10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-Q

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

For the quarterly period ended January 31, 2008

OR

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

Commission File Number 0-16231

XETA Technologies, Inc.

 (Exact name of registrant as specified in its charter)

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

918-664-8200

(Registrant’s telephone number, including area code)

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

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

Yes   x      No  o

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding at January 31, 2008
Common Stock, $.001 par value	10,231,214

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets - January 31, 2008 and October 31, 2007	3
Consolidated Statements of Operations - For the Three Months Ended January 31, 2008 and 2007	4
Consolidated Statement of Shareholders’ Equity - For the Three Months Ended January 31, 2008	5
Consolidated Statements of Cash Flows - For the Three Months Ended January 31, 2008 and 2007	6
Notes to Consolidated Financial Statements	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS	12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 4. CONTROLS AND PROCEDURES	16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	17
ITEM 1A. RISK FACTORS	17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	18
ITEM 5. OTHER INFORMATION	18
ITEM 6. EXHIBITS	18

2

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	January 31, 2008			October 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	151,321		$	402,918
Current portion of net investment in sales-type leases and other receivables	891,311			490,033
Trade accounts receivable, net	17,173,985			16,236,137
Inventories, net	5,232,275			4,296,574
Deferred tax asset, net	767,794			916,259
Prepaid taxes	31,288			19,737
Prepaid expenses and other assets	895,144			517,757
Total current assets	25,143,118			22,879,415
Noncurrent assets:
Goodwill	26,351,199			26,365,093
Intangible assets, net	265,435			104,042
Net investment in sales-type leases, less current portion above	136,519			136,493
Property, plant & equipment, net	10,601,999			10,610,820
Total noncurrent assets	37,355,152			37,216,448
Total assets	$	62,498,270		$	60,095,863
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	171,123		$	171,123
Revolving line of credit	4,818,748			2,758,660
Accounts payable	5,718,712			5,670,240
Current unearned revenue	2,692,798			2,212,247
Accrued liabilities	2,833,502			3,565,031
Total current liabilities	16,234,883			14,377,301
Noncurrent liabilities:
Long-term debt, less current portion above	1,311,759			1,354,530
Accrued long-term liability	177,700			211,300
Noncurrent unearned service revenue	80,245			81,650
Noncurrent deferred tax liability, net	4,716,526			4,631,917
Total noncurrent liabilities	6,286,230			6,279,397
Contingencies
Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,273,098 and 11,233,529 issued at January 31, 2008 and October 31, 2007, respectively	11,272			11,233
Paid-in capital	13,300,844			13,189,311
Retained earnings	28,872,509			28,483,280
Less treasury stock, at cost (1,001,883 shares at January 31, 2008 and 1,018,788 October 31, 2007)	(2,207,468		)	(2,244,659		)
Total shareholders’ equity	39,977,157			39,439,165
Total liabilities and shareholders’ equity	$	62,498,270		$	60,095,863

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

3

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended January 31,
	2008			2007
Systems sales	$	7,714,159		$	7,026,848
Services	9,724,942			8,776,763
Other revenues	510,634			247,068
Net sales and service revenues	17,949,735			16,050,679
Cost of systems sales	5,786,822			5,307,829
Services costs	7,130,924			6,348,097
Cost of other revenues & corporate COGS	441,379			443,140
Total cost of sales and service	13,359,125			12,099,066
Gross profit	4,590,610			3,951,613
Operating expenses
Selling, general and administrative	3,662,262			3,528,410
Amortization	202,898			140,277
Total operating expenses	3,865,160			3,668,687
Income from operations	725,450			282,926
Interest expense	(102,985		)	(10,387		)
Interest and other income	17,764			17,571
Total interest and other income (expense)	(85,221		)	7,184
Income before provision for income taxes	640,229			290,110
Provision for income taxes	251,000			120,000
Net income	$	389,229		$	170,110
Earnings per share
Basic	$	0.04		$	0.02
Diluted	$	0.04		$	0.02
Weighted average shares outstanding	10,224,971			10,214,741
Weighted average equivalent shares	10,249,693			10,214,741

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

4

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock
	Shares	Par		Treasury Stock					Paid-in			Retained
	Issued	Value		Shares		Amount			Capital			Earnings		Total
Balance- October 31, 2007	11,233,529	$	11,233	1,018,788		$	(2,244,659	)	$	13,189,311		$	28,483,280	$	39,439,165
Stock options exercised $.001 par value	22,664	22		—		—			90,193			—		90,215
Issuance of restricted common stock	16,905	17		(16,905	)	37,191			(37,208		)			—
Tax benefit of stock options	—	—		—		—			4,032			—		4,032
Stock based compensation	—	—		—		—			54,516			—		54,516
Net Income	—	—		—		—			—			389,229		389,229
Balance- January 31, 2008	11,273,098	$	11,272	1,001,883		$	(2,207,468	)	$	13,300,844		$	28,872,509	$	39,977,157

The accompanying notes are an integral part of this consolidated financial statement.

5

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended January 31,
	2008			2007
Cash flows from operating activities:
Net income	$	389,229		$	170,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	166,810			123,102
Amortization	202,899			140,277
Stock based compensation	54,516			23,935
Loss (gain) on sale of assets	425			(5,000		)
Provision for excess and obsolete inventory	25,500			25,500
Increase in deferred tax liability	102,535			146,243
Change in assets and liabilities, net of acquisitions:
(Increase) decrease in net investment in sales-type leases & other receivables	(401,304		)	168,834
(Increase) decrease in trade account receivables	(903,872		)	2,269,541
(Increase) decrease in inventories	(931,924		)	141,631
Decrease (increase) in deferred tax asset	148,465			(26,242		)
(Increase) in prepaid expenses and other assets	(377,387		)	(301,886		)
(Increase) in prepaid taxes	(11,551		)	(9,355		)
Increase (decrease) in accounts payable	48,472			(480,320		)
Increase in unearned revenue	404,992			469,847
(Decrease) increase in accrued liabilities and lease payable	(949,438		)	65,707
Total adjustments	(2,420,862		)	2,751,814
Net cash (used in) provided by operating activities	(2,031,633		)	2,921,924
Cash flows from investing activities:
Additions to property, plant & equipment	(327,496		)	(279,343		)
Proceeds from sale of assets				5,000
Net cash used in investing activities	(327,496		)	(274,343		)
Cash flows from financing activities:
Proceeds from draws on revolving line of credit	11,114,434			5,461,702
Principal payments on debt	(42,771		)	(42,773		)
Payments on revolving line of credit	(9,054,346		)	(7,836,062		)
Exercise of stock options	90,215
Net cash provided by (used in) financing activities	2,107,532			(2,417,133		)
Net (decrease) increase in cash and cash equivalents	(251,597		)	230,448
Cash and cash equivalents, beginning of period	402,918			174,567
Cash and cash equivalents, end of period	$	151,321		$	405,015
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amount capitalized of $0 in 2008 and $64,652 in 2007	$	97,220		$	29,226
Cash paid during the period for income taxes	$	11,519		$	9,355

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

6

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

January 31, 2008

(Unaudited)

1.  BASIS OF PRESENTATION:

XETA Technologies, Inc. (“XETA” or the “Company”) is a leading provider of communications solutions with nationwide sales and service. XETA serves a diverse group of business clients in sales, engineering, project management, installation, and service support.  The Company sells products produced by a variety of manufacturers including Avaya, Inc. (“Avaya”), Nortel Networks Corporation (“Nortel”), and Mitel Corporation (“Mitel”).  In addition, the Company manufactures and markets a line of proprietary call accounting systems to the hospitality industry.  XETA is an Oklahoma corporation.

The Company prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.  It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto made a part of the Company’s Annual Report on Form 10-K, Commission File No. 0-16231, which was filed with the Commission on January 7, 2008.  Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented.  All adjustments made were of a normal recurring nature.  The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

Segment Information

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

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 in the Company’s Form 10-K described above.  Company management evaluates a segment’s performance based on gross margins.  Assets are not allocated to the segments.  Sales to customers located outside of the U.S. are immaterial.

The following is a tabulation of business segment information for the three months ended January 31, 2008 and 2007.

	Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total
2008
Sales	$	9,724,942		$	6,029,935		$	1,684,224		$	510,634		$	17,949,735
Cost of sales	(7,130,924		)	(4,601,659		)	(1,185,163		)	(441,379		)	(13,359,125		)
Gross profit	$	2,594,018		$	1,428,276		$	499,061		$	69,255		$	4,590,610
2007
Sales	$	8,776,763		$	5,252,398		$	1,774,450		$	247,068		$	16,050,679
Cost of sales	(6,348,097		)	(3,984,231		)	(1,323,598		)	(443,140		)	(12,099,066		)
Gross profit	$	2,428,666		$	1,268,167		$	450,852		$	(196,072	)	$	3,951,613

7

Stock-Based Compensation Plans

The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”).  SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements.  The valuation provisions of SFAS 123(R) apply to new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled.  The Company adopted on a prospective basis SFAS 123(R) beginning November 1, 2005 for stock-based compensation awards granted after that date and for unvested awards outstanding at that date using the modified prospective application method.  The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense as appropriate in the consolidated statements of operations on a straight-line basis over the vesting period.  Compensation expense was recognized in the statement of operations as follows:

	2008		2007
Three months ended January 31,	$	54,516	$	23,935

Use of Estimates

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

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions.  The Company adopted this interpretation on November 1, 2007 and there was no impact to the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs are recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  The adoption of SFAS No. 141(R) will change the accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No. 160).  SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity.  SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2010.  As of January 31, 2008, the Company did not have any minority interests, therefore the adoption of SFAS No. 160 is not expected to have an impact on our consolidated financial statements.

8

2.  ACCOUNTS RECEIVABLE:

	January 31, 2008			(Audited) October 31, 2007
Trade receivables	$	17,327,095		$	16,411,981
Less reserve for doubtful accounts	(153,110		)	(175,844		)
Net trade receivables	$	17,173,985		$	16,236,137

3.  INVENTORIES:

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

	January 31, 2008			(Audited) October 31, 2007
Finished goods and spare parts	$	6,023,867		$	5,068,227
Less- reserve for excess and obsolete inventories	(791,592		)	(771,653		)
Total inventories, net	$	5,232,275		$	4,296,574

4.  PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following:

	Estimated Useful Lives	January 31, 2008			(Audited) October 31, 2007
Building and building improvements	3-20	$	2,729,604		$	2,686,753
Data processing and computer field equipment	2-7	2,643,296			2,556,878
Software development costs, work-in-process	N/A	3,869,749			3,792,567
Software development costs of components placed Into service	3-10	4,442,988			4,355,953
Hardware	3-5	599,751			599,751
Land	—	611,582			611,582
Office furniture	5-7	954,944			947,094
Auto	5	528,793			539,184
Other	3-7	253,193			239,533
Total property, plant and equipment		16,633,900			16,329,295
Less- accumulated depreciation		(6,031,901		)	(5,718,475		)
Total property, plant and equipment, net		$	10,601,999		$	10,610,820

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 $0 and $64,652 in interest costs in the three months ended January 31, 2008 and 2007, respectively.

9

5.  INCOME TAXES:

The Company has recorded a tax provision of $251,000 or 39% and $120,000 or 41% for the three months ended January 31, 2008 and 2007, respectively, reflecting the statutory federal tax rate of 34% plus a blended state income tax rate of approximately 5% and the impact of minimum income tax payments in certain states.  The Company currently estimates its annual effective income tax rate to be approximately 40% for fiscal 2008, compared to a 40% effective income tax rate in fiscal 2007.

6.  CREDIT AGREEMENTS:

The Company’s credit facility consists of a revolving credit and term loan agreement with a commercial bank including a mortgage agreement maturing on September 30, 2009 and amortizing based on a 13 year life and a $7.5 million revolving credit agreement to finance growth in working capital.  Trade accounts receivable and inventories collateralize the revolving line of credit At January 31, 2008 and October 31, 2007, the Company had approximately $4.819 million and $2.759 million, respectively, outstanding on the revolving line of credit.  The Company had approximately $2.7 million available under the revolving line of credit at January 31, 2008.  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 23, 2008.  Long-term debt consisted of the following:

	January 31, 2008		(Audited) October 31, 2007
Real estate term note, payable in monthly installments of $14,257 plus interest, plus a fixed payment of $1,198,061 due September 30, 2009, collateralized by a first mortgage on the Company’s building	$	1,482,882	$	1,525,653
Less-current maturities	171,123		171,123
Total long-term debt, less current maturities	$	1,311,759	$	1,354,530

Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (3.14% at January 31, 2008) plus 1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’s prime rate (6.0% at January 31, 2008) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio.  At January 31, 2008, the Company was paying 4.875% on the revolving line of credit borrowings and 6.1% 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 earnings before interest, taxes, depreciation and amortization, limitations on capital spending, and debt service coverage requirements.  The Company was in compliance with these covenants at January 31, 2008.

7.  EARNINGS PER SHARE:

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

10

	For the Three Months Ended January 31, 2008
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	389,229	10,224,971	$	0.04
Dilutive effect of stock options			24,722
Diluted EPS
Net income	$	389,229	10,249,693	$	0.04

	For the Three Months Ended January 31, 2007
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	170,110	10,214,741	$	0.02
Dilutive effect of stock options			—
Diluted EPS
Net income	$	170,110	10,214,741	$	0.02

Options to purchase 774,900 shares of common stock at an average exercise price of $8.43 and 1,104,068  shares of common stock at an average exercise price of $7.18 were not included in the computation of diluted earnings per share for the three months ended January 31, 2008 and 2007, respectively, because inclusion of these options would be antidilutive.

11

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Preliminary Note Regarding Forward-Looking Statements

In the following discussion, we make forward-looking statements about future events, performance and results.  Such statements are not guarantees of performance, but rather reflect our current expectations, estimates, and forecasts about the industry and markets where we operate, based on information available to us.   Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” “may”, “plans,” “believes,” “intends,” “projects,” “estimates,” “targets,” “may,” “should” and similar words or expressions.  These statements are subject to risks and uncertainties that are difficult to predict or are beyond our control, such as customer demand for advanced communications products; capital spending trends within our market; delays in installation schedules for the Miami-Dade County Public School District orders; our ability to successfully develop the Mitel product and services offering; the financial condition of our suppliers and changes in their distribution strategies and support; technological changes; fluctuating margins and product mix; failure to expand our wholesale service relationships; the ability to attract and retain highly skilled personnel and technical competencies; and intense competition.  These and other risks and uncertainties are discussed under the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 2007 (filed with the Commission on January 7, 2008), and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report.  Because of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements.  Consequently, we caution investors to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties.  The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

Overview

Strategy.

In fiscal 2008, we will continue to focus on three primary strategies:  acquire, penetrate, and retain targeted customers; expand our wholesale service offerings; and improve alignment with our major business partners.

Our sales efforts target large, multi-location, national, or super-regional customers.  Our national technical footprint and 24/7/365 call center are complimentary to the needs of these customers.  Additionally, these larger enterprises often have a mixture of manufacturer platforms within their communications equipment portfolio and our ability to sell and service both the Avaya and Nortel product lines is an important competitive advantage.  Additionally, because of our extensive array of products and services, we enjoy multiple sales opportunities with these customers.  These include new product sales, implementation of advanced applications, and a variety of potential service relationships.  Once we establish a relationship with a customer, we search for opportunities to penetrate deeper into the account.  We do this by assessing the customer’s needs, proposing appropriate technologies, establishing or expanding the service relationship, and proposing equipment and service solutions to other divisions or subsidiaries.

We launched our wholesale service offering in fiscal 2006 and its success was a key factor in our fiscal 2007 revenue growth and a significant contributor to our recurring revenues.  Under this service offering, we partner with manufacturers, network service providers and systems integrators to provide services to their end-user customers.  In many instances, we provide field resources to carry out service responsibilities.  However, under a full outsourcing arrangement we may provide a broader range of services, including call center support, remote technical support, on-site labor and spare parts to a particular end-user.  Our entry into the wholesale services market has been successful because we provide excellent service to end-user customers and demonstrate a willingness to create and execute flexible service programs and billing arrangements.  The continued success of this strategic initiative is a vital ingredient to our long-term goal of shifting our revenue mix toward more recurring services revenues.

Finally, we strive to align our company’s sales, marketing, and services programs with those of our manufacturing partners.  Avaya and Nortel approach the communications technology market differently and therefore we have assigned separate executive sales management to each manufacturer’s products and services.  Our Avaya sales and marketing efforts focus on partnering with the Avaya national sales force to

12

sell equipment to large and medium sized enterprises and to sell Avaya implementation and post-warranty maintenance contracts.  Our Nortel initiatives focus on creating relationships with Nortel’s regional sales management to sell equipment and applications.  In addition, we work to deepen our relationships with key Nortel services decision makers to create wholesale service offerings for large Nortel end-users.  Since starting this initiative in late fiscal 2006, we have significantly improved our relationships and penetration with both Nortel and Avaya, the result is a demonstrable increase in equipment and services revenues.

Effective November 1, 2007, we completed the acquisition of the commercial division of HCI Technologies, Inc. (“HCI”)  Under the terms of the acquisition, we assumed the service responsibilities and the associated revenue stream with all of HCI’s non-Federal government customers.  No cash was paid at closing; however, in exchange for the assets and customer relationships purchased, we agreed to pay HCI a portion of the gross profits earned from the service relationships in place at closing.  These payments continue on a quarterly basis for three years.  Before the acquisition, the Company occasionally engaged HCI as a third-party contractor to provide technical services to our customers.  At the close, HCI owed XETA $43,000 in accounts receivable plus accrued interest of $6,800.  The terms of the acquisition agreementallow us to deduct these amounts from any earn-out payments.  We have recorded the assets acquired, including an intangible asset related to the value of the customer relationships, at their fair values on the date of acquisition.  We have also recorded an initial estimate of the earn-out liability.  The assets acquired in this transaction were not material to our financial statements.

Operating Summary.

In the first quarter of fiscal 2008, we earned net income of $389,000 on revenues of $17.9 million compared to net income of $170,000 on revenues of $16.1 million in the first quarter of last year.  These results reflect our successful execution of the strategies discussed above and other contributing factors that we discuss in more detail under “Results of Operations” below.

Financial Position Summary.

Our financial condition was relatively unchanged during the first quarter of fiscal 2008.  Our working capital increased approximately 5%; however temporary growth in our receivables and inventory balances resulted in increased borrowings on our working capital revolver in the first quarter of fiscal 2008.  We discuss these and other financial items in more detail under “Financial Condition” below.

The following discussion presents additional information regarding our financial condition and results of operations for the three month period ended January 31, 2008 and 2007 and should be read in conjunction with our comments above as well as the “Risk Factors” section below.

Financial Condition

Cash used by operations for the three months ended January 31, 2008 was $2.0 million.  Increases in accounts receivable and inventories were partially offset by net income and non-cash charges resulting in the cash deficit in the first quarter.  During the quarter, our accounts receivable balances grew by approximately $904,000 reflecting temporary declines in the pace of completion and billing of complex equipment projects.  These delays reflect the surge in systems shipped toward the end of fiscal 2007 coupled with the complexity of many of those systems, which delayed final customer acceptance, and billing of the systems.  Another contributing factor to the increase in accounts receivable was the initiation of our large project with the Miami-Dade County Public Schools (“M-DCPS”).  We expect this project to produce over $10 million in revenues during fiscal 2008.  In the first quarter, we began installing the systems shipped at the end of fiscal 2007.  Shipments and installations continued to accelerate throughout the quarter to meet the customer’s expectations.  The billing and collecting of these projects is a complicated process requiring funding from both M-DCPS and the Federal government.  While we do not expect any prolonged difficulties regarding the collection of M-DCPS receivables, navigating through the complexities of the initial billing and collections cycle negatively affected our first quarter cash flows.

In addition to the cash used by operations, we invested approximately $327,000 in capital projects, including $163,000 in equipment and fixtures, as part of our normal replacement and refurbishment cycles.  Additionally, we invested $164,000 in the continued implementation of Oracle’s eBusiness Suite..  Early in the second fiscal quarter of fiscal 2008, we completed the cutover of the last portion of our functional

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operations to the platform.  During the remainder of the year, we expect to implement additional features including, sales management, customer relationship management, and an online service ticket initiation and tracking system.

At January 31, 2008 our total borrowings were $6.3 million, consisting of a mortgage on our headquarters building of $1.5 million and $4.8 million due on our revolving line of credit.  At January 31, 2008 there was $2.7 million available under the revolver to meet working capital needs.  We believe that the current amount of working capital available under our revolving line of credit will be sufficient to meet our needs for the remainder of fiscal 2008.  In addition, we believe that we could arrange supplemental short-term financing under acceptable terms and prices should the need arise.

There have been no stock repurchases to date under the repurchase program announced in October 2006.  Under the program, our board of directors authorized the Company to utilize up to $960,000 per year to repurchase our common stock in open market, block purchases or in privately negotiated transactions and at prices we deem appropriate.

The table below presents our contractual obligations at January 31, 2008 as well as payment obligations over the next five years:

			Payments due by period
Contractual Obligations	Total		Less than 1 year		2 — 3 Years		4 — 5 Years
Long-term debt	$	1,619,905	$	256,815	$	1,363,090	$	—
Operating leases	601,715		316,849		281,809		3,057
Total	$	2,221,620	$	573,664	$	1,644,899	$	3,057

Results of Operations

In the first quarter of fiscal 2008, our revenues increased $1.9 million or 12% compared to the first quarter last year and our net income increased $219,000 or 129%.  These positive results reflect improvements in all of our major revenue categories, partially offset by lower gross profit margins on services revenues and higher operating costs.  The narrative below provides further explanation of these results.

Services Revenues.

Services revenues consist of the following:

	For the Three Months Ended January 31,
	2008		2007
Contract & T&M	$	7,208,000	$	6,005,000
Implementation	2,042,000		2,132,000
Cabling	475,000		640,000
Total Services revenues	$	9,725,000	$	8,777,000

Services revenues increased 11% in first quarter of fiscal 2008 compared to last year and included a 20% increase in contract and time and materials (“T&M”) revenues which was partially offset by decreases in implementation and cabling revenues of 4% and 26%, respectively.  The increase in contract and T&M revenues was generated primarily from new customer relationships secured in the acquisition of HCI which was effective on November 1, 2007.  In accordance with the terms of the acquisition, we assumed the service responsibilities for HCI’s commercial maintenance contracts as well as stepping in HCI’s position on many customer relationships that produce recurring T&M revenues.  We did not secure any major organic additions to our base of new contract maintenance or contracted T&M customers during the first quarter.  However, as discussed above under “Strategy”, the pursuit of contract and T&M revenues, particularly under our wholesale service program is a key strategic initiative in fiscal 2008 and we expect it to be the primary driver of services revenue growth during the 2008 fiscal year.

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Implementation revenues were slightly less in the first quarter of fiscal 2008 as compared to last year, primarily because of a single, large installation project that occurred in the first quarter of fiscal 2007.  In addition, our first quarter implementation revenues were slightly lower than our expectations due to customer-created delays early in the quarter related to the installation of the first set of M-DCPS orders.

Cabling revenues were down approximately 26% compared to the first quarter of fiscal 2007 due to construction delays at customer locations.  Frequently, our significant cabling projects occur in conjunction with new construction or major renovations.  As is common in the construction industry, delays by other contractors and weather often impact our portion of the project.

Systems Sales

System sales increased approximately 10% in the first quarter of fiscal 2008 compared to last year.  This increase reflects a 15% increase in sales of systems to commercial customers.  We achieved this increase despite higher than expected seasonal weakness in the quarter and significantly lower sales of systems and equipment to the Federal government.  The lower Federal government sales reflects the loss of a contract to supply small phone systems to the U.S. Senate as well as continued budget approval delays by Congress.  Our sales of systems to  lodging customers declined approximately 5% in the first quarter of fiscal 2008 compared to last year reflecting shipments deferred to the second quarter.  Our Lodging equipment order rates and backlogs are higher in fiscal 2008 to date compared to fiscal 2007, giving us confidence that this segment of our business remains at or above our expectations for the year.  Overall, our system sales continue to be an unpredictable segment of our business as the timing of the receipt of orders, product delivery, and customer installation schedules may fluctuate dramatically.  Systems orders’ backlogs typically range from thirty to forty-five days providing limited visibility of future results for this line of business.

Gross Margins.

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

	For the Three Months Ended January 31,
Gross Margins	2008		2007
Services revenues	26.7	%	27.7	%
Systems sales	25.0	%	24.5	%
Other revenues	89.0	%	62.1	%
Corporate cost of goods sold	-2.2	%	-2.2	%
Total	25.6	%	24.6	%

The decline in gross margins earned on our Services business in the first quarter reflects a higher cost structure and lower implementation and cabling revenues.  We experienced higher Services costs in the first quarter of fiscal 2008 due to higher personnel related expenses, increased training costs, and the opening of a Services branch office in Miami, FL to support our M-DCPS implementation and Services project.  This higher cost structure, coupled with lower implementation and cabling revenues resulted in the erosion of services margins.  Our two to four year target for services gross margins is 30% to 35%. Achieving this target is a key ingredient to establishing long-term profitability for the Company.

Gross margins on systems sales in the first quarter were up slightly over last year and within our 23% to 25% expectations for systems revenues. The gross margins on systems sold to commercial customers were down slightly compared to the first quarter of last year due entirely to lower gross margins on sales of systems and equipment to the Federal government.  Gross margins on sales of systems to lodging customers were up in the first quarter compared to last year due to a favorable mix of larger, more profitable systems sold during the quarter.  We continue to receive strong pricing support from our vendors in the form of project-specific discounts and incentive rebates.  These incentives are material to our gross margins and we work diligently to maximize this support; however, no assurance can be given that future support will continue at historical levels.

A final component to our gross margins is the margins earned on other revenues and our corporate cost of goods sold.  We earn the majority of our other revenues from the sale of Avaya maintenance contracts on which we earn either a commission or gross profit.  We have no continuing service obligation associated with these revenues and gross profits.  In the first quarter we enjoyed significantly increased commission

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revenues from sales of Avaya maintenance contracts and these revenues were material to our overall operating income.  This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, the customer type as defined by Avaya, and the number of years that customers contract for services.  Consequently, it is unlikely that we can sustain the results enjoyed in the first quarter throughout the fiscal year.  Other revenues may also include sales and cost of goods sold on equipment or services outside our normal provisioning processes. These revenues vary significantly in both sales volume and gross margins earned.  Corporate cost of goods sold represents our material logistics and purchasing functions that support all of our revenue segments.

Operating Expenses.

Our total operating expenses increased $196,000 or 5% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.  Operating expenses were 21.5% of revenues in the first quarter compared to 22.9% last year.  This improvement in operating expense margins included the absorption of $50,000 in increased amortization expense resulting from increased utilization of the Company’s Oracle platform.  In addition, improved sales and marketing incentives from vendors in the first quarter offset increases in sales and general and administrative expenses.  The incentives we receive from vendors to support the sales and marketing of their products come in the form of payments for growth in sales of their products; reimbursement for specific, pre-approved marketing programs; and additions to sales headcount.  The timing of these incentives is unpredictable and frequently we must rely upon suppliers to calculate the value of the award.  Also, incentive programs and rules are frequently revised, replaced by new programs, or halted altogether as manufacturers attempt to influence the behavior of their dealers and respond to market conditions.  This unpredictability results in fluctuations in the size and timing of recognition of these items in our financial statements.  Despite these factors, we make every reasonable effort to understand the various programs and maximize their benefit.  The amount of incentives recognized during our first quarter was higher than our normal run-rates, and may not be sustainable throughout the remainder of the year.  We have anticipate our operating expense margins to decline to between 18% and 20% of revenues over the next two to four years through economies of scale and improved operating efficiencies.

Interest Expense and Other Income.

Net interest and other expense was $85,000 in the first quarter of fiscal 2008 compared to $7,000 in net other income in the first quarter of fiscal 2007.  This increase in expense reflects higher average borrowings in first quarter as described under “Financial Condition” above and the discontinuation of capitalizing interest expense related to the implementation of Company’s new software platform.

Tax Provision.

We recorded a combined federal and state tax provision of 39% for the first quarter of fiscal 2008 compared to a tax provision of 41% in the first quarter of fiscal 2007.  The tax provision reflects the effective federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred.  Generally, we expect our tax provision rate to be approximately 40%.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations results primarily from changes in interest rates.  We did not use derivative financial instruments for speculative or trading purposes during the three month period ended January 31, 2008.

Interest Rate Risk.   Due to utilization of variable interest rate debt, we are subject to the risk of fluctuation in interest rates in the normal course of business.  Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate (3.14% at January 31, 2008) plus 1.25% to 2.75% or the bank’s prime rate (6.0% at January 31, 2008) less 0.0% to minus 1.125%.  A hypothetical 1% increase in interest rates would not have a material impact on our financial position or cash flows.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  Based on an evaluation conducted as of January 31, 2008 by our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer

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(“CFO”), our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to reasonably ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls.  There were no changes in our internal controls or in other factors that could materially affect, or is reasonably likely to materially affect, these controls subsequent to the date of their evaluation.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

None.

ITEM 1A.  RISK FACTORS.

The information presented below is an update to the “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2007 and should be read in conjunction therewith.  Except as set forth below, the Risk Factors included in the Company’s Form 10-K for its 2007 fiscal year have not materially changed.

Avaya’s strategies regarding the provision of services to its customers are changing dramatically and may have a material impact on our operating results.

Avaya is repositioning itself as a hardware and software vendor providing a wide range of voice communications hardware and applications to its customers.  As part of this strategy, Avaya is segmenting its hardware maintenance and software support.  The new software support offerings include technical support for specific voice applications and upgrade services to ensure customers can access all software patches and upgrades..

If in connection with the series of orders from the Miami-Dade County Public School system (“MDCPS”), we incur delays in our anticipated installation schedule, significant installation challenges, product performance issues, weather-related catastrophes and/or delays in the collection of amounts due, our expected revenues, gross profits, and cash flows in fiscal 2008 from the sale of equipment and installation services to MDCPS could be materially different than expected.

In November, 2007, we announced the award of a series of orders from M-DCPS totaling in excess of $10 million to provide and install communications equipment.  In the first quarter of fiscal 2008, we installed the initial systems shipped at the end of fiscal 2007.  After a customer-driven delay in installations in November, shipments and installations continued satisfactorily throughout the remainder of the quarter.  We continue to expect the remaining revenues and gross profits on these orders to be recognized in fiscal 2008 based on current installation schedules.  However, over the course of the year we may experience delays in the installation schedule due to circumstances out of our control as we are reliant on M-DCPS personnel to assist us in coordinating each installation.  Furthermore, we could experience delays or a halt in installations due to a variety of other factors including catastrophic weather conditions such as hurricanes which are prone to the Miami area.  Additionally, unexpected technical installation challenges or product performance issues could occur, also resulting in delays in the recognition of revenues or erosion of gross profits from these orders.  Lastly, we have experienced delays in successfully billing and collecting the amounts due on the first wave of installations.  These delays increased our short-term borrowings and consequently negatively affected our operating results.  We expect to work through these initial processing details and begin to improve the cash flows on this project during our second quarter.  However, if billing and collection difficulties persist, it

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would create additional interest expense for us and consume borrowing capacity under our revolving line of credit.

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.  OTHER INFORMATION.

(a)  None.

(b)   On January 23, 2008 the Company’s Board of Directors approved an amendment to the Company’s bylaws which provides for an advance notice procedure for shareholders to nominate individuals for election to the Board (as well as to submit shareholder proposals for consideration at an annual meeting).  Shareholders who wish to nominate an individual for election to the Board must comply with the advance notice deadline set forth in the bylaws.  This deadline requires that the shareholder provide the Company with written notice no later than 120 days in advance of the anniversary date that proxy materials for the previous year’s annual meeting were first mailed to shareholders; provided, however, that if the meeting date has changed by more than 30 days from the anniversary date of last year’s meeting, then the shareholder must notify the Company and the Company must receive such advance notice no later than the 10^th day following the date on which notice of the meeting is first mailed to shareholders or is publicly announced.   The notice must also include all of the information specified in the new bylaw provision.  The new bylaw provision is set forth in Article 2, Section 2.11 of the Company’s amended and restated bylaws, which are filed as Exhibit 3(ii) to this report.  This bylaw amendment was also reported by the Company in its report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on January 29, 2008 and is described in the Company’s proxy statement to be filed with the Commission on February 27, 2008.

ITEM 6.   EXHIBITS.

Exhibits (filed herewith):

SEC Exhibit No.	Description
3(ii)	Amended and Restated Bylaws of XETA Technologies, Inc. dated January 23, 2008
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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SIGNATURES

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

	XETA Technologies, Inc. (Registrant)
Dated: March 5, 2008	By:	/s/ Greg D. Forrest
		Greg D. Forrest
		Chief Executive Officer
Dated: March 5, 2008	By:	/s/ Robert D. Wagner
		Robert B. Wagner
		Chief Financial Officer

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EXHIBIT INDEX

SEC Exhibit No.	Description
3(ii)	Amended and Restated Bylaws of XETA Technologies, Inc. dated January 23, 2008
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-3.(II)

Exhibit 3.(iii)

AMENDED AND RESTATED

BYLAWS OF

XETA TECHNOLOGIES, INC.

(as adopted January 23, 2008)

ARTICLE 1

OFFICES

                1.1           The principal office of the Corporation shall be located at 1814 West Tacoma, Broken Arrow, State of Oklahoma.  The Corporation may have such other offices either within or without the State of Oklahoma, as the Board of Directors may designate or as the business of the Corporation may require from time to time.

ARTICLE 2

SHAREHOLDERS

                2.1           Annual Meeting.  The annual meeting of the shareholders shall be held each year in March on a date to be selected by the Board of Directors, for the purpose of electing Directors and for the transaction of such other business as may come before the meeting.  If the day fixed for the annual meeting shall be a legal holiday in the State in which the annual meeting is to be held, such meeting shall be held on the next succeeding business day.  If the election of Directors shall not be held on the day designated herein for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as is convenient.

                2.2           Special Meetings.  Special meetings of the shareholders, for any purpose, unless otherwise prescribed by statute or the Certificate of Incorporation, may be called by the President or by the Board of Directors, and shall be called by the President at the request of the holders of not less than ten percent (10%) of all the outstanding shares of the Corporation entitled to vote at the meeting, which request shall state the purpose or purposes of the proposed meeting.  Business at special meetings shall be limited to the purpose or purposes stated in the call of said meeting.

                2.3           Place of Meeting.  The annual meeting or any special meeting shall be held at such location as may be determined by the Corporation’s Board of Directors.  A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of Oklahoma, unless otherwise prescribed by statute, as the place for the holding of such meeting.  If no designation is made, or if a special meeting be otherwise called, the place of the meeting shall be the principal office of the Corporation.

                2.4           Notice of Meeting.  Written notice stating the place, date, and hour of the meeting and, in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered no less than ten (10) nor more than sixty (60) days before the date of the meeting,

either personally or by mail, by or at the direction of the President, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting.  If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation.

                2.5           Closing of Transfer Books or Fixing of Record Date.  For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, sixty (60) days.  If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed not less than ten (10) days before the date of such meeting.  In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken.  If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day next preceding the day upon which such meeting is called, or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.  When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.

                2.6           Voting Lists.  The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each.  Such list, for a period of at least ten (10) days prior to such meeting, shall be open to inspection by any shareholder, during usual business hours, either at a place within the city where the meeting is to be held, which place shall be specified on the notice of the meeting, or, if not so specified, at the place where the meeting is to be held.  Such list shall also be produced and kept at the time and place of the meeting during the entire time thereof, and shall be open to the inspection of any shareholder who is present.  The stock ledger shall be the only evidence as to the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders.

                2.7           Quorum.  The holders of a majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, except as otherwise provided by statute or the Certificate of Incorporation.  If less than a majority of the outstanding shares are so represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice.  At such adjourned meeting, any business may be transacted which might have been transacted at the original meeting, provided a quorum shall be represented.  the shareholders so represented at a duly organized meeting at which a quorum is present may continue to transact business until

2

adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

                2.8           Proxies.  At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact, and bearing a date not more than eleven (11) months prior to said meeting unless said instrument provides for a longer period.  Such proxy shall be filed with the Secretary of the Corporation at or before the time of the meeting.

                2.9           Voting of Shares.  When a quorum is present at a meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a different vote is required, in which case such express provisions shall govern and control the decision of such question.

                2.10         Voting of Shares by Certain Holders.  Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provisions, as the Board of Directors of such corporation may determine.

                Shares held by an administrator, executor, guardian or conservator may be voted by him either in person or by proxy, without a transfer of such shares into his name.  Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name.

                Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed.

                A shareholder whose shares are pledged shall be entitled to vote such shares unless in the transfer by the pledgor on the books of the Corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such stock and vote thereon.

                Shares of its own stock belonging to the Corporation, except shares held by it in a fiduciary capacity, shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time.

2.11     Conduct of Meetings.   At a meeting of the shareholders, only such business may be brought before the meeting that is either:

(i)specified in the notice of meeting given by or at the direction of the Board of Directors,

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(ii)brought by or at the discretion of the Board of Directors; or

(iii)otherwise properly brought by any shareholder of the Corporation who (A) is a shareholder of record on the date of giving the notice provided for in this Section 2.11 and on the record date for the determination of shareholders entitled to notice of and to vote at such annual meeting, and (B) complies with the notice procedures set forth herein.

For business, including director nominations, to be properly brought before a meeting by a shareholder pursuant to clause (iii) above, the business must be a proper subject to be brought before the meeting and the shareholder must have given timely notice thereof in writing to the Secretary. To be timely as to an annual meeting of shareholders, a shareholder’s notice must be received at the principal executive office of the Corporation not less than 120 calendar days before the anniversary of the date on which the Corporation first mailed its proxy materials for the previous year’s annual meeting; provided however, that if the date of the meeting is changed by more than 30 days from the date of the previous year’s meeting, notice by a shareholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed to shareholders or public disclosure of such date was made.  To be timely as to a special meeting of shareholders, a shareholder notice must be received not later than the call of the meeting as provided for in Section 2.2 of this Article 2.   Such shareholder notice shall set forth, as to each matter the shareholder proposes to bring before the meeting: (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (2) the name and record address of the shareholder proposing such business, (3) the class and number of shares of the Corporation which are beneficially owned by the shareholder, (4) a representation that the shareholder is a holder of record of capital stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such business, and (5) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of the shareholder in such business.

Notwithstanding anything in these By-laws to the contrary, no business shall be proper at a meeting unless brought before it in accordance with the procedures set forth herein.  Further, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth herein.

                Notwithstanding anything provided herein to the contrary, the procedures for submission of shareholder proposals have not expended, altered or affected in any manner, whatever rights or limitations may exist regarding the ability of a shareholder of the Corporation to submit a proposal for consideration by shareholders of the Corporation under Oklahoma or federal law.

                2.12         Informal Action by Shareholders.  Unless otherwise provided for in the Certificate of Incorporation, any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting,

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without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.  Such consent shall be filed the Secretary of the Corporation and made a part of the corporate records, and notice of the taking of such action, if by less than unanimous written consent, shall be given to those shareholders who have not consented in writing, within five (5) days of the taking of such action.

ARTICLE 3

BOARD OF DIRECTORS

                3.1           General Powers.  The property and business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation, and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders.

                3.2           Number, Tenure and Qualifications.  The number of Directors constituting the whole Board of Directors of the Corporation shall not be less the one (1) nor more than twelve (12), as the Board may determine by resolution from time to time.  Unless an election is contested, a Board resolution nominating persons for election shall suffice to evidence the fixing of the number of Directors constituting the Board.  All Directors shall be elected for a term of one (1) year at the annual meeting of Shareholders, and shall hold office until his successor has been elected and qualified, unless removed earlier in accordance with Section 3.3 of these Bylaws or upon his death, resignation or disqualification.

                3.3           Removal of Directors.  The entire Board of Directors or any individual Director may be removed from office with cause by a vote of the shareholders holding a majority of the outstanding shares entitled to vote, or may be removed without cause by a vote of the shareholders holding sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote at any annual or special meeting of said shareholders.  Should said Board of Directors or any one or more Directors be so removed at any annual or special meeting of the shareholders, new Directors may be elected at the same meeting.

                3.4           Regular Meetings.  A regular meeting of the Board of Directors shall be held at such time and at such place as shall be fixed by the vote of the shareholders at the meeting at which Directors are elected without other notice than the resolution of the shareholders fixing said time and place of meeting.  The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution.

                3.5           Special Meetings.  Special meetings of the Board of Directors may be called by or at the request of the President or any two (2) Directors.  The person or persons authorized to call special meetings of the Board of Directors may fix the place for holding any special meeting of the Board of Directors called by them.

                3.6           Notice.  Notice of any special meeting shall be given at least seven (7) days previously thereto by written notice delivered personally or mailed to each Director at his

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business address, or by telegram.  If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid.  If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company.  Any Director may waive notice of any meeting.  The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.

                3.7           Quorum.  A majority of the number of Directors fixed by Article 3.2 hereof shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice.  When the Board of Directors consists of one Director, then one Director shall constitute a quorum.

                3.8           Manner of Acting.  The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

                3.9           Vacancies.  Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining Directors though less than a quorum of the Board of Directors.  A Director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office.  Any Directorship to be filled by reason of an increase in the number of Directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose.

                3.10         Compensation.  Directors, as such, may receive compensation in such amounts and in such forms as the Board of Directors shall determine from time to time by resolution.  No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor.

                3.11         Presumption of Assent.  A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as Secretary of the Corporation immediately after the adjournment of the meeting.  Such right to dissent shall not apply to a Director who voted in favor of such action.

                3.12         Committees.  The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of one (1) or more of the Directors of the Corporation, which, to the extent provided in the resolution and permitted by law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, except where action by the Board of Directors is required by law, and shall have the power to authorize the seal of the Corporation to be affixed to all papers which may require it.  Such committees shall have such names as may be determined from time to time by resolution adopted by the whole Board, and shall keep regular minutes of their proceedings and report the same to the Board of Directors when required.

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                3.13         Informal Action by Directors.  Any action required or permitted to be taken at a meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

                3.14         Telephone Conference.  Members of the Board of Directors, or any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other.  Such participation shall constitute presence in person at such meeting.

ARTICLE 4

OFFICERS

                4.1           Number.  The Officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors.  The office of Vice President may be held vacant.  Such other Officers, assistant Officers, and agents as may be deemed necessary may be elected or appointed by the Board of Directors.  Two (2) or more offices may be held at the same time by one person, except that the offices of President and Secretary or President and Vice President shall not be held by the same person at any time.

                4.2           Election and Term of Office.  The Officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at a meeting of the Board of Directors to be held after each annual meeting of the shareholders.  If the election of Officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be.  Each Officer shall hold office until his successor shall have been duly elected and shall have qualified or until he shall resign or shall have been removed in the manner hereinafter provided.

                4.3           Removal.  Any Officer or agent elected by the Board of Directors may be removed by an affirmative vote of a majority of the Board of Directors, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed.

                4.4           Vacancies.  A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

                4.5           (a)           Chairman.  The Board of Directors may appoint from its members a Chairman of the Board.  The Chairman, if one has been appointed, shall preside over all meetings of the Board of Directors and all meetings of the shareholders.  The Chairman shall have direct supervision over the Office of the Chief Executive Officer and shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Chairman of the Board is also designated as the corporation’s Chief Executive Officer, the Chairman shall

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also have the powers and duties of the Chief Executive Officer prescribed in Section 4.5(b) of these Bylaws.

                (b)           Chief Executive Officer.  The Office of Chief Executive Officer, if one has been appointed by the Board, shall be the chief executive office of the Corporation and shall be subject to the control of the Board of Directors.  The Chief Executive Officer shall report directly to the Chairman of the Board, if one has been appointed.  The Board of Directors, in its discretion, may appoint two Chief Executive Officers to be known as Co-CEOs.  If Co-CEOs are appointed by the Board, the responsibilities of the Office of Chief Executive Officer shall be shared between the Co-CEOs as they shall determine, unless specific direction or assignment has been given by the Board.  The Office of Chief Executive Officer shall have general supervision and control of the business and affairs of the Corporation; shall have direct supervision over the offices of President and Chief Financial Officer; and shall exercise and perform such other specific powers and duties as may be assigned to him from time to time by the Board of Directors.  In the absence of the Chairman of the Board, the Office of Chief Executive Officer shall preside at meetings of the Board of Directors and meetings of the shareholders.  The Office of the Chief Executive Officer shall have authority to execute instruments and to enter into contracts on behalf of the Corporation, except in cases where the signing and execution thereof are expressly delegated by the Board of Directors or the Corporation’s Bylaws to some other officer or agent of the Corporation.

(c)           President.  The office of President shall be the chief operating officer of the Corporation and shall be subject to the control of the Office of Chief Executive Officer and the Board of Directors and shall report directly to the Office of Chief Executive Officer.  Subject to the supervisory powers given by the Board of Directors to the Office of Chief Executive Officer, the President shall be responsible for the general administration and management of the business and day-to-day operations of the Corporation and shall, together with the Office of Chief Executive Officer, see that all orders and resolutions of the Board of Directors are carried into effect.  The President shall, in general, perform all duties normally incident to the office of the President and shall exercise and perform such other specific powers and duties as may be assigned to him from time to time by the Board of Directors or by the Office of Chief Executive Officer.  He shall, in the absence of both the Chairman of the Board and Chief Executive Officer, preside at all meetings of the shareholders.  He may sign, with the Secretary or any other proper officer of the Corporation, certificates of shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed.”

                4.6           Vice President.  In the absence of the President or in the event of his death, inability, or refusal to act, the Vice President shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.  The Vice President shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

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                4.7           Secretary.  The Secretary shall: (a) keep the minutes of the shareholders’ meetings and of the Board of Directors’ meetings in one or more books provided for that purpose; (b) give, or cause to be given, all notices in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized or required; (d) keep a register of the post office address of each shareholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

                4.8           Treasurer.  The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation; (b) receive and give receipts for monies due and payable to the Corporation from any source whatsoever; (c) deposit all such monies in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article 5 of these Bylaws; (d) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (e) render to the President and Directors at each regular meeting of the Board, or whenever they may require it, an account of all of such transactions and the financial condition of the Corporation; and (f) in general, perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.  If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine.

                4.9           Other Officers.  Such other Officers, assistant Officers and agents, which may be elected or appointed by the Board of Directors, shall perform such duties as shall be assigned to them by the Board of Directors.

                4.10         Salaries.  The salaries of the Officers shall be fixed from time to time by the Board of Directors.  No Officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation.

ARTICLE 5

CONTRACTS, LOANS, AND DEPOSITS

                5.1           Contracts.  The Board of Directors may authorize any Officer or Officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

                5.2           Loans.  No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors.  Such authority may be general or confined to specific instances.

                5.3           Checks, Drafts, Etc.  All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed

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by such Officer of Officers, agent or agents of the Corporation in such manner as shall from time to time be determined by the Board of Directors.

                5.4           Deposits.  All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select.

ARTICLE 6

CERTIFICATES FOR SHARES AND THEIR TRANSFER

                6.1           Certificates of Stock; Un-certificated Shares.   The shares of the Corporation shall be represented by certificates unless the Board of Directors shall by resolution or resolutions provide that some or all of any class or series of stock of the Corporation shall be un-certificated shares.  Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation.  Notwithstanding the adoption by the Board of any resolution(s) providing for un-certificated shares, every holder of stock in the Corporation represented by certificates and, upon request, every holder of un-certificated shares, shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form.  Such certificate shall be in such form as may be determined by the Board of Directors to the extent consistent with applicable law, the Certificate of Incorporation and these Bylaws.

                6.2           Transfer of Stock.  Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by his attorney or legal representative, written evidence of whose authority shall be filed with the Corporation.  No transfer of shares of capital stock shall be valid until such transfer has been entered on the books of the Corporation by an entry showing from and to whom transferred and, (i) if the stock is certificated, the transfer shall not be valid until the surrender of the certificate, duly endorsed or accompanied by proper evidence of succession, assignation or transfer, and cancellation of the certificate representing the same or (ii) if the stock is un-certificated, the transfer shall not be valid unless accompanied by a duly executed stock transfer power or other proper transfer instructions from the registered owner of such un-certificated shares.

6.3                 Lost, Stolen or Destroyed Certificates. No certificate for shares or un-certificated shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer may in its or his discretion require.

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ARTICLE 7

FISCAL YEAR

7.1           The fiscal year of the Corporation shall be determined by the Board of Directors.

ARTICLE 8

DIVIDENDS

8.1           The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation.  Dividends may be paid in cash, in property, or in shares of capital stock, subject to the provisions of the Certificate of Incorporation and the laws of the State of Oklahoma.

ARTICLE 9

SEAL

9.1           The Board of Directors shall provide a corporate seal which shall have inscribed thereon the name of the Corporation and the words “Corporate Seal.”

ARTICLE 10

WAIVER OF NOTICE

10.1         Unless otherwise provided by law, whenever any notice is required to be given to any shareholder or Director of the Corporation under the provisions of these Bylaws or under the provisions of the Certificate of Incorporation, a waiver thereof, in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

ARTICLE 11

AMENDMENTS

11.1         These Bylaws may be altered, amended, or repealed and new Bylaws may be adopted by affirmative vote of the shareholders representing fifty-one percent (51%) of all the shares issued and outstanding, at any annual shareholders’ meeting or at any special shareholders’ meeting when the proposed amendment has been set out in the notice of such meeting, or by the Board of Directors at any regular or special meeting of the Board when the proposed amendment has been set out in the notice of such meeting.

ARTICLE 12

INDEMNIFICATION OF DIRECTORS AND OFFICERS

12.1         Indemnification: Actions Other Than By The Corporation.  The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation,

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partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees, court costs, judgments, fines and amounts paid in settlement) actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful.  The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

12.2         Indemnification:  Actions By The Corporation.  The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees, court costs and fines) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but  12 in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

12.3         Right to Indemnification.  To the extent that any present or former director, officer and employee and any person who is or was serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, or any agent of the Corporation or any person who is or was serving at the request of the Corporation as an agent of another corporation, partnership, joint venture, trust or other enterprise, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article 12, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

12.4         Authorization of Indemnification.  Any indemnification under Sections 1 and 2 of this Article 12 (unless ordered by a court) shall be made by the Corporation only upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 and 2 of this Article 12.  Such determination shall be made: (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding; or (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (iii) by the shareholders.

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12.5         Advance Indemnification.  Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article 12.  Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.

12.6         Non-Exclusive Indemnification.  The indemnification provided by this Article 12 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while  13 holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

12.7         Insurance.  The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article 12.

12.8         Modification or Repeal.  No modification or repeal of any of the provisions under this Article 12 shall operate retroactively or impair the rights of any person which shall have accrued hereunder.

12.9         Constituent Corporation.  For the purpose of this Article, references to “the Corporation” include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article 12 with respect to the resulting or surviving corporation in the same capacity.

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EX-31.1

Exhibit 31.1

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION

Under Rule 13a-14 (a) / 15d-14 (a)

I, Greg D. Forrest, certify that:

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

2.Based on my knowledge, this quarterly 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 quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly 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 most recent 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.

Dated:  March 5, 2008

/s/ Greg D. Forrest

Greg D. Forrest

Chief Executive Officer

EX-31.2

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, Robert B. Wagner, certify that:

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

2.Based on my knowledge, this quarterly 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 quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and

presented in this quarterly 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 most recent 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.

Dated:  March 5, 2008

/s/ Robert B. Wagner

Robert B. Wagner

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of XETA Technologies, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended January 31, 2008, as filed with the Securities and Exchange Commission (the “Report”), I, Greg D. Forrest, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Greg D. Forrest

Greg D. Forrest

Chief Executive Officer

March 5, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of XETA Technologies, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended January 31, 2008, as filed with the Securities and Exchange Commission (the “Report”), I, Robert B. Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Robert B. Wagner

Robert B. Wagner

Chief Financial Officer

March 5, 2008