acceptance of this Mortgage, (ii) any credit that the Mortgagee extends to the Borrower, (iii) the Borrower’s default, (iv) any demand, diligence, presentment, dishonor and protest, or (v) any action that the Mortgagee takes regarding the Borrower, anyone else, any other collateral for the Liabilities, or any of the Liabilities, which it might be entitled to by law or under any other agreement, (c) any right it may have to require the Mortgagee to proceed against the Borrower, any other obligor or guarantor of the Liabilities, the Premises or any other collateral for the Liabilities, or pursue any remedy in the Mortgagee’s power to pursue, (d) any defense based on any claim that the Mortgagor’s obligations exceed or are more burdensome than those of the Borrower, (e) the benefit of any statute of limitations affecting the Mortgagor’s obligations hereunder or the enforcement hereof, (f) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of the obligation of the Borrower for the Liabilities, and (g) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof. The Mortgagee may waive or delay enforcing any of its rights without losing them. Any waiver affects only the specific terms and time period stated in the waiver.

	15.10 The Mortgagor agrees that to the extent any payment is received by the Mortgagee in connection with the Liabilities, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by the Mortgagee or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a “Preferential Payment”), then this Mortgage shall continue to be effective or shall be reinstated, as the case may be, and whether or not the Mortgagee is in possession of this Mortgage, and, to the extent of such payment or repayment by the Mortgagee, the Liabilities or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. If this Mortgage must be reinstated, the Mortgagor agrees to execute and deliver to the Mortgagee any new mortgages and agreements, if necessary or if requested by the Mortgagee, in form and substance acceptable to the Mortgagee, covering the Premises.

	15.11 Any rights of the Mortgagor, whether now existing or hereafter arising, to receive payment on account of any indebtedness (including interest) owed to the Mortgagor by the Borrower, or to withdraw capital invested by the Mortgagor in the Borrower, or to receive distributions from the Borrower, shall at all times be subordinate to the full and prior repayment to the Mortgagee of the Liabilities. The Mortgagor shall not be entitled to enforce or receive payment of any sums hereby subordinated until the Liabilities have been paid in full and any such sums received in violation of this Mortgage shall be received by the Mortgagor in trust for the Mortgagee. The Mortgagor agrees to fully cooperate with the Mortgagee and not to delay, impede or otherwise interfere with the efforts of the Mortgagee to secure payment from the assets which secure the Liabilities including actions, proceedings, motions, orders, agreements or other matters relating to relief from automatic stay, abandonment of property, use of cash collateral


	and sale of the Mortgagee’s collateral free and clear of all liens. The foregoing notwithstanding, until the occurrence of any default, the Mortgagor is not prohibited from receiving distributions from the Borrower in an amount equal to any income tax liability imposed on the Mortgagor attributable to the Mortgagor’s ownership interest in the Borrower, if any.

16. Representations by the Mortgagor. Each Mortgagor represents that: (a) it is well and truly seized of good and marketable fee simple title to the real property comprising the Premises and it is the lawful owner of the personal property comprising the Premises, subject only to Permitted Encumbrances; (b) the execution and delivery of this Mortgage and the performance of the obligations it imposes do not violate any law, conflict with any agreement by which it is bound or require the consent or approval of any governmental authority or any third party; (c) this Mortgage is a valid and binding agreement enforceable according to its terms; (d) any balance sheets, profit and loss statements, and other financial statements furnished to the Mortgagee in connection with the Liabilities are accurate and fairly reflect the financial condition of the organizations and persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not changed materially and adversely since those dates; and (e) it shall not permit any proceedings in foreclosure or otherwise that would affect the Premises. Each Mortgagor, other than a natural person, further represents that: (i) it is duly organized, existing and in good standing pursuant to the laws under which it is organized and (ii) the execution and delivery of this Mortgage and the performance of the obligations it imposes (A) are within its powers and have been duly authorized by all necessary action of its governing body and (B) do not contravene the terms of its articles of incorporation or organization, its by-laws, or any partnership, operating or other agreement governing its affairs.

17. Notice. Any notices and demands under or related to this document shall be in writing and delivered to the intended party at its address stated herein, and if to the Mortgagee, at its main office if no other address of the Mortgagee is specified herein, by one of the following means: (a) by hand, (b) by a nationally recognized overnight courier service, or (c) by certified mail, postage prepaid, with return receipt requested. Notice shall be deemed given: (a) upon receipt if delivered by hand, (b) on the Delivery Day after the day of deposit with a nationally recognized courier service, or (c) on the third Delivery Day after the notice is deposited in the mail. “Delivery Day” means a day other than a Saturday, a Sunday or any other day on which national banking associations are authorized to be closed. Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision. This notice provision shall be inapplicable to any judicial or non-judicial proceeding where state law governs the manner and timing of notices in foreclosure or receivership proceedings.

18. Miscellaneous. If any provision of this Mortgage is in conflict with any statute or rule of law or is otherwise unenforceable for any reason whatsoever, then that provision is null and void to the extent of the conflict or unenforceability and shall be severed from but shall not invalidate any other provision of this Mortgage. No waiver by the Mortgagee of any right or remedy granted or failure to insist on strict performance by the Mortgagor waives any other right or remedy of the Mortgagee or waives or bars the subsequent exercise of the same right or remedy by the Mortgagee for any subsequent default by the Mortgagor. All rights and remedies of the Mortgagee are cumulative.

These promises and agreements bind and these rights benefit the parties and their respective successors and assigns. If there is more than one Mortgagor, the obligations under

this Mortgage are joint and several. The Mortgagor agrees that the Mortgagee may at any time sell or transfer one or more participation interests in all or any part of the Liabilities to one or more purchasers whether or not related to the Mortgagee.

This Mortgage and the Related Documents constitute the entire understanding of the parties hereto and may not be amended or altered except by a written instrument that has been signed by the party(ies) against which enforcement of the amendment or alteration is sought.

Captions in this Mortgage are for convenience of reference only and do not limit the provisions of this Mortgage.

19. Governing Law and Venue. This Mortgage is delivered in the State of Oklahoma and governed by Oklahoma law (without giving effect to its laws of conflicts); provided, however, that if the real estate that is the subject of this Mortgage is located in another state, the laws of such other state shall govern the validity, enforceability, perfection, priority, construction, effect, enforcement and remedies with respect to this Mortgage, but nothing herein shall be construed to provide that the laws of any state other than the State of Oklahoma shall apply to the obligations and indebtedness secured by this Mortgage. The parties agree that any legal action or proceeding with respect to any of its obligations under this Mortgage shall be brought by the Mortgagee exclusively in state or federal court located in Tulsa County of the State of Oklahoma and that proper venue shall lie only in such courts. By the execution and delivery of this Mortgage, the Mortgagor submits to and accepts, for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of those courts. The Mortgagor waives any claim that the State of Oklahoma is not a convenient forum or the proper venue for any such suit, action or proceeding.

20. Indemnification. In addition to the indemnification provisions described in the section captioned “Environmental Provisions” of this Mortgage, the Mortgagor agrees to indemnify, defend and hold the Mortgagee, or any of its subsidiaries or affiliates or their successors, and each of their respective shareholders, directors, officers, employees and agents (collectively, the “Indemnified Persons”) harmless from any and all obligations, claims, liabilities, losses, damages, penalties, fines, forfeitures, actions, judgments, suits, costs, expenses and disbursements of any kind or nature (including, without limitation, any Indemnified Person’s attorneys’ fees) (collectively, the “Claims”) which may be imposed upon, incurred by or assessed against any Indemnified Person (whether or not caused by any Indemnified Person’s sole, concurrent, or contributory negligence) arising out of or relating to this Mortgage; the Mortgagor’s use of the property covered by this Mortgage; the exercise of the rights and remedies granted under this Mortgage (including, without limitation, the enforcement of this Mortgage and the defense of any Indemnified Person’s action or inaction in connection with this Mortgage); and in connection with the Mortgagor’s failure to perform all of the Mortgagor’s obligations under this Mortgage, except to the limited extent that the Claims against any such Indemnified Person are proximately caused by such Indemnified Person’s gross negligence or willful misconduct. The indemnification provided for in this section shall survive the termination of this Mortgage and shall extend to and continue to benefit each individual or entity who is or has at any time been an Indemnified Person. The Mortgagor’s indemnity obligations under this section shall not in any way be affected by the presence or absence of covering insurance, or by the amount of such insurance or by the failure or refusal of any insurance earner to perform any obligation on its part under any insurance policy or policies affecting the Mortgagor’s assets or the Mortgagor’s business activities. Should any Claim be made or brought against any

Indemnified Person by reason of any event as to which the Mortgagor’s indemnification obligations apply, then, upon any Indemnified Person’s demand, the Mortgagor, at its sole cost and expense, shall defend such Claim in the Mortgagor’s name, if necessary, by the attorneys for the Mortgagor’s insurance carrier (if such Claim is covered by insurance), or otherwise by such attorneys as any Indemnified Person shall approve. Any Indemnified Person may also engage its own attorneys at its reasonable discretion to defend the Mortgagor and to assist in its defense and the Mortgagor agrees to pay the fees and disbursements of such attorneys.

21. Material Information. The Mortgagee acknowledges Section 10.1 of the Revolving Credit and Term Loan Agreement, dated of even date herewith between the parties, regarding its obligations surrounding the possession of material, non-public information. , the Mortgagor agrees that the Mortgagee may, subject to such obligations, provide any information or knowledge the Mortgagee may have about the Mortgagor or about any matter relating to this Mortgage or the Related Documents to any of its subsidiaries or affiliates or their successors. Any dissemination of material, non-public information to any party not listed in the foregoing sentence shall only be made subsequent to such party signing a non-disclosure agreement in a form satisfactory to Mortgagee.

22. Relationship of the Parties. This Mortgage is given as an incentive to a lending transaction between the Mortgagee and the Mortgagor, and in no event shall the Mortgagee be construed or held to be a partner, joint venturer or associate of the Mortgagor in the conduct of business of the Mortgagor on or about the Premises or otherwise, nor shall the Mortgagee be liable for any debts or obligations incurred by the Mortgagor in the conduct of such business, it being understood and agreed that the relationship of the parties is and at all times shall remain that of lender and borrower.

23. Mineral Interests. The Mortgagor acknowledges that any exploration or drilling for oil, gas or other minerals in, on, about, or through the Premises would waste and impair the value of the Premises as security for the payment of the Liabilities, and the Mortgagor covenants and agrees that it will not explore or drill for any oil, gas or other minerals, or consent, permit, authorize or otherwise agree to any exploration or drilling of any oil, gas or other minerals in, on or through the Premises, without first obtaining from the Mortgagee written permission, which permission may be granted or withheld on such terms as the Mortgagee, in its sole subjective discretion, deems appropriate and shall not be valid until recorded. However, the Mortgagor does not own any of such oil, gas and other minerals, and the Mortgagor may not be able to prevent third party owners and lessees thereof from exercising their rights to explore or drill for such oil, gas and other minerals. If any other mineral owner, mineral lessee or other third party explores or drills or undertakes to explore or drill for any oil, gas or other minerals in, on, under or through the Premises which exploration or drilling would, in the reasonable judgment of the Mortgagee, waste or impair the value of the Premises as security for the payment of the Liabilities, then the Mortgagor further covenants and agrees to pay over unto the Mortgagee any and all moneys, proceeds, awards or judgments received by the Mortgagor representing damages or payment in lieu thereof occasioned by such exploration or drilling, which moneys, proceeds, awards or judgments when received by the Mortgagee shall be applied towards the Liabilities.

This instrument was acknowledged before me on this 1^st day of October, 2003 by Robert B. Wagner, as CFO of XETA TECHNOLOGIES, INC., an Oklahoma corporation.

18 EX-10.9 7 d11884exv10w9.htm EX-10.9 PROMISSORY NOTE ($2,238,333.48 TO BOK) exv10w9

FOR VALUE RECEIVED, the undersigned, XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Maker”), promises to pay to the order of BANK OF OKLAHOMA, N.A. (“Lender”), at its offices in Tulsa, Oklahoma, the principal sum of Two Million Two Hundred Thirty-Eight Thousand Three Hundred and Thirty-Three and 48/100 Dollars ($2,238,333.48) under the terms of the Revolving Credit and Term Loan Agreement (“Credit Agreement”) between Maker and Lender of even date herewith, payable as follows (all capitalized terms used but not defined herein shall have the meanings given in the Credit Agreement):

		Principal. Principal shall be shall be payable in consecutive monthly installments on the 1st day of each month, commencing November, 2003, with each installment except the last equal to $14,257.48. The last installment, due September 30, 2006, shall equal the remaining balance of principal hereunder.

		Interest. Interest shall be payable on the first day of each month, commencing the 1st day of November, 2003, and at maturity. Interest shall accrue on the principal balance outstanding hereunder and on any past due interest hereunder at a rate at all times equal to the Note Rate (defined below).

“Note Rate” shall mean a rate at all times equal to the Adjusted Prime Rate or the Adjusted LIBOR Rate, as elected by Maker pursuant to a properly made Interest Rate Election (defined below); provided, that at the end of any applicable Interest Period (defined below), the Note Rate shall revert to the Adjusted Prime Rate unless a new Interest Rate Election has been properly made by Maker. The Adjusted Prime Rate and the Adjusted LIBOR Rate shall be calculated, on any date of determination thereof, as follows:

The Adjusted LIBOR Rate and Adjusted Prime Rate shall be recalculated on not less than a quarterly basis, on the date on which the Lender is in receipt of Maker’s most recent financial

statements (and, in the case of the year-end financial statements, audit report) for the fiscal quarter then ended (“Pricing Date”). From the date of this Agreement to the first recalculation, the Adjusted LIBOR Rate shall be set at the LIBOR Rate plus 1.75 percent (1.75%), and the Adjusted Prime Rate shall be set at the Prime Rate Minus .50 percent (.50%). The Note Rate shall be established based on the ratio of Funded Debt to Cash Flow for the most recently completed fiscal quarter and the Note Rate established on a Pricing Date shall remain in effect until the next Pricing Date. If the Maker has not delivered its financial statements by the date such financial statements (and, in the case of the year-end financial statements, audit report) are required to be delivered under the Credit Agreement, until such financial statements and audit report are delivered, the Note Rate shall be the LIBOR Rate plus one and one half of one percent (1.5%). If the Maker subsequently delivers such financial statements before the next Pricing Date, the Note Rate established by such late delivered financial statements shall take effect from the date of delivery until the next Pricing Date. In all other circumstances, the Note Rate established by such financial statements shall be in effect from the Pricing Date that occurs immediately after the end of the fiscal quarter covered by such financial statements until the next Pricing Date. Each determination of the Note Rate made by the Lender in accordance with the foregoing shall be conclusive and binding on the Maker and the Lender if reasonably determined. Any change in the Note Rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective.

“Funded Debt” (for purposes of this Note) shall mean all interest bearing debt.

“Interest Rate Election” means written notice from Maker to Lender no earlier than twenty (20) days and no later than five (5) days prior to the contemplated effective date, substantially in form and content as set forth on Exhibit “A” hereto, whereby Maker may elect from time to time that interest shall accrue hereunder at the Adjusted Prime Rate or the Adjusted LIBOR Rate.

“LIBOR Rate” means the London Interbank Offered Rate composite rate per annum for U.S. Dollars for the applicable Interest Period which appears on the LIBOR 01 page of the Reuters information service on the day the Interest Rate Election is received by Lender. The LIBOR Rate shall remain fixed during the applicable Interest Period.

“Interest Period” shall mean a period of time equal to the lesser of: (i) at the election of the Maker, thirty (30), sixty (60), or ninety (90) days; or (ii) the number of days between the contemplated effective date specified by the Maker in the applicable Interest Rate Election and the maturity date hereunder.

“Prime Rate” shall mean a fluctuating interest rate per annum as in effect from time to time, which interest rate per annum shall at all times be equal to the rate of interest announced publicly from time to time (whether or not charged in each instance), by JP Morgan Chase Bank, at New York, New York (“Rate Bank”), as its base rate or general reference rate. Each change in the Prime Rate (or any component thereof) shall become effective hereunder without notice to Maker (which notice is hereby expressly waived by Maker), on the effective date of each such change. Should the Rate Bank abolish or abandon the practice of announcing or publishing a Prime Rate, then the Prime Rate used during the remaining term of this Note shall be that interest rate or other general reference rate then in effect at the Rate Bank which, from time to time, in the reasonable judgment of Bank, most effectively approximates the initial definition of the “Prime Rate.” Maker acknowledges that Lender may, from time to time, extend credit to other borrowers at rates of interest varying from, and having no relationship to, the Prime Rate. The rate of interest payable

upon the indebtedness evidenced by this Note shall not, however, at any time exceed the maximum rate of interest permitted under the laws of the State of Oklahoma for loans of the type and character evidenced by this Note.

If any payment shall be due on a Saturday or Sunday or upon any other day on which state or national banks in the State of Oklahoma are closed for business by virtue of a legal holiday for such banks, such payment shall be due and payable on the next succeeding banking day and interest shall accrue to such day. All interest due hereon shall be computed on the actual number of days elapsed (365 or 366) based upon a 360-day year.

All payments under this Note shall be made in legal tender of the United States of America or in other immediately available funds at Lender’s office described above, and no credit shall be given for any payment received by check, draft or other instrument or item until such time as the holder hereof shall have received credit therefor from the holder’s collecting agent or, in the event no collecting agent is used, from the bank or other financial institution upon which said check, draft or other instrument or item is drawn.

From time to time the maturity date of this Note may be extended or this Note may be renewed, in whole or in part, or a new note of different form may be substituted for this Note and/or the rate of interest may be changed, or changes may be made in consideration of loan extensions, and the holder, from time to time, may waive or surrender, either in whole or in part, any rights, guarantees, security interests or liens given for the benefit of the holder in connection herewith; but no such occurrences shall in any manner affect, limit, modify or otherwise impair any rights, guarantees or security of the holder not specifically waived, released or surrendered in writing, nor shall any maker, guarantor, endorser or any person who is or might be liable hereon, either primarily or contingently, be released from such liability by reason of the occurrence of any such event. The holder hereof, from time to time, shall have the unlimited right to release any person who might be liable hereon; and such release shall not affect or discharge the liability of any other person who is or might be liable hereon.

If any payment required by this Note to be made is not made when due, or if any default occurs under any loan agreement or under the provisions of any mortgage, security agreement, assignment, pledge or other document or agreement which provides security for the indebtedness evidenced by this Note, the holder hereof may, at its option, without notice or demand, declare this Note in default and all indebtedness due and owing hereunder immediately due and payable. Interest from the date of default on such principal balance and on any past due interest hereunder shall accrue at the rate of five percent (5%) per annum above the nondefault interest rate accruing hereunder. The Maker and any endorsers, guarantors and sureties hereby severally waive protest, presentment, demand, and notice of protest and nonpayment in case this Note or any payment due hereunder is not paid when due; and they agree to any renewal, extension, acceleration, postponement of the time of payment, substitution, exchange or release of collateral and to the release of any party or person primarily or contingently liable without prejudice to the holder and without notice to the Maker or any endorser, guarantor or surety. Maker and any guarantor, endorser, surety or any other person who is or may become liable hereon will, on demand, pay all costs of collection, including reasonable attorney fees of the holder hereof in attempting to enforce payment of this Note and reasonable attorney fees for defending the validity of any document securing this Note as a valid first and prior lien.

Upon the occurrence of any default hereunder, Lender shall have the right, immediately and without further action by it, to set off against this Note all money owed by Lender in any capacity to the Maker or any guarantor, endorser or other person who is or might be liable for payment hereof,

whether or not due, and also to set off against all other liabilities of Maker to Lender all money owed by Lender in any capacity to Maker; and Lender shall be deemed to have exercised such right of setoff and to have made a charge against such money immediately upon the occurrence of such default even though such charge is made or entered into the books of Lender subsequently thereto.

The holder of this Note may collect a late charge not to exceed an amount equal to five percent (5%) of the amount of any payment which is not paid within ten (10) days from the due date thereof, for the purposes of covering the extra expenses involved in handling delinquent payments. This late charge provision shall not be applicable in the event the holder hereof, at its option, elects to receive interest at the increased rate as provided hereunder in the event of default.

This Note is given for an actual loan of money for business purposes and not for personal, agricultural or residential purposes, and is executed and delivered in the State of Oklahoma and shall be governed by and construed in accordance with the laws of the State of Oklahoma.

Bank of Oklahoma, N.A.
P. O. Box 2300
Tulsa, Oklahoma 74192-2300
Attn: Mr. Stephen R. Wright, Senior Vice President

Please be advised that no Initial Default or Matured Default exists under the Loan Agreement, and the Borrower hereby provides the following interest rate election:

A. Revolving Line. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

B. Term Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

C. Real Estate Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

-5- EX-10.10 8 d11884exv10w10.htm EX-10.10 PROMISSORY NOTE ($7,500,000 TO BOK) exv10w10

FOR VALUE RECEIVED, the undersigned, XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Maker”), promises to pay to the order of BANK OF OKLAHOMA, N.A. (“Lender”), at its offices in Tulsa, Oklahoma, the principal sum of Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000) or, if less, the aggregate sum of advances made by Lender to Maker under the Revolving Credit and Term Loan Agreement (“Credit Agreement”) between Maker and Lender of even date herewith, payable as follows (all capitalized terms used but not defined herein shall have the meanings given in the Credit Agreement):

	a.		Principal. Principal shall be payable on September 29, 2004.

	b.		Interest. Interest shall be payable on the first day of each month, commencing the 1^st day of November, 2003, and at maturity. Interest shall accrue on the principal balance outstanding hereunder and on any past due interest hereunder at a rate at all times equal to the Note Rate (defined below).

The Adjusted LIBOR Rate and Adjusted Prime Rate shall be recalculated on not less than a quarterly basis, on the date on which the Lender is in receipt of Maker’s most recent financial statements (and, in the case of the year-end financial statements, audit report) for the fiscal quarter then ended (“Pricing Date”). From the date of this Agreement to the first recalculation, the Adjusted LIBOR Rate shall be set at the LIBOR Rate plus 1.75 percent (1.75%), and the Adjusted Prime Rate

shall be set at the Prime Rate minus .875 percent (-.875%). The Note Rate shall be established based on the ratio of Funded Debt to Cash Flow for the most recently completed fiscal quarter and the Note Rate established on a Pricing Date shall remain in effect until the next Pricing Date. If the Maker has not delivered its financial statements by the date such financial statements (and, in the case of the year-end financial statements, audit report) are required to be delivered under the Credit Agreement, until such financial statements and audit report are delivered, the Note Rate shall be the Prime Rate minus one and one hundred twenty-five thousandths of one percent (1.125%). If the Maker subsequently delivers such financial statements before the next Pricing Date, the Note Rate established by such late delivered financial statements shall take effect from the date of delivery until the next Pricing Date. In all other circumstances, the Note Rate established by such financial statements shall be in effect from the Pricing Date that occurs immediately after the end of the fiscal quarter covered by such financial statements until the next Pricing Date. Each determination of the Note Rate made by the Lender in accordance with the foregoing shall be conclusive and binding on the Maker and the Lender if reasonably determined. Any change in the Note Rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective.

“Funded Debt” (for purposes of this Note) shall mean all interest bearing debt.

rate of interest permitted under the laws of the State of Oklahoma for loans of the type and character evidenced by this Note.

Bank of Oklahoma, N.A.
P. O. Box 2300
Tulsa, Oklahoma 74192-2300
Attn: Mr. Stephen R. Wright, Senior Vice President

Please be advised that no Initial Default or Matured Default exists under the Loan Agreement, and the Borrower hereby provides the following interest rate election:

-5- EX-10.11 9 d11884exv10w11.htm EX-10.10 PROMISSORY NOTE ($3,374,734.33 TO BOK) exv10w11

FOR VALUE RECEIVED, the undersigned, XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Maker”), promises to pay to the order of BANK OF OKLAHOMA, N.A. (“Lender”), at its offices in Tulsa, Oklahoma, the principal sum of Three Million Three Hundred Seventy-Four Thousand Seven Hundred Thirty-Four and 33/100 Dollars ($3,374,734.33) under the terms of the Revolving Credit and Term Loan Agreement (“Credit Agreement”) between Maker and Lender of even date herewith, payable as follows (all capitalized terms used but not defined herein shall have the meanings given in the Credit Agreement):

		Principal. Principal shall be shall be payable in consecutive monthly installments on the 1st day of each month, commencing November, 2003, with each installment except the last equal to $86,524.26. The last installment, due September 30, 2006, shall equal the remaining balance of principal hereunder.

		Interest. Interest shall be payable on the first day of each month, commencing the 1st day of November, 2003, and at maturity. Interest shall accrue on the principal balance outstanding hereunder and on any past due interest hereunder at a rate at all times equal to the Note Rate (defined below).

The Adjusted LIBOR Rate and Adjusted Prime Rate shall be recalculated on not less than a quarterly basis, on the date on which the Lender is in receipt of Maker’s most recent financial

statements (and, in the case of the year-end financial statements, audit report) for the fiscal quarter then ended (“Pricing Date”). From the date of this Agreement to the first recalculation, the Adjusted LIBOR Rate shall be set at the LIBOR Rate plus 2 percent (2.00%), and the Adjusted Prime Rate shall be set at the Prime Rate minus .5 percent (-.50%). The Note Rate shall be established based on the ratio of Funded Debt to Cash Flow for the most recently completed fiscal quarter and the Note Rate established on a Pricing Date shall remain in effect until the next Pricing Date. If the Maker has not delivered its financial statements by the date such financial statements (and, in the case of the year-end financial statements, audit report) are required to be delivered under the Credit Agreement, until such financial statements and audit report are delivered, the Note Rate shall be the LIBOR Rate plus one and three quarters of one percent (1.75%). If the Maker subsequently delivers such financial statements before the next Pricing Date, the Note Rate established by such late delivered financial statements shall take effect from the date of delivery until the next Pricing Date. In all other circumstances, the Note Rate established by such financial statements shall be in effect from the Pricing Date that occurs immediately after the end of the fiscal quarter covered by such financial statements until the next Pricing Date. Each determination of the Note Rate made by the Lender in accordance with the foregoing shall be conclusive and binding on the Maker and the Lender if reasonably determined. Any change in the Note Rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective.

“Funded Debt” (for purposes of this Note) shall mean all interest bearing debt.

Bank of Oklahoma, N.A.
P. O. Box 2300
Tulsa, Oklahoma 74192-2300
Attn: Mr. Stephen R. Wright, Senior Vice President

Please be advised that no Initial Default or Matured Default exists under the Loan Agreement, and the Borrower hereby provides the following interest rate election:

A. Revolving Line. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

B. Term Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

C. Real Estate Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

-5- EX-10.12 10 d11884exv10w12.htm EX-10.12 SECURITY AGREEMENT GRANTED TO BOK exv10w12

SECURITY AGREEMENT, dated as of October 1, 2003, between XETA TECHNOLOGIES, INC., an Oklahoma corporation (the “Debtor”), and BANK OF OKLAHOMA, N.A. (the “Secured Party”).

WHEREAS, the Debtor has entered into a Revolving Credit and Term Loan Agreement dated as of October 1, 2003 (as amended and in effect from time to time, the “Credit Agreement”), with the Secured Party, pursuant to which the Secured Party, subject to the terms and conditions contained therein, is to make loans or otherwise to extend credit to the Debtor; and

WHEREAS, it is a condition precedent to the Secured Party’s making any loans or otherwise extending credit to the Debtor under the Credit Agreement that the Debtor execute and deliver to the Secured Party a security agreement in substantially the form hereof; and

WHEREAS, the Debtor wishes to grant a security interest in favor of the Secured Party as herein provided;

NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions. All capitalized terms used herein without definitions shall have the respective meanings provided therefor in the Credit Agreement. The term “State,” as used herein, means the State of Oklahoma. All terms defined in the Uniform Commercial Code of the State and used herein shall have the same definitions herein as specified therein. However, if a term is defined in Article 9 of the Uniform Commercial Code of the State differently than in another Article of the Uniform Commercial Code of the State, the term has the meaning specified in Article 9.

2. Grant of Security Interest. The Debtor hereby grants to the Secured Party, to secure the payment and performance in full of all of the Obligations, a security interest in and so pledges and assigns to the Secured Party the following properties, assets and rights of the Debtor, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same being hereinafter called the “Collateral”): all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including health-care-insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, and all general intangibles (including all payment intangibles). The Secured Party acknowledges that the attachment of its security interest in any additional commercial tort claim as original collateral is subject to the Debtor’s compliance with Section 4.7.

3. Authorization to File Financing Statements. The Debtor hereby irrevocably authorizes the Secured Party at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the State or such jurisdiction, or (ii) as being of an equal or lesser

scope or with greater detail, and (b) provide any other information required by part 5 of Article 9 of the Uniform Commercial Code of the State, or such other jurisdiction, for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Debtor is an organization, the type of organization and any organizational identification number issued to the Debtor and, (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Debtor agrees to furnish any such information to the Secured Party promptly upon the Secured Party’s request.

4. Other Actions. To further the attachment, perfection and first priority of, and the ability of the Secured Party to enforce, the Secured Party’s security interest in the Collateral, and without limitation on the Debtor’s other obligations in this Agreement, the Debtor agrees, in each case at the Debtor’s expense, to take the following actions with respect to the following Collateral:

4.1. Promissory Notes and Tangible Chattel Paper. If the Debtor shall at any time hold or acquire any promissory notes or tangible chattel paper, the Debtor shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify.

4.2. Deposit Accounts. For each deposit account that the Debtor at any time opens or maintains, the Debtor shall, at the Secured Party’s request and option, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (a) cause the depositary bank to comply at any time with instructions from the Secured Party to such depositary bank directing the disposition of funds from time to time credited to such deposit account, without further consent of the Debtor, or (b) arrange for the Secured Party to become the customer of the depositary bank with respect to the deposit account, with the Debtor being permitted, only with the consent of the Secured Party, to exercise rights to withdraw funds from such deposit account. The Secured Party agrees with the Debtor that the Secured Party shall not give any such instructions or withhold any withdrawal rights from the Debtor, unless an Event of Default has occurred and is continuing, or would occur, if effect were given to any withdrawal not otherwise permitted by the Loan Documents. The provisions of this paragraph shall not apply to (i) any deposit account for which the Debtor, the depositary bank and the Secured Party have entered into a cash collateral agreement specially negotiated among the Debtor, the depositary bank and the Secured Party for the specific purpose set forth therein, (ii) a deposit account for which the Secured Party is the depositary bank and is in automatic control, and (iii) deposit accounts specially and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Debtor’s salaried employees.

4.3. Investment Property. If the Debtor shall at any time hold or acquire any certificated securities, the Debtor shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify. If any securities now or hereafter acquired by the Debtor are uncertificated and are issued to the Debtor or its nominee directly by the issuer thereof, the Debtor shall immediately notify the Secured Party thereof and, at the Secured Party’s request and option, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (a) cause the issuer to agree to comply with instructions from the Secured Party as to such securities, without further consent of the Debtor or such nominee, or (b) arrange for the Secured Party to become the registered owner of the securities. If any securities, whether certificated or uncertificated, or other investment property now or hereafter acquired by the Debtor are held by the Debtor or its nominee through a securities intermediary or commodity intermediary, the Debtor shall immediately notify the Secured Party thereof and, at the Secured Party’s request and option,

pursuant to an agreement in form and substance satisfactory to the Secured Party, either (i) cause such securities intermediary or (as the case may be) commodity intermediary to agree to comply with entitlement orders or other instructions from the Secured Party to such securities intermediary as to such securities or other investment property, or (as the case may be) to apply any value distributed on account of any commodity contract as directed by the Secured Party to such commodity intermediary, in each case without further consent of the Debtor or such nominee, or (ii) in the case of financial assets or other investment property held through a securities intermediary, arrange for the Secured Party to become the entitlement holder with respect to such investment property, with the Debtor being permitted, only with the consent of the Secured Party, to exercise rights to withdraw or otherwise deal with such investment property. The Secured Party agrees with the Debtor that the Secured Party shall not give any such entitlement orders or instructions or directions to any such issuer, securities intermediary or commodity intermediary, and shall not withhold its consent to the exercise of any withdrawal or dealing rights by the Debtor, unless an Event of Default has occurred and is continuing, or, after giving effect to any such investment and withdrawal rights not otherwise permitted by the Loan Documents, would occur. The provisions of this paragraph shall not apply to any financial assets credited to a securities account for which the Secured Party is the securities intermediary.

4.4. Collateral in the Possession of a Bailee. If any Collateral is at any time in the possession of a bailee, the Debtor shall promptly notify the Secured Party thereof and, at the Secured Party’s request and option, shall promptly obtain an acknowledgement from the bailee, in form and substance satisfactory to the Secured Party, that the bailee holds such Collateral for the benefit of the Secured Party, and that such bailee agrees to comply, without further consent of the Debtor, with instructions from the Secured Party as to such Collateral. The Secured Party agrees with the Debtor that the Secured Party shall not give any such instructions unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the Debtor with respect to the bailee.

4.5. Electronic Chattel Paper and Transferable Records. If the Debtor at any time holds or acquires an interest in any electronic chattel paper or any “transferable record,” as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Debtor shall promptly notify the Secured Party thereof and, at the request and option of the Secured Party, shall take such action as the Secured Party may reasonably request to vest in the Secured Party control, under Section 9-105 of the Uniform Commercial Code, of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. The Secured Party agrees with the Debtor that the Secured Party will arrange, pursuant to procedures satisfactory to the Secured Party and so long as such procedures will not result in the Secured Party’s loss of control, for the Debtor to make alterations to the electronic chattel paper or transferable record permitted under UCC Section 9-105 or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control, unless an Event of Default has occurred and is continuing or would occur after taking into account any action by the Debtor with respect to such electronic chattel paper or transferable record.

4.6. Letter-of-Credit Rights. If the Debtor is at any time a beneficiary under a letter of credit, the Debtor shall promptly notify the Secured Party thereof and, at the request and option of the Secured Party, the Debtor shall, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (i) arrange for the issuer and any confirmer or other nominated person

of such letter of credit to consent to an assignment to the Secured Party of the proceeds of the letter of credit, or (ii) arrange for the Secured Party to become the transferee beneficiary of the letter of credit.

4.7 Commercial Tort Claims. If the Debtor shall at any time hold or acquire a commercial tort claim, the Debtor shall immediately notify the Secured Party in a writing signed by the Debtor of the particulars thereof and grant to the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Party.

4.8. Other Actions as to Any and All Collateral. The Debtor further agrees, at the request and option of the Secured Party, to take any and all other actions the Secured Party may determine to be necessary or useful for the attachment, perfection and first priority of, and the ability of the Secured Party to enforce, the Secured Party’s security interest in any and all of the Collateral, including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Debtor’s signature thereon is required therefor, (b) causing the Secured Party’s name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the Secured Party’s security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the Secured Party’s security interest in such Collateral, (d) obtaining governmental and other third party waivers, consents and approvals in form and substance satisfactory to Secured Party, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Secured Party and (f) taking all actions under any earlier versions of the Uniform Commercial Code or under any other law, as reasonably determined by the Secured Party to be applicable in any relevant Uniform Commercial Code or other jurisdiction, including any foreign jurisdiction.

5. Relation to Other Security Documents. The provisions of this Agreement supplement the provisions of any real estate mortgage or deed of trust granted by the Debtor to the Secured Party which secures the payment or performance of any of the Obligations. Nothing contained in any such real estate mortgage or deed of trust shall derogate from any of the rights or remedies of the Secured Party hereunder.

6. Representations and Warranties Concerning Debtor’s Legal Status. The Debtor represents and warrants to the Secured Party as follows: (a) the Debtor’s exact legal name is that indicated on the signature page hereof, (b) the Debtor is a corporation and is organized in the State of Oklahoma, (c) the Debtor’s place of business or, if more than one, its chief executive office, as well as the Debtor’s mailing address, if different, is accurately set forth on Schedule “6” hereto, (d) all other information provided by Debtor to Secured Party pertaining to the Debtor is accurate, complete and unchanged.

7. Covenants Concerning Debtor’s Legal Status. The Debtor covenants with the Secured Party as follows: (a) without providing at least 30 days prior written notice to the Secured Party, the Debtor will not change its name, its place of business or, if more than one, chief executive office, or its mailing address or organizational identification number if it has one, (b) if the Debtor does not have an organizational identification number and later obtains one, the Debtor shall forthwith notify

the Secured Party of such organizational identification number, and (c) the Debtor will not change its type of organization, jurisdiction of organization or other legal structure.

8. Representations and Warranties Concerning Collateral, etc. The Debtor further represents and warrants to the Secured Party as follows: (a) the Debtor is the owner of the Collateral, free from any right or claim or any person or any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement and other liens permitted by the Credit Agreement, (b) none of the Collateral constitutes, or is the proceeds of, “farm products” as defined in Section 9-102(a)(34) of the Uniform Commercial Code of the State, (c) the Debtor holds no commercial tort claim except as set forth on Schedule “8” hereto, and (d) the Debtor has at all times operated its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, (e) all other information provided by Debtor to Secured Party pertaining to the Collateral is accurate, complete, and unchanged.

9. Covenants Concerning Collateral, etc. The Debtor further covenants with the Secured Party as follows: (a) the Collateral, to the extent not delivered to the Secured Party pursuant to Section 4, will be kept at those locations set forth on Schedule “9” hereto and the Debtor will not remove the Collateral from such locations, without providing at least thirty days prior written notice to the Secured Party, (b) except for the security interest herein granted and liens permitted by the Credit Agreement, the Debtor shall be the owner of the Collateral free from any right or claim of any other person, lien, security interest or other encumbrance, and the Debtor shall defend the same against all claims and demands of all persons at any time claiming the same or any interests therein adverse to the Secured Party, (c) the Debtor shall not pledge, mortgage or create, or suffer to exist any right of any person in or claim by any person to the Collateral, or any security interest, lien or encumbrance in the Collateral in favor of any person, other than the Secured Party except for liens permitted by the Credit Agreement, (d) the Debtor will keep the Collateral in good order and repair and will not use the same in violation of law or any policy of insurance thereon, (e) as provided in the Credit Agreement, the Debtor will permit the Secured Party, or its designee, to inspect the Collateral at any reasonable time, wherever located, (f) the Debtor will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incurred in connection with the use or operation of such Collateral or incurred in connection with this Agreement, (g) the Debtor will continue to operate, its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, and (h) the Debtor will not sell or otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or any interest therein except for (i) sales of inventory in the ordinary course of business and (ii) so long as no Event of Default has occurred and is continuing, sales or other dispositions of obsolescent items of equipment consistent with past practices.

10.1. Maintenance of Insurance. The Debtor will maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with general practices of businesses engaged in similar activities in similar geographic areas. Such insurance shall be in such minimum amounts that the Debtor will not be deemed a co-insurer under applicable insurance laws, regulations and policies and otherwise shall be in such amounts, contain such terms, be in such forms and be for such periods as may be reasonably satisfactory to the Secured Party. In addition, all such

insurance shall be payable to the Secured Party as loss payee. Without limiting the foregoing, the Debtor will (i) keep all of its physical property insured with casualty or physical hazard insurance on an “all risks” basis, with broad form flood and earthquake coverages and electronic data processing coverage, with a full replacement cost endorsement and an “agreed amount” clause in an amount equal to 100% of the full replacement cost of such property, (ii) maintain all such workers’ compensation or similar insurance as may be required by law, and (iii) maintain, in amounts equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims of bodily injury, death or property damage occurring, on, in or about the properties of the Debtor; business interruption insurance; and product liability insurance.

10.2. Insurance Proceeds. The proceeds of any casualty insurance in respect of any casualty loss of any of the Collateral shall, subject to the rights, if any, of other parties with an interest having priority in the property covered thereby, (i) so long as no Default or Event of Default has occurred and is continuing and in the discretion of Secured Party, be disbursed to the Debtor for direct application by the Debtor solely to the repair or replacement of the Debtor’s property so damaged or destroyed, and (ii) in all other circumstances, be held by the Secured Party as cash collateral for the Obligations. The Secured Party may, at its sole option, disburse from time to time all or any part of such proceeds so held as cash collateral, upon such terms and conditions as the Secured Party may reasonably prescribe, for direct application by the Debtor solely to the repair or replacement of the Debtor’s property so damaged or destroyed, or the Secured Party may apply all or any part of such proceeds to the Obligations.

10.3. Continuation of Insurance. All policies of insurance shall provide for at least thirty (30) days prior written cancellation notice to the Secured Party. In the event of failure by the Debtor to provide and maintain insurance as herein provided, the Secured Party may, at its option, provide such insurance and charge the amount thereof to the Debtor. The Debtor shall furnish the Secured Party with certificates of insurance and policies evidencing compliance with the foregoing insurance provision.

11.1. Expenses Incurred by Secured Party. In the Secured Party’s discretion, if the Debtor fails to do so, the Secured Party may discharge taxes and other encumbrances at any time levied or placed on any of the Collateral, maintain any of the Collateral, make repairs thereto and pay any necessary filing fees or insurance premiums. The Debtor agrees to reimburse the Secured Party on demand for all expenditures so made. The Secured Party shall have no obligation to the Debtor to make any such expenditures, nor shall the making thereof be construed as the waiver or cure of any Default or Event of Default.

11.2. Secured Party’s Obligations and Duties. Anything herein to the contrary notwithstanding, the Debtor shall remain obligated and liable under each contract or agreement comprised in the Collateral to be observed or performed by the Debtor thereunder. The Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Secured Party of any payment relating to any of the Collateral, nor shall the Secured Party be obligated in any manner to perform any of the obligations of the Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Secured Party or to which the

Secured Party may be entitled at any time or times. The Secured Party’s sole duty with respect to the custody, safe keeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code of the State or otherwise, shall be to deal with such Collateral in the same manner as the Secured Party deals with similar property for its own account.

12. Securities and Deposits. The Secured Party may at any time following and during the continuance of an Event of Default, at its option, transfer to itself or any nominee any securities constituting Collateral, receive any income thereon and hold such income as additional Collateral or apply it to the Obligations. Whether or not any Obligations are due, the Secured Party may following and during the continuance of an Event of Default demand, sue for, collect, or make any settlement or compromise which it deems desirable with respect to the Collateral. Regardless of the adequacy of Collateral or any other security for the Obligations, any deposits or other sums at any time credited by or due from the Secured Party to the Debtor may at any time be applied to or set off against any of the Obligations.

13. Notification to Account Debtors and Other Persons Obligated on Collateral. If an Event of Default shall have occurred and be continuing, the Debtor shall, at the request and option of the Secured Party, notify account debtors and other persons obligated on any of the Collateral of the security interest of the Secured Party in any account, chattel paper, general intangible, instrument or other Collateral and that payment thereof is to be made directly to the Secured Party or to any financial institution designated by the Secured Party as the Secured Party’s agent therefor, and the Secured Party may itself, if a Default or an Event of Default shall have occurred and be continuing, without notice to or demand upon the Debtor, so notify account debtors and other persons obligated on Collateral. After the making of such a request or the giving of any such notification, the Debtor shall hold any proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Debtor as trustee for the Secured Party without commingling the same with other funds of the Debtor and shall turn the same over to the Secured Party in the identical form received, together with any necessary endorsements or assignments. The Secured Party shall apply the proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Secured Party to the Obligations, such proceeds to be immediately credited after final payment in cash or other immediately available funds of the items giving rise to them.

14.1. Appointment and Powers of Secured Party. The Debtor hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorneys-in-fact with full irrevocable power and authority in the place and stead of the Debtor or in the Secured Party’s own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or useful to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives said attorneys the power and right, on behalf of the Debtor, without notice to or assent by the Debtor, to do the following:

(a) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise dispose of or deal with any of the Collateral in such manner as is consistent with the Uniform Commercial Code of the State and as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Debtor’s expense, at any time, or from time to time, all

acts and things which the Secured Party deems necessary or useful to protect, preserve or realize upon the Collateral and the Secured Party’s security interest therein, in order to effect the intent of this Agreement, all at least as fully and effectively as the Debtor might do, including, without limitation, (i) the filing and prosecuting of registration and transfer applications with the appropriate federal, state, local or other agencies or authorities with respect to trademarks, copyrights and patentable inventions and processes, (ii) upon written notice to the Debtor, the exercise of voting rights with respect to voting securities, which rights may be exercised, if the Secured Party so elects, with a view to causing the liquidation of assets of the issuer of any such securities, and (iii) the execution, delivery and recording, in connection with any sale or other disposition of any Collateral, of the endorsements, assignments or other instruments of conveyance or transfer with respect to such Collateral; and

(b) to the extent that the Debtor’s authorization given in Section 3 is not sufficient, to file such financing statements with respect hereto, with or without the Debtor’s signature, or a photocopy of this Agreement in substitution for a financing statement, as the Secured Party may deem appropriate and to execute in the Debtor’s name such financing statements and amendments thereto and continuation statements which may require the Debtor’s signature.

14.2. Ratification by Debtor. To the extent permitted by law, the Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and is irrevocable.

14.3. No Duty on Secured Party. The powers conferred on the Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be accountable only for the amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act, except for the Secured Party’s own gross negligence or willful misconduct.

15. Rights and Remedies. If an Event of Default shall have occurred and be continuing, the Secured Party, without any other notice to or demand upon the Debtor have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of the State and any additional rights and remedies which may be provided to a secured party in any jurisdiction in which Collateral is located, including, without limitation, the right to take possession of the Collateral, and for that purpose the Secured Party may, so far as the Debtor can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Secured Party may in its discretion require the Debtor to assemble all or any part of the Collateral at such location or locations within the jurisdiction(s) of the Debtor’s principal office(s) or at such other locations as the Secured Party may reasonably designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Party shall give to the Debtor at least ten (10) Business Days’ prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. The Debtor hereby acknowledges that ten (10) Business Days’ prior written notice of such sale or sales shall be reasonable notice. In addition, the Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Secured Party’s rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.

16. Standards for Exercising Rights and Remedies. To the extent that applicable law imposes duties on the Secured Party to exercise remedies in a commercially reasonable manner, the Debtor acknowledges and agrees that it is not commercially unreasonable for the Secured Party (a) to fail to incur expenses reasonably deemed significant by the Secured Party to prepare Collateral for disposition or otherwise to fail to complete raw material or work in process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against account debtors or other persons obligated on Collateral or to fail to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against account debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other persons, whether or not in the same business as the Debtor, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, (k) to purchase insurance or credit enhancements to insure the Secured Party against risks of loss, collection or disposition of Collateral or to provide to the Secured Party a guaranteed return from the collection or disposition of Collateral, or (l) to the extent deemed appropriate by the Secured Party, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Secured Party in the collection or disposition of any of the Collateral. The Debtor acknowledges that the purpose of this Section 16 is to provide non-exhaustive indications of what actions or omissions by the Secured Party would fulfill the Secured Party’s duties under the Uniform Commercial Code or other law of the State or any other relevant jurisdiction in the Secured Party’s exercise of remedies against the Collateral and that other actions or omissions by the Secured Party shall not be deemed to fail to fulfill such duties solely on account of not being indicated in this Section 16. Without limitation upon the foregoing, nothing contained in this Section 16 shall be construed to grant any rights to the Debtor or to impose any duties on the Secured Party that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section 16.

17. No Waiver by Secured Party, etc. The Secured Party shall not be deemed to have waived any of its rights or remedies in respect of the Obligations or the Collateral unless such waiver shall be in writing and signed by the Secured Party. No delay or omission on the part of the Secured Party in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies of the Secured Party with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Secured Party deems expedient.

18. Suretyship Waivers by Debtor. The Debtor waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to both the Obligations and the Collateral, the Debtor assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or

release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Secured Party may deem advisable. The Secured Party shall have no duty as to the collection or protection of the Collateral or any income therefrom, the preservation of rights against prior parties, or the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in Section 11.2. The Debtor further waives any and all other suretyship defenses.

19. Marshalling. The Secured Party shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights and remedies hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, the Debtor hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Secured Party’s rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Debtor hereby irrevocably waives the benefits of all such laws.

20. Proceeds of Dispositions; Expenses. The Debtor shall pay to the Secured Party on demand any and all expenses, including reasonable attorneys’ fees and disbursements, incurred or paid by the Secured Party in protecting, preserving or enforcing the Secured Party’s rights and remedies under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale or other disposition of the Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as the Secured Party may determine, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State, any excess shall be returned to the Debtor. In the absence of final payment and satisfaction in full of all of the Obligations, the Debtor shall remain liable for any deficiency.

21. Overdue Amounts. Until paid, all amounts due and payable by the Debtor hereunder shall be a debt secured by the Collateral and shall bear, whether before or after judgment, interest at the default rate set forth in the Note.

22. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OKLAHOMA. The parties agree that any action or claim arising out of, or any dispute in connection with, this Agreement, any rights, remedies, obligations, or duties hereunder, or the performance or enforcement hereof or thereof, shall be brought exclusively in the courts of the State or any federal court sitting in Tulsa County of the State and that proper venue shall lie only in such courts. Each party hereby consents to the exclusive jurisdiction of such courts and to service of process in any such suit being made upon the Debtor by mail at the address specified in Section 10.2 of the Credit Agreement. Each party hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court.

23. Miscellaneous. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon the Debtor and its respective successors and assigns, and shall inure to the benefit of the Secured Party and its successors and assigns. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Debtor acknowledges receipt of a copy of this Agreement.

IN WITNESS WHEREOF, intending to be legally bound, the Debtor has caused this Agreement to be duly executed as of the date first above written.

Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of October, 2003, personally appeared Robert Wagner to me known personally, and who, being by me duly sworn, deposes and says that he is the CFO of XETA TECHNOLOGIES, INC., and that said instrument was signed on behalf of said corporation by authority of its Board of Directors, and said CFO acknowledged said instrument to be the free act and deed of said corporation.

Notary Public LaTisha O’Neal
My commission expires: 05/04/07
Commission No.: 03005686

1.		Debtor’s place of business or, if more than one, its chief executive office:

		1814 W. Tacoma Broken Arrow, Oklahoma 74012

2.		Debtor’s mailing address (if different from above):

		Same

1.		Locations of Collateral:

		Boulder 5350 Manhattan Circle, Suite 210 Boulder, Colorado

		Fenton-Office 1749 Larkin Williams Fenton, Missouri

		Fenton-Warehouse 1111 Horan Drive, Suite 1 & J Fenton, Missouri

		Seattle-Office 3425 S. 116^th Street, Suite 101 Tukwila, Washington

		Seattle-KMI 10617 N.E. Second Street Bellevue, Washington

We have issued our report dated December 5, 2003, accompanying the consolidated financial statements in the Annual Report of Xeta Technologies, Inc. on Form 10-K for the year ended October 31, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statements of Xeta Technologies, Inc. on Form S-8 (File No. 033-62173 and File No. 333-44544).

EX-31.1 13 d11884exv31w1.htm EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER exv31w1

	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)		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

	c)		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 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.

EX-31.2 14 d11884exv31w2.htm EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER exv31w2

	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)		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

	(c)		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 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.

EX-32.1 15 d11884exv32w1.htm EX-32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER exv32w1

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, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, Jack R. Ingram, 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, to my knowledge, 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.

EX-32.2 16 d11884exv32w2.htm EX-32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER exv32w2

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, 2003, 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, to my knowledge, 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.

GRAPHIC 17 d11884d1188400.gif GRAPHIC begin 644 d11884d1188400.gif M1TE&.#EA.``X`/<``````/______________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M_____________________RP`````.``X```(XP`#"!Q(L*!!@0`2*EQXL*'# MAPT72IRH$*+%BQ0S4KS(L:#&CQL[8@1)DJ%(AR532CQI4*7+BBP#O)P)LR/- MFP!LXKS)<2=/BSYQ0@RZ\R%1H1&/(O6HM"C3IC\'!B4X56K4@TNO&J6)<*9( MKC)?LO0:UN58L63/0ET9VXLG'7(N0$!`#L_ ` end GRAPHIC 18 d11884d1188401.gif GRAPHIC begin 644 d11884d1188401.gif M1TE&.#EA.``X`/<``````/______________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M_____________________RP`````.``X```(XP`#"!Q(L*!!@0`2*EQXL*'# MAPT72IRH$*+%BQ0S4KS(L:#&CQL[8@1)DJ%(AR532CQI4*7+BBP#O)P)LR/- MFP!LXKS)<2=/BSYQ0@RZ\R%1H1&/(O6HM"C3IC\'!B4X56K4@TNO&J6)<*9( MKC)?LO0:UN58L63/0ET9VXLG'7(N0$!`#L_ ` end -----END PRIVACY-ENHANCED MESSAGE-----


Oklahoma		73-1130045

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


1814 West Tacoma, Broken Arrow, Oklahoma			74012

(Address of principal executive offices)			(Zip Code)


PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9A. CONTROLS AND PROCEDURES
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
EX-10.4 Authorized Distributor Agreement for 2003
EX-10.6 Reseller Master Terms and Conditions
EX-10.7 Revolving Credit and Term Loan Agreement
EX-10.8 Mortgage, Assignment of Leases and Rents
EX-10.9 Promissory Note ($2,238,333.48 to BOK)
EX-10.10 Promissory Note ($7,500,000 to BOK)
EX-10.10 Promissory Note ($3,374,734.33 to BOK)
EX-10.12 Security Agreement granted to BOK
EX-21 Subsidiaries of XETA Technologies, Inc.
EX-23 Consent of Grant Thornton LLP
EX-31.1 Certification of Chief Executive Officer
EX-31.2 Certification of Chief Financial Officer
EX-32.1 Certification of Chief Executive Officer
EX-32.2 Certification of Chief Financial Officer


Name and Age		Positions With Company

Jack R. Ingram Age 60		Chairman of the Board, Chief Executive Officer, and President

Robert B. Wagner Age 42		Chief Financial Officer, Vice President of Finance, Secretary, Treasurer, and Director

Larry N. Patterson Age 47		Senior Vice President, Sales and Marketing


	2003				2002

	High		Low		High		Low

Quarter Ending:
January 31	$	4.06	$	1.29	$	6.20	$	3.63
April 30		2.50		1.86		7.00		4.78
July 31		5.71		2.55		6.00		1.80
October 31		6.06		4.62		2.55		1.05


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


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


For the Year Ending October 31,		2003			2002		2001			2000			1999

Results of Operations
	Systems sales	$	27,550		$	27,852	$	52,028		$	70,231		$	17,857
	Installation and Service sales		23,339			25,390		33,105			31,220			18,766
	Other revenues		1,792			498		921			968			640

	Total Revenues		52,681			53,740		86,054			102,419			37,263

	Cost of equipment sales		19,622			21,384		36,261			47,480			10,412
	Cost of installation and services		16,548			18,803		23,616			21,627			12,206
	Cost of other revenues & corporate COGS		2,193			1,956		2,759			2,482			655

	Total Cost of Sales		38,363			42,143		62,636			71,589			23,273

	Gross Profit		14,318			11,597		23,418			30,830			13,990
	Operating expenses		11,210			10,459		16,069			18,452			7,622

	Income from operations		3,108			1,138		7,349			12,378			6,368
	Interest and other income (expense)		(545	)		309		(1,623	)		(1,761	)		665

	Income before taxes		2,563			1,447		5,726			10,617			7,033
	Provisions for taxes		1,005			569		2,245			4,156			2,750

	Net Income	$	1,558		$	878	$	3,481		$	6,461		$	4,283

	Earnings per share - Basic	$	0.16		$	0.09	$	0.38		$	0.77		$	0.53
	Earnings per share - Diluted	$	0.16		$	0.09	$	0.36		$	0.66		$	0.46
	Weighted Average Common Shares Outstanding		9,828			9,375		9,061			8,350			8,021
	Weighted Average Common Share Equivalents		9,960			9,866		9,698			9,792			9,254


As of October 31,		2003		2002		2001		2000		1999

Balance Sheet Data:
	Working Capital	$	4,204	$	8,580	$	11,214	$	15,145	$	8,021
	Total Assets		50,673		59,384		67,285		74,149		25,316
	Long Term Debt, less current portion		4,030		11,565		14,853		17,983		—
	Shareholders’ Equity		34,611		32,521		31,197		25,565		14,551


				Payments due by period

				Less than		2 - 3		4 - 5		More than
		Total		1 year		years		years		5 years

Contractual Obligations
Long-term debt		$	5,239,383	$	1,209,645	$	4,029,738	$	—	$	—
Operating leases		$	416,387		271,728		126,302		18,357		—
	Total	$	5,655,770	$	1,481,373	$	4,156,040	$	18,357	$	—


Index to Financial Statements		Page

Reports of Independent Public Accountants			F-1
Consolidated Financial Statements
	Consolidated Balance Sheets - October 31, 2003 and 2002		F-4
	Consolidated Statements of Operations - For the Years Ended October 31, 2003, 2002 and 2001		F-5
	Consolidated Statements of Shareholders’ Equity - For the Years Ended October 31, 2003, 2002 and 2001		F-6
	Consolidated Statements of Cash Flows - For the Years Ended October 31, 2003, 2002 and 2001		F-7
Notes to Consolidated Financial Statements			F-8


			October 31, 2003			October 31, 2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	291,118		$	1,966,734
	Current portion of net investment in sales-type leases and other receivables			979,255			1,015,096
	Trade accounts receivable, net			5,794,949			9,478,706
	Inventories, net			5,614,902			7,801,781
	Deferred tax asset, net			885,752			592,643
	Prepaid taxes			—			1,195,539
	Prepaid expenses and other assets			322,699			165,657

		Total current assets		13,888,675			22,216,156

Noncurrent Assets:
	Goodwill, net of accumulated amortization prior to adoption of SFAS 142			25,726,886			25,782,462
	Net investment in sales-type leases, less current portion above			419,800			519,270
	Property, plant & equipment, net			10,466,824			10,457,718
	Capitalized software production costs, net of accumulated amortization of $1,233,066 and $1,053,066			57,955			237,955
	Other assets			112,528			170,424

		Total noncurrent assets		36,783,993			37,167,829

		Total assets	$	50,672,668		$	59,383,985

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Current portion of long-term debt		$	1,209,645		$	3,288,337
	Revolving line of credit			719,073			—
	Accounts payable			3,928,878			6,119,135
	Unearned service revenue			1,620,323			2,078,741
	Accrued liabilities			1,869,024			1,968,771
	Accrued taxes			58,134			—
	Other liabilities			279,250			181,501

		Total current liabilities		9,684,327			13,636,485

Noncurrent Liabilities:
	Long-term debt, less current portion above			4,029,738			11,565,012
	Deferred tax liability, net			1,973,575			1,186,680
	Unearned service revenue			229,910			233,859
	Other liabilities			144,101			240,955

				6,377,324			13,226,506

Contingencies
Shareholders’ Equity:
	Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued			—			—
	Common stock; $.001 par value; 50,000,000 shares authorized, 11,021,740 and 10,721,740 issued at October 31, 2003 and 2002, respectively			11,021			10,721
	Paid-in capital			12,681,681			12,193,029
	Retained earnings			24,229,820			22,672,256
	Accumulated other comprehensive loss			(66,846	)		(110,353	)
	Less treasury stock, at cost			(2,244,659	)		(2,244,659	)

		Total shareholders’ equity		34,611,017			32,520,994

		Total liabilities and shareholders’ equity	$	50,672,668		$	59,383,985


				For the Years
				Ended October 31,
				2003			2002			2001

Systems sales				$	27,549,876		$	27,852,358		$	52,027,695
Installation and service revenues					23,338,915			25,390,142			33,105,152
Other revenues					1,792,512			497,778			921,182

	Net sales and service revenues				52,681,303			53,740,278			86,054,029

Cost of systems sales					19,621,591			21,383,502			36,260,942
Installation and services costs					16,548,392			18,803,143			23,616,074
Cost of other revenues & corporate COGS					2,192,967			1,956,071			2,758,651

	Total cost of sales and service				38,362,950			42,142,716			62,635,667

		Gross profit			14,318,353			11,597,562			23,418,362

Operating expenses:
	Selling, general and administrative				11,030,671			10,279,299			14,459,740
	Amortization				180,000			180,000			1,609,466

			Total operating expenses		11,210,671			10,459,299			16,069,206

Income from operations					3,107,682			1,138,263			7,349,156
	Interest expense				(473,979	)		(887,274	)		(2,095,331	)
	Interest income and other income (expense)				(71,139	)		1,196,250			471,812

			Subtotal		(545,118	)		308,976			(1,623,519	)

Income before provision for income taxes					2,562,564			1,447,239			5,725,637
Provision for income taxes					1,005,000			569,000			2,245,000

Net income				$	1,557,564		$	878,239		$	3,480,637

Earnings per share
	Basic			$	0.16		$	0.09		$	0.38

	Diluted			$	0.16		$	0.09		$	0.36

Weighted average shares - Basic					9,827,884			9,375,336			9,061,105

Weighted average shares - Diluted					9,960,098			9,866,162			9,698,048


		Common Stock				Treasury Stock

		Shares Issued		Par Value		Shares		Amount

Balance-October 31, 2000			9,662,736	$	9,662		1,018,788	$	(2,244,659	)
Stock options exercised $.001 par value			594,004		594		—		—
Tax benefit of stock options			—		—		—		—
Net Income			—		—		—		—

Balance-October 31, 2001			10,256,740		10,256		1,018,788		(2,244,659	)
Stock options exercised $.001 par value			465,000		465		—		—
Tax benefit of stock options			—		—		—		—
Components of comprehensive income:
	Net income		—		—		—		—
	Unrealized gain/loss on hedge, net of tax of $71,148		—		—		—		—
	Total comprehensive income

Balance-October 31, 2002			10,721,740		10,721		1,018,788		(2,244,659	)
Stock options exercised $.001 par value			300,000		300		—		—
Tax benefit of stock options			—		—		—		—
Components of comprehensive income:
	Net income		—		—		—		—
	Unrealized gain on hedge, net of tax of $28,050		—		—		—		—
	Total comprehensive income

Balance-October 31, 2003			11,021,740	$	11,021		1,018,788	$	(2,244,659	)


		For the Year Ended
		October 31,

		2003			2002			2001

NET INCOME:
	As reported	$	1,557,564		$	878,239		$	3,480,637
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(701,520	)		(641,258	)		(666,184	)

	Pro forma	$	856,044		$	236,981		$	2,814,453

EARNINGS PER SHARE:
	As reported – Basic	$	0.16		$	0.09		$	0.38
	As reported – Diluted	$	0.16		$	0.09		$	0.36
	Pro forma – Basic	$	0.09		$	0.03		$	0.31
	Pro forma – Diluted	$	0.09		$	0.03		$	0.29


	/s/ GRANT THORNTON LLP


		As of October 31, 2003				As of October 31, 2002
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Amortized intangible assets:
	Software production costs	$	1,291,021	$	1,233,066	$	1,291,021	$	1,053,066
	Other		190,780		134,089		190,780		93,564

Total amortized intangible assets		$	1,481,801	$	1,367,155	$	1,481,801	$	1,146,630


	Estimated
	Useful
	Lives		2003		2002

Building		20	$	2,397,954	$	2,397,954
Data processing and computer field equipment		3-5		4,280,916		4,121,640
Software development costs		N/A		6,687,540		5,889,556


	Estimated
	Useful
	Lives		2003		2002

Land		—		611,582		611,582
Office furniture		5		1,108,029		1,073,851
Auto		5		126,743		126,743
Other		3-7		511,320		634,213

Total property, plant and equipment				15,724,084		14,855,539
Less- accumulated depreciation				5,257,260		4,397,821

Total property, plant and equipment, net			$	10,466,824	$	10,457,718


	Commercial		Lodging		Installation
	System		System		and Service		Other
	Sales		Sales		Revenues		Revenue			Total

2003
Sales	$	21,304,223	$	6,245,653	$	23,338,915	$	1,792,512		$	52,681,303
Cost of sales		15,279,565		4,342,026		16,548,392		2,192,967			38,362,950
Gross profit		6,024,658		1,903,627		6,790,523		(400,455	)		14,318,353
2002
Sales	$	21,788,576	$	6,063,782	$	25,390,142	$	497,778		$	53,740,278
Cost of sales		17,117,974		4,265,528		18,803,143		1,956,071			42,142,716
Gross profit		4,670,602		1,798,254		6,586,999		(1,458,293	)		11,597,562
2001
Sales	$	41,964,072	$	10,063,623	$	33,105,152	$	921,182		$	86,054,029
Cost of sales		29,811,902		6,449,040		23,616,074		2,758,651			62,635,667
Gross profit		12,152,170		3,614,583		9,489,078		(1,837,469	)		23,418,362


		For the year ended October 31,

		2003		2002		2001

Reported net income		$	1,557,564	$	878,239	$	3,480,637
Add back: Goodwill amortization			—		—		869,115

Adjusted net income		$	1,557,564	$	878,239	$	4,349,752

Basic Earnings Per Share:
	Reported net income	$	0.16	$	0.09	$	0.38
	Add back: Goodwill amortization		—		—		0.10

	Adjusted net income	$	0.16	$	0.09	$	0.48

Diluted Earnings Per Share:
	Reported net income	$	0.16	$	0.09	$	0.36
	Add back: Goodwill amortization		—		—		0.09

	Adjusted net income	$	0.16	$	0.09	$	0.45


	2003		2002

Trade receivables	$	6,130,490	$	9,824,222
Less- reserve for doubtful accounts		335,541		345,516

Net trade receivables	$	5,794,949	$	9,478,706


	2003			2002

Balance, beginning of period	$	345,516		$	1,298,245
Reversal of provision for doubtful accounts		(45,907	)		(748,200	)
Net write-offs		35,932			(204,529	)

Balance, end of period	$	335,541		$	345,516


		2003		2002

Raw materials		$	366,305	$	354,380
Finished goods and spare parts			6,430,977		8,234,020

			6,797,282		8,588,400
Less- reserve for excess and obsolete inventories			1,182,380		786,619

	Total inventories, net	$	5,614,902	$	7,801,781


		2003		2002

Commissions		$	371,765	$	428,460
Interest			13,413		11,265
Payroll			424,243		417,171
Bonuses			363,794		213,735
Vacation			436,784		481,228
Other			259,025		416,912

Total current			1,869,024		1,968,771
Noncurrent liabilities			144,101		240,955

	Total accrued liabilities	$	2,013,125	$	2,209,726


		2003		2002

Service contracts		$	640,922	$	785,067
Warranty service			344,192		366,586
Customer deposits			488,137		897,171
Systems shipped but not installed			99,490		28,866
Other			47,582		1,051

Total current unearned revenue			1,620,323		2,078,741
Noncurrent unearned service contract revenue			229,910		233,859

	Total unearned revenue	$	1,850,233	$	2,312,600


	Year Ended
	October 31,

	2003			2002			2001

Statutory rate		34	%		34	%		34	%
State income taxes, net of federal benefit		5	%		5	%		5	%

Effective rate		39	%		39	%		39	%


			2003			2002

Deferred tax assets:
	Currently nondeductible reserves		$	453,413		$	299,530
	Accrued liabilities			345,021			166,762
	Prepaid service contracts			107,310			168,210
	Unamortized cost of service contracts			19,338			52,788
	Other			111,605			119,418

		Total deferred tax asset		1,036,687			806,708

Deferred tax liabilities:
	Tax income to be recognized on sales-type lease contracts			27,000			50,062
	Unamortized capitalized software development costs			22,718			93,279
	Depreciation and sale of assets			454,694			307,234
	Intangible assets			1,620,098			950,170

		Total deferred tax liability		2,124,510			1,400,745

		Net deferred tax liability	$	( 1,087,823	)	$	(594,037	)


	Outstanding Options
	(1988 and 2000 Plans)

				Price Per
	Number			Share

Balance, October 31, 2000		474,644		$	0.25	—	18.13
Granted		119,350			5.31	—	11.63
Exercised		(94,004	)		0.25	—	4.38
Forfeited		(58,850	)		9.06	—	18.13

Balance, October 31, 2001		441,140			0.31	—	18.13
Granted		277,900			3.63	—	5.80
Exercised		—					—
Forfeited		(44,100	)		3.63	—	18.13

Balance, October 31, 2002		674,940			0.31	—	18.13
Granted		5,000				3.00
Exercised		—					—
Forfeited		(56,340	)		3.63	—	18.13

Balance, October 31, 2003		623,600		$	0.31	—	18.13


	Outstanding Options

	Number			Price Per Share

Balance, October 31, 2000		2,150,400		$	0.25	—	15.53
Exercised		(500,000	)		0.25	—	0.25
Forfeited		(200,000	)			5.81

Balance, October 31, 2001		1,450,400			0.25	—	15.53
Granted		—					—
Exercised		(465,000	)			0.25

Balance, October 31, 2002		985,400			0.25	—	15.53
Granted		—					—
Exercised		(300,000	)			0.25
Forfeited		—					—

Balance, October 31, 2003		685,400		$	0.38	—	15.53


		Options Outstanding						Options Exercisable

						Weighted
						Average
		Number		Weighted		Remaining		Number		Weighted
Range of Exercise		Outstanding at		Average		Contractual Life		Exercisable at		Average
Prices		October 31, 2003		Exercise Price		(Years)		October 31, 2003		Exercise Price

$	0.31-1.64		110,072	$	0.81		0.08		110,072	$	0.81
$	3.63-5.81		956,928	$	5.11		6.20		686,001	$	5.64
$	9.06-12.31		62,450	$	10.07		6.60		19,900	$	9.15
$	15.53-18.13		179,550	$	17.55		6.40		179,550	$	17.55


		For the Year Ended October 31, 2003

		Income		Shares		Per Share
		(Numerator)		(Denominator)		Amount

Basic EPS
	Net income	$	1,557,564		9,827,884	$	0.16

	Dilutive effect of stock options				132,214

Diluted EPS
	Net income	$	1,557,564		9,960,098	$	0.16


		For the Year Ended October 31, 2002

		Income		Shares		Per Share
		(Numerator)		(Denominator)		Amount

Basic EPS
	Net income	$	878,239		9,375,336	$	0.09

	Dilutive effect of stock options				490,826

Diluted EPS
	Net income	$	878,239		9,866,162	$	0.09


		For the Year Ended October 31, 2001

		Income		Shares		Per Share
		(Numerator)		(Denominator)		Amount

Basic EPS
	Net income	$	3,480,637		9,061,105	$	0.38

	Dilutive effect of stock options				636,943

Diluted EPS
	Net income	$	3,480,637		9,698,048	$	0.36


		Sales-Type
		Lease Payments
		Receivable

	2004	$	977,074
	2005		278,938
	2006		159,547
	2007		7,419
	2008		—

			1,422,978
Less- imputed interest			169,870

Present value of minimum payments		$	1,253,108


	For the Fiscal Year Ended October 31, 2003

	Quarter Ended

	January 31,		April 30,		July 31,		October 31,
	2003		2003		2003		2003

	(in thousands, except per share data)
Net sales	$	15,431	$	11,765	$	12,910	$	12,575
Gross profit		3,919		3,436		3,561		3,402
Operating income		937		637		742		792
Net income		491		313		376		378


No.		Description

3(i)1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 and 3.2 to XETA’s Registration Statement on Form S-1 filed June 17, 1987, File No. 33-7841).

3(i)2		Amendment No. 1 to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.2 to XETA’s Post-Effective Amendment No. 1 to Registration Statement on Form S-8 filed July 28, 1999, File No. 33-62173).

3(i)3		Amendment No. 2 to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3(i)(c) to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).

3(i)4		Amendment No. 3 to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.4 to XETA’s Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed June 28, 2000).

3(ii)		Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii)(a) to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2001).

10.1*		Stock Purchase Option dated February 1, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.9 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).

10.2*		XETA Technologies 2000 Stock Option Plan (incorporated by reference to Exhibit 10.11 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).

10.3*		Stock Purchase Option dated August 11, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.14 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000).

10.4		HCX 5000/HCX 5000i® Authorized Distributor Agreement for 2003 dated January 1, 2003 between Hitachi Telecom (USA), Inc. and XETA Corporation.

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

10.5		Nortel Networks Premium Partner U. S. Agreement effective June 25, 2003 between Nortel Networks, Inc. and XETA Technologies, Inc. (incorporated by reference to Exhibit 10.1 to XETA’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003).


No.		Description

10.6		Avaya Inc. Reseller Master Terms and Conditions effective as of August 6, 2003 between Avaya Inc. and XETA Technologies, Inc., including Reseller Product Group Attachment for Enterprise Communication and Internetworking Solutions Product, Reseller Product Group Attachment: Octel®Products, and Addendum for GSA Schedule Contract Sales to the Federal Government.

10.7		Revolving Credit and Term Loan Agreement dated as of October 1, 2003 between XETA Technologies, Inc. and Bank of Oklahoma, N.A. (“BOK”)

10.8		Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement dated October 1, 2003 granted to BOK.

10.9		Promissory Note ($2,238,333.48 payable to BOK) dated October 1, 2003.

10.10		Promissory Note ($7,500,000 payable to BOK) dated October 1, 2003.

10.11		Promissory Note ($3,374,734.33 payable to BOK) dated October 1, 2003.

10.12		Security Agreement dated October 1, 2003 granted to BOK.

21		Subsidiaries of XETA Technologies, Inc.

23		Consent of Grant Thornton 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.


	XETA TECHNOLOGIES, INC.

January 13, 2004	By:	/s/ Jack R. Ingram

		Jack R. Ingram, Chief Executive Officer and President