10-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

Amendment No. 2

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended October 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16231

XETA Technologies, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma	73-1130045
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1814 West Tacoma, Broken Arrow, Oklahoma	74012
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number including area code          (918) 664-8200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)

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

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

Yes o No x

          The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the Nasdaq closing price on April 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $17,317,620.81. 

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

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held April 6, 2004 are incorporated by reference into Part III, Items 11 through 14 hereof. 

EXPLANATORY NOTE

          This Amendment No. 2 to our Annual Report on Form 10-K for the fiscal year ended October 31, 2003, which was originally filed with the Securities and Exchange Commission on January 16, 2004 and amended on February 27, 2004 (the “Annual Report”) is being filed to correct an error in Footnote 1 to the Consolidated Financial Statements with regard to the disclosure for “Stock-Based Compensation Plans”.  This amendment to the Annual Report does not result in a restatement of the Company’s reported earnings, its financial condition, cash flows, or stockholders’ equity, nor does the amendment affect any other disclosure made in the Annual Report, including the Company’s compliance with bank loan covenants.

          In accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123, the Company accounts for stock-based employee compensation under the intrinsic value method, an alternative to the fair value method allowed by SFAS 123.  Under this method, the Company discloses the pro forma effect of issued stock options as if the expense, based on the fair value method, had been recorded in the financial statements; and, as if the Company would have not adjusted its employee compensation plans to minimize the impact of such effect on the income statement.  The Company recently discovered that it had misapplied certain of the provisions of SFAS 123 relating to computing the pro forma impact of the stock options.  Most significantly, the Company has been amortizing the pro forma effect of the stock options over their expected life, estimated to be six years, rather than their vesting period, generally three years.   This amendment corrects the pro forma net income (loss) and pro forma earnings (loss) per share disclosures found in footnote 1 to the Consolidated Financial Statements under the caption “Stock-Based Compensation Plans”.

          This Amendment No. 2 amends Item 8 of Part II of the Annual Report to the extent described above and Item 15 of Part IV, and except for such Items and Exhibits 23, 31.1, 31.2, 32.1 and 32.2, no other information in the Annual Report as originally filed is amended hereby.

          This Form 10-K/A continues to speak as of the date of the original filing of the Annual Report and we have not updated any disclosures contained herein to reflect any events that have occurred since the filing of the original Annual Report.  Accordingly, this Form 10-K/A should be read in conjunction with the Company’s subsequent filings with the SEC.  The filing of this Form 10-K/A shall not be deemed an admission that the original filing, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

2

PART II

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements	Page
Reports of Independent Public Accountants	F-1
Consolidated Financial Statements
Consolidated Balance Sheets - October 31, 2003 and 2002	F-4
Consolidated Statements of Operations - For the Years Ended October 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Shareholders’ Equity - For the Years Ended October 31, 2003, 2002 and 2001	F-6
Consolidated Statements of Cash Flows - For the Years Ended October 31, 2003, 2002 and 2001	F-7
Notes to Consolidated Financial Statements	F-8

3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
XETA Technologies, Inc.

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

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XETA Technologies, Inc. and subsidiaries as of October 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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

Subsequent to the initial issuance of these financial statements, management determined that certain provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), relating to computing the pro forma impact of issued stock options were misapplied.  The pro forma disclosures in the “Stock Based Compensation Plans” section of Note 1 to the consolidated financial statements have been revised to correct the previously reported pro forma disclosures.

F-1

As discussed above, the consolidated financial statements of XETA Technologies, Inc. and subsidiaries for the year ended October 31, 2001, were audited by other auditors who have ceased operations.  As described in Note 1, these financial statements have been revised to include the disclosures required by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, which was adopted by the Company for the year ended October 31, 2003 and as discussed in the previous paragraph, to correct the previously reported pro forma disclosures.  Our audit procedures with respect to the disclosures in the “Stock Based Compensation Plans” section of Note 1 for 2001 included (i) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing compensation expense recognized in that year under APB No. 25, Accounting for Stock Issued to Employees and the pro forma compensation expense under SFAS 123, to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income and the related earnings-per-share amounts.  In our opinion, the disclosures for 2001 in the “Stock Based Compensations Plans” section of Note 1 are appropriate.  However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and the matters discussed in a previous paragraph and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

/s/ GRANT THORNTON LLP

Tulsa, Oklahoma
December 5, 2003 (except for the “Stock Based Compensation Plans”
     section of Note 1, as to which the date is June 3, 2004)

F-2

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

Report of Independent Public Accountants

To XETA Technologies, Inc.:

          We have audited the accompanying consolidated balance sheets of XETA Technologies, Inc. (formerly XETA Corporation, an Oklahoma corporation) and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2001.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits in accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 

          In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XETA Technologies, Inc. and subsidiaries as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States.

          ARTHUR ANDERSEN LLP

Tulsa, Oklahoma
December 11, 2001

F-3

XETA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

	October 31, 2003			October 31, 2002
ASSETS
Current Assets:
Cash and cash equivalents	$	291,118		$	1,966,734
Current portion of net investment in sales-type leases and other receivables		979,255			1,015,096
Trade accounts receivable, net		5,794,949			9,478,706
Inventories, net		5,614,902			7,801,781
Deferred tax asset, net		885,752			592,643
Prepaid taxes		—			1,195,539
Prepaid expenses and other assets		322,699			165,657
Total current assets		13,888,675			22,216,156
Noncurrent Assets:
Goodwill, net of accumulated amortization prior to adoption of SFAS 142		25,726,886			25,782,462
Net investment in sales-type leases, less current portion above		419,800			519,270
Property, plant & equipment, net		10,466,824			10,457,718
Capitalized software production costs, net of accumulated amortization of $1,233,066 and $1,053,066		57,955			237,955
Other assets		112,528			170,424
Total noncurrent assets		36,783,993			37,167,829
Total assets	$	50,672,668		$	59,383,985
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	1,209,645		$	3,288,337
Revolving line of credit		719,073			—
Accounts payable		3,928,878			6,119,135
Unearned service revenue		1,620,323			2,078,741
Accrued liabilities		1,869,024			1,968,771
Accrued taxes		58,134			—
Other liabilities		279,250			181,501
Total current liabilities		9,684,327			13,636,485
Noncurrent Liabilities:
Long-term debt, less current portion above		4,029,738			11,565,012
Deferred tax liability, net		1,973,575			1,186,680
Unearned service revenue		229,910			233,859
Other liabilities		144,101			240,955
		6,377,324			13,226,506
Contingencies
Shareholders’ Equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued		—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,021,740 and 10,721,740 issued at October 31, 2003 and 2002, respectively		11,021			10,721
Paid-in capital		12,681,681			12,193,029
Retained earnings		24,229,820			22,672,256
Accumulated other comprehensive loss		(66,846	)		(110,353	)
Less treasury stock, at cost		(2,244,659	)		(2,244,659	)
Total shareholders’ equity		34,611,017			32,520,994
Total liabilities and shareholders’ equity	$	50,672,668		$	59,383,985

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

F-4

XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended October 31,
	2003			2002			2001
Systems sales	$	27,549,876		$	27,852,358		$	52,027,695
Installation and service revenues		23,338,915			25,390,142			33,105,152
Other revenues		1,792,512			497,778			921,182
Net sales and service revenues		52,681,303			53,740,278			86,054,029
Cost of systems sales		19,621,591			21,383,502			36,260,942
Installation and services costs		16,548,392			18,803,143			23,616,074
Cost of other revenues & corporate COGS		2,192,967			1,956,071			2,758,651
Total cost of sales and service		38,362,950			42,142,716			62,635,667
Gross profit		14,318,353			11,597,562			23,418,362
Operating expenses:
Selling, general and administrative		11,030,671			10,279,299			14,459,740
Amortization		180,000			180,000			1,609,466
Total operating expenses		11,210,671			10,459,299			16,069,206
Income from operations		3,107,682			1,138,263			7,349,156
Interest expense		(473,979	)		(887,274	)		(2,095,331	)
Interest income and other income (expense)		(71,139	)		1,196,250			471,812
Subtotal		(545,118	)		308,976			(1,623,519	)
Income before provision for income taxes		2,562,564			1,447,239			5,725,637
Provision for income taxes		1,005,000			569,000			2,245,000
Net income	$	1,557,564		$	878,239		$	3,480,637
Earnings per share
Basic	$	0.16		$	0.09		$	0.38
Diluted	$	0.16		$	0.09		$	0.36
Weighted average shares - Basic		9,827,884			9,375,336			9,061,105
Weighted average shares - Diluted		9,960,098			9,866,162			9,698,048

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

F-5

XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock				Treasury Stock					Paid-in Capital		Comprehensive Loss			Retained Earnings		Total
	Shares Issued		Par Value		Shares		Amount
Balance-October 31, 2000		9,662,736	$	9,662		1,018,788	$	(2,244,659	)	$	9,486,776	$	—		$	18,313,380	$	25,565,159
Stock options exercised $.001 par value		594,004		594		—		—			369,169		—			—		369,763
Tax benefit of stock options		—		—		—		—			1,781,867		—			—		1,781,867
Net Income		—		—		—		—			—		—			3,480,637		3,480,637
Balance-October 31, 2001		10,256,740		10,256		1,018,788		(2,244,659	)		11,637,812		—			21,794,017		31,197,426
Stock options exercised $.001 par value		465,000		465		—		—			115,785		—			—		116,250
Tax benefit of stock options		—		—		—		—			439,432		—			—		439,432
Components of comprehensive income:
Net income		—		—		—		—			—		—			878,239		878,239
Unrealized gain/loss on hedge, net of tax of $71,148		—		—		—		—			—		(110,353	)		—		(110,353	)
Total comprehensive income																		767,886
Balance-October 31, 2002		10,721,740		10,721		1,018,788		(2,244,659	)		12,193,029		(110,353	)		22,672,256		32,520,994
Stock options exercised $.001 par value		300,000		300		—		—			74,700		—			—		75,000
Tax benefit of stock options		—		—		—		—			413,952		—			—		413,952
Components of comprehensive income:
Net income		—		—		—		—			—		—			1,557,564		1,557,564
Unrealized gain on hedge, net of tax of $28,050		—		—		—		—			—		43,507			—		43,507
Total comprehensive income																		1,601,071
Balance-October 31, 2003		11,021,740	$	11,021		1,018,788	$	(2,244,659	)	$	12,681,681	$	(66,846	)	$	24,229,820	$	34,611,017

F-6

XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended October 31,
	2003			2002			2001
Cash flows from operating activities:
Net income	$	1,557,564		$	878,239		$	3,480,637
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		971,499			1,167,226			1,004,518
Amortization		180,000			180,000			1,609,466
Loss on sale of assets		48,521			47,373			10,693
Provision for (reversal of) returns & doubtful accounts receivable		(45,907	)		(748,200	)		290,000
Provision for excess and obsolete inventory		280,431			1,068,013			1,300,000
Change in assets and liabilities, net of acquisitions:
Decrease in net investment in sales-type leases & other receivables		135,311			2,093,243			1,488,208
Decrease in trade receivables		3,963,230			7,176,595			15,111,338
(Increase) decrease in inventories		1,906,448			139,171			(2,548,903	)
(Increase) decrease in deferred tax asset		(293,109	)		421,105			(502,687	)
(Increase) decrease in prepaid expenses and other assets		(99,146	)		168,755			159,284
(Increase) decrease in prepaid taxes		1,195,539			(532,581	)		(662,958	)
Increase (decrease) in accounts payable		(2,190,257	)		1,571,788			(7,782,294	)
(Decrease) in unearned revenue		(462,367	)		(669,669	)		(2,794,181	)
Increase in accrued income taxes		96,352			550,919			1,655,925
(Decrease) in accrued liabilities and other		(260,861	)		(1,140,540	)		(2,107,597	)
Increase in deferred tax liabilities		1,190,155			592,563			82,280
Total adjustments		6,615,839			12,085,761			6,313,092
Net cash provided by operating activities		8,173,403			12,964,000			9,793,729
Cash flows from investing activities:
Acquisitions, net of cash acquired		—			—			(5,595,193	)
Additions to property, plant & equipment		(1,031,696	)		(2,121,298	)		(3,585,867	)
Proceeds from sale of assets		2,568			48,232			1,200
Net cash used in investing activities		(1,029,128	)		(2,073,066	)		(9,179,860	)
Cash flows from financing activities:
Proceeds from issuance of debt		1,125			—			5,500,000
Proceeds from draws on revolving line of credit		16,083,009			16,275,000			40,035,000
Principal payments on debt		(9,615,089	)		(4,288,339	)		(11,162,073	)
Payments on revolving line of credit		(15,363,936	)		(21,625,000	)		(35,685,000	)
Exercise of stock options		75,000			116,250			369,763
Net cash (used in) financing activities		(8,819,891	)		(9,522,089	)		(942,310	)
Net increase (decrease) in cash and cash equivalents		(1,675,616	)		1,368,845			(328,441	)
Cash and cash equivalents, beginning of period		1,966,734			597,889			926,330
Cash and cash equivalents, end of period	$	291,118		$	1,966,734		$	597,889
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	784,006		$	1,246,709		$	2,760,516
Cash paid during the period for income taxes	$	132,011		$	409,404		$	1,645,414
Contingent consideration paid to target shareholder(s)	$	—		$	1,000,000		$	2,000,000

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

F-7

XETA TECHNOLOGIES, INC.

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

1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business

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

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

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

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

Revenue Recognition

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

Shipping and Handling Fees

In accordance with Emerging Issues Task Force Issue 00-10, “Accounting for Shipping and Handling Fees and Costs,” freight billed to customers is included in net sales and service revenues in the consolidated statements of operations, while freight billed by vendors is included in cost of sales in the consolidated statements of operations.

F-8

Accounting for Manufacturer Incentives

The Company receives various forms of incentive payments, rebates, and negotiated price discounts from the manufacturers of the products it sells.  Rebates and negotiated price discounts directly related to specific customer sales are recorded as a reduction in the cost of goods sold on those systems sales.  Incentive payments which are based on purchasing certain product lines exclusively from one manufacturer (“loyalty rebates”) are also recorded as a reduction in systems cost of goods sold.  Rebates and other incentives designed to offset marketing expenses and certain growth initiatives supported by the manufacturer are recorded as contra expense to the related expenditure.  All incentive payments are recorded when earned under the specific rules of the incentive plan.

Lease Accounting

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

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

Accounts Receivable

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

Property, Plant and Equipment

The Company capitalizes the cost of all significant property, plant and equipment additions including equipment manufactured by the Company and installed at customer locations under certain systems service agreements.  Depreciation is computed over the estimated useful life of the asset or the terms of the lease for leasehold improvements, whichever is shorter, on a straight-line basis.  When assets are retired or sold, the cost of the assets and the related accumulated depreciation is removed from the accounts and any resulting gain or loss is included in income.  Maintenance and repair costs are expensed as incurred.  Interest costs related to an investment in long-lived assets are capitalized as part of the cost of the asset during the period the asset is being prepared for use.  The Company capitalized $337,000, $277,000 and $131,000 in interest costs in fiscal years 2003, 2002 and 2001, respectively.

Research and Development and Capitalization of Software Production Costs

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

F-9

Software Development Costs

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

Derivative Instruments and Hedging Activities

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

Stock-Based Compensation Plans

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

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

The Company recently discovered that it had misapplied certain provisions of SFAS 123, most significantly relating to the amortization period to be used when computing the pro forma impact of issued stock options.  The Company has been amortizing the pro forma effect of issued stock options over the option’s expected life, estimated to be six years, rather than the option’s vesting period, generally three years.   The following pro forma disclosures for the fiscal years ended October 31, 2003, 2002, and 2001, have been revised to correct the previously reported pro forma disclosures and are presented in the table below:

Revised Pro Forma Disclosures:	For the Year Ended October 31,
	2003			2002			2001
NET INCOME (LOSS):
As reported	$	1,557,564		$	878,239		$	3,480,637
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(388,628	)		(1,084,695	)		(1,006,100	)
Pro forma	$	1,168,936		$	(206,456	)	$	2,474,537
EARNINGS (LOSS) PER SHARE:
As reported – Basic	$	0.16		$	0.09		$	0.38
As reported – Diluted	$	0.16		$	0.09		$	0.36
Pro forma – Basic	$	0.12		$	(0.02	)	$	0.27
Pro forma – Diluted	$	0.12		$	(0.02	)	$	0.26

F-10

Previously reported pro forma amounts for the fiscal years ended October 31, 2003, 2002, and 2001 were as follows:   stock-based employee compensation expense, net of tax effects - $701,520, $641,258, and $666,184, respectively: net income - $856,044, $236,981 and $2,814,453, respectively;  earnings per share – basic - $0.09, $0.03, and $0.31, respectively; and earnings per share – diluted - $0.09, $0.03, and $0.29, respectively.

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

Income Taxes

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

Unearned Revenue and Warranty

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

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

Use of Estimates

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

Segment Information

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

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

F-11

The following is tabulation of business segment information for 2003, 2002 and 2001.

	Commercial System Sales		Lodging System Sales		Installation and Service Revenues		Other Revenue			Total
2003
Sales	$	21,304,223	$	6,245,653	$	23,338,915	$	1,792,512		$	52,681,303
Cost of sales		15,279,565		4,342,026		16,548,392		2,192,967			38,362,950
Gross profit		6,024,658		1,903,627		6,790,523		(400,455	)		14,318,353
2002
Sales	$	21,788,576	$	6,063,782	$	25,390,142	$	497,778		$	53,740,278
Cost of sales		17,117,974		4,265,528		18,803,143		1,956,071			42,142,716
Gross profit		4,670,602		1,798,254		6,586,999		(1,458,293	)		11,597,562
2001
Sales	$	41,964,072	$	10,063,623	$	33,105,152	$	921,182		$	86,054,029
Cost of sales		29,811,902		6,449,040		23,616,074		2,758,651			62,635,667
Gross profit		12,152,170		3,614,583		9,489,078		(1,837,469	)		23,418,362

Recently Issued Accounting Pronouncements

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

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

F-12

Goodwill

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

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

	For the year ended October 31,
	2003		2002		2001
Reported net income	$	1,557,564	$	878,239	$	3,480,637
Add back: Goodwill amortization		—		—		869,115
Adjusted net income	$	1,557,564	$	878,239	$	4,349,752
Basic Earnings Per Share:
Reported net income	$	0.16	$	0.09	$	0.38
Add back: Goodwill amortization		—		—		0.10
Adjusted net income	$	0.16	$	0.09	$	0.48
Diluted Earnings Per Share:
Reported net income	$	0.16	$	0.09	$	0.36
Add back: Goodwill amortization		—		—		0.09
Adjusted net income	$	0.16	$	0.09	$	0.45

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

Other Intangible Assets

	As of October 31, 2003				As of October 31, 2002
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Software production costs	$	1,291,021	$	1,233,066	$	1,291,021	$	1,053,066
Other		190,780		134,089		190,780		93,564
Total amortized intangible assets	$	1,481,801	$	1,367,155	$	1,481,801	$	1,146,630

Aggregate amortization expense of intangible assets was $220,525 and $219,430 for the years ended October 31, 2003 and 2002, respectively, which includes $40,525 and $39,430 recorded as interest expense in the consolidated

F-13

statements of operations for the years ended October 31, 2003 and 2002, respectively.  The estimated aggregate amortization expense for the next five fiscal years is $114,646 for 2004; and $0 thereafter.

2.  ACCOUNTS RECEIVABLE:

Trade accounts receivable consist of the following at October 31:

	2003		2002
Trade receivables	$	6,130,490	$	9,824,222
Less- reserve for doubtful accounts		335,541		345,516
Net trade receivables	$	5,794,949	$	9,478,706

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

	2003			2002
Balance, beginning of period	$	345,516		$	1,298,245
Reversal of provision for doubtful accounts		(45,907	)		(748,200	)
Net write-offs		35,932			(204,529	)
Balance, end of period	$	335,541		$	345,516

3.  INVENTORIES:

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

	2003		2002
Raw materials	$	366,305	$	354,380
Finished goods and spare parts		6,430,977		8,234,020
		6,797,282		8,588,400
Less- reserve for excess and obsolete inventories		1,182,380		786,619
Total inventories, net	$	5,614,902	$	7,801,781

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

	2003		2002
Balance, beginning of period	$	786,619	$	1,687,233
Provision for excess and obsolete inventories		280,431		1,068,013
Adjustments to inventories		115,330		(1,968,627	)
Balance, end of period	$	1,182,380	$	786,619

F-14

4.  PROPERTY, PLANT AND EQUIPMENT:

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

	Estimated Useful Lives		2003		2002
Building		20	$	2,397,954	$	2,397,954
Data processing and computer field equipment		3-5		4,280,916		4,121,640
Software development costs		N/A		6,687,540		5,889,556
Land		—		611,582		611,582
Office furniture		5		1,108,029		1,073,851
Auto		5		126,743		126,743
Other		3-7		511,320		634,213
Total property, plant and equipment				15,724,084		14,855,539
Less- accumulated depreciation				5,257,260		4,397,821
Total property, plant and equipment, net			$	10,466,824	$	10,457,718

5.  ACCRUED LIABILITIES:

Accrued liabilities consist of the following at October 31:

	2003		2002
Commissions	$	371,765	$	428,460
Interest		13,413		11,265
Payroll		424,243		417,171
Bonuses		363,794		213,735
Vacation		436,784		481,228
Other		259,025		416,912
Total current		1,869,024		1,968,771
Noncurrent liabilities		144,101		240,955
Total accrued liabilities	$	2,013,125	$	2,209,726

6.  UNEARNED SERVICE REVENUE:

Unearned service revenue consists of the following at October 31:

	2003		2002
Service contracts	$	640,922	$	785,067
Warranty service		344,192		366,586
Customer deposits		488,137		897,171
Systems shipped but not installed		99,490		28,866
Other		47,582		1,051
Total current unearned revenue		1,620,323		2,078,741
Noncurrent unearned service contract revenue		229,910		233,859
Total unearned revenue	$	1,850,233	$	2,312,600

7.  INCOME TAXES:

Income tax expense is based on pretax income.  Deferred income taxes are computed using the asset-liability method in accordance with SFAS No. 109, “Accounting for Income Taxes” and are provided on all temporary differences between the financial basis and the tax basis of the Company’s assets and liabilities.

The income tax provision for the years ending October 31, 2003, 2002 and 2001, consists of the following:

F-15

	2003		2002			2001
Current provision (benefit) – federal	$	484,930	$	(384,790	)	$	1,630,630
Current provision (benefit) – state		97,590		(22,910	)		350,800
Deferred provision		422,480		976,700			263,570
Total provision	$	1,005,000	$	569,000		$	2,245,000

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

	Year Ended October 31,
	2003		2002		2001
Statutory rate		34%		34%		34%
State income taxes, net of federal benefit		5%		5%		5%
Effective rate		39%		39%		39%

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

	2003			2002
Deferred tax assets:
Currently nondeductible reserves	$	453,413		$	299,530
Accrued liabilities		345,021			166,762
Prepaid service contracts		107,310			168,210
Unamortized cost of service contracts		19,338			52,788
Other		111,605			119,418
Total deferred tax asset		1,036,687			806,708
Deferred tax liabilities:
Tax income to be recognized on sales-type lease contracts		27,000			50,062
Unamortized capitalized software development costs		22,718			93,279
Depreciation and sale of assets		454,694			307,234
Intangible assets		1,620,098			950,170
Total deferred tax liability		2,124,510			1,400,745
Net deferred tax liability	$	(1,087,823	)	$	(594,037	)

8.  CREDIT AGREEMENTS:

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

F-16

	October 31,
	2003		2002
Term loan, payable in monthly installments of $86,524, due September 30, 2006 collateralized by all assets of the Company.	$	3,029,041	$	12,473,349
Real estate term note, payable in monthly installments of $14,166, due September 30, 2006, secured by a first mortgage on the Company’s building.		2,210,342		2,380,000
		5,239,383		14,853,349
Less-current maturities		1,209,645		3,288,337
	$	4,029,738	$	11,565,012

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

2004	$	1,209,645
2005	$	1,209,645
2006	$	2,820,093

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

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

9.  DERIVATIVES AND RISK MANAGEMENT:

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

10.  STOCK OPTIONS:

During fiscal 2000, the Company adopted a new stock option plan (2000 Plan) for officers, directors and key employees.  The 2000 Plan replaces the previous 1988 Plan, which had expired.  Under the 2000 Plan, the Board of Directors or a committee thereof determine the option price, not to be less than fair market value at the date of grant, number of options granted, and the vesting period.  Although there are exceptions, generally options that have been granted under the 2000 Plan expire 10 years from the date of grant, have 3-year cliff-vesting and are incentive stock options as defined under the applicable IRS tax rules. Options granted under the previous 1988 Plan generally vested 33 1/3% per year after a 1-year waiting period.

F-17

	Outstanding Options (1988 and 2000 Plans)
	Number			Price Per Share
Balance, October 31, 2000		474,644			$ 0.25  —   18.13
Granted		119,350			5.31  —   11.63
Exercised		(94,004	)		0.25  —    4.38
Forfeited		(58,850	)		9.06  —   18.13
Balance, October 31, 2001		441,140			0.31  —   18.13
Granted		277,900			3.63  —    5.80
Exercised		—			—
Forfeited		(44,100	)		3.63  —   18.13
Balance, October 31, 2002		674,940			0.31  —   18.13
Granted		5,000			3.00
Exercised		—			—
Forfeited		(56,340	)		3.63  —   18.13
Balance, October 31, 2003		623,600			$ 0.31  —   18.13

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

	Outstanding Options
	Number			Price Per Share
Balance, October 31, 2000		2,150,400			$0.25  —   15.53
Exercised		(500,000	)		0.25  —    0.25
Forfeited		(200,000	)		5.81
Balance, October 31, 2001		1,450,400			0.25  —   15.53
Granted		—			—
Exercised		(465,000	)		0.25
Balance, October 31, 2002		985,400			0.25  —   15.53
Granted		—			—
Exercised		(300,000	)		0.25
Forfeited		—			—
Balance, October 31, 2003		685,400			$0.38  —   15.53

The following is a summary of stock options outstanding as of October 31, 2003:

	Options Outstanding				Options Exercisable
Range of Exercise Prices		Number Outstanding at October 31, 2003	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Years)		Number Exercisable at October 31, 2003	Weighted Average Exercise Price
$0.31-1.64		110,072	$0.81	0.08		110,072	$0.81
$3.63-5.81		956,928	$5.11	6.20		686,001	$5.64
$9.06-12.31		62,450	$10.07	6.60		19,900	$9.15
$15.53-18.13		179,550	$17.55	6.40		179,550	$17.55

F-18

11.  EARNINGS PER SHARE:

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

	For the Year Ended October 31, 2003
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic EPS
Net income	$	1,557,564		9,827,884	$	0.16
Dilutive effect of stock options				132,214
Diluted EPS
Net income	$	1,557,564		9,960,098	$	0.16
	For the Year Ended October 31, 2002
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic EPS
Net income	$	878,239		9,375,336	$	0.09
Dilutive effect of stock options				490,826
Diluted EPS
Net income	$	878,239		9,866,162	$	0.09
	For the Year Ended October 31, 2001
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic EPS
Net income	$	3,480,637		9,061,105	$	0.38
Dilutive effect of stock options				636,943
Diluted EPS
Net income	$	3,480,637		9,698,048	$	0.36

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

F-19

12.  FINANCING RECEIVABLES:

A small portion of the Company’s systems sales are made under sales-type lease agreements with the end-users of the equipment.  These receivables are secured by the cash flows under the leases and the equipment installed at the customers’ premises.  Minimum future annual payments to be received under various leases are as follows for years ending October 31,:

	Sales-Type Lease Payments Receivable
2004	$	977,074
2005		278,938
2006		159,547
2007		7,419
2008		—
		1,422,978
Less- imputed interest		169,870
Present value of minimum payments	$	1,253,108

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

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

The Company extends credit to its customers in the normal course of business, including under its sales-type lease program.  As a result, the Company is subject to changes in the economic and regulatory environments or other conditions, which in turn, may impact the Company’s overall credit risk.  However, the Company sells to a wide variety of customers, and except for its hospitality customers, does not focus its sales and marketing efforts on any particular industry.  Management considers the Company’s credit risk to be satisfactorily diversified and believes that the allowance for doubtful accounts is adequate to absorb estimated losses at October 31, 2003.

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

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

14.  EMPLOYMENT AGREEMENTS:

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

15.  CONTINGENCIES:

Lease Commitments

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

F-20

Litigation

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

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

16.  RETIREMENT PLAN:

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

F-21

17.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

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

	For the Fiscal Year Ended October 31, 2003
	Quarter Ended
	January 31, 2003		April 30, 2003		July 31, 2003			October 31, 2003
	(in thousands, except per share data)
Net sales	$	15,431	$	11,765	$	12,910		$	12,575
Gross profit		3,919		3,436		3,561			3,402
Operating income		937		637		742			792
Net income		491		313		376			378
Basic EPS	$	0.05	$	0.03	$	0.04		$	0.04
Diluted EPS	$	0.05	$	0.03	$	0.04		$	0.04
	For the Fiscal Year Ended October 31, 2002
	Quarter Ended
	January 31, 2002		April 30, 2002		July 31, 2002			October 31, 2002
	(in thousands, except per share data)
Net sales	$	13,763	$	12,559	$	12,808		$	14,610
Gross profit		3,259		2,914		2,139			3,285
Operating income		599		154		(67	)		452
Net income		276		7		129			466
Basic EPS	$	0.03	$	0.00	$	0.01		$	0.05
Diluted EPS	$	0.03	$	0.00	$	0.01		$	0.05

F-22

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)	The following documents are filed as a part of this report:
	(1)	Financial Statements – See Index to Financial Statements at Page 3 of this Form 10-K/A.
	(2)	Financial Statement Schedule – None.
	(3)	Exhibits – The following exhibits are included with this report or incorporated herein by reference:

No.	Description
3(i)1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 and 3.2 to XETA’s Registration Statement on Form S-1 filed June 17, 1987, File No. 33-7841).
3(i)2	Amendment No. 1 to Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 4.2 to XETA’s Post-Effective Amendment No. 1 to Registration Statement on Form S-8 filed July 28, 1999, File No. 33-62173).
3(i)3	Amendment No. 2 to Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 3(i)I to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
3(i)4	Amendment No. 3 to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.4 to XETA’s Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed June 28, 2000).
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii)(a) to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2001).
10. 1**	Stock Purchase Option dated February 1, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.9 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
10. 2**	XETA Technologies 2000 Stock Option Plan (incorporated by reference to Exhibit 10.11 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
10. 3**	Stock Purchase Option dated August 11, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.14 to XETA’s Annual  Report on Form 10-K for the fiscal year ended October 31, 2000).
10.4*	HCX 5000/HCX 5000i® Authorized Distributor Agreement for 2003 dated January 1, 2003 between Hitachi Telecom (USA), Inc. and XETA Corporation.
	PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.  SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE

4

	COMMISSION WITH THE APPLICATION FOR CONFIDENTIAL TREATMENT.
10.5	Nortel Networks Premium Partner U. S. Agreement effective June 25, 2003 between Nortel Networks, Inc. and XETA Technologies, Inc.  (incorporated by reference to Exhibit 10.1 to XETA’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003).
10.6*	Avaya Inc. Reseller Master Terms and Conditions effective as of August 6, 2003 between Avaya Inc. and XETA Technologies, Inc., including Reseller Product Group Attachment for Enterprise Communication and Internetworking Solutions Product, Reseller Product Group Attachment: Octel® Products, and Addendum for GSA Schedule Contract Sales to the Federal Government.
10.7*	Revolving Credit and Term Loan Agreement dated as of October 1, 2003 between XETA Technologies, Inc. and Bank of Oklahoma, N.A. (“BOK”)
10.8*	Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement dated October 1, 2003 granted to BOK.
10.9*	Promissory Note ($2,238,333.48 payable to BOK) dated October 1, 2003.
10.10*	Promissory Note ($7,500,000 payable to BOK) dated October 1, 2003.
10.11*	Promissory Note ($3,374,734.33 payable to BOK) dated October 1, 2003.
10.12*	Security Agreement dated October 1, 2003 granted to BOK.
21*	Subsidiaries of XETA Technologies, Inc.
23†	Consent of Grant Thornton LLP.
31.1†	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*  Filed with the Company’s Annual Report on Form 10-K for the year ended October 31, 2003, filed with the Securities and Exchange Commission on January 16, 2004.
**  Indicates management contract or compensatory plan or arrangement.
†   Filed herewith.

(b)	We filed the following Reports on Form 8-K during the last quarter of the fiscal year covered by this report:
	1.	August 20, 2003—Item 12—Earnings Press Release
	2.	October 9, 2003—Item 5—Bank of Oklahoma Credit Agreement

5

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	XETA TECHNOLOGIES, INC.
June 10, 2004	By:	/s/  JACK R. INGRAM
		Jack R. Ingram, Chief Executive Officer and President

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

June 10, 2004	/s/  JACK R. INGRAM
	Jack R. Ingram, Chief Executive Officer, President, and Director
June 10, 2004	/s/  ROBERT B. WAGNER
	Robert B. Wagner, Chief Financial Officer
June 10, 2004	/s/  DONALD T. DUKE
	Donald T. Duke, Director
June 10, 2004	/s/  RONALD L. SIEGENTHALER
	Ronald L. Siegenthaler, Director

6

INDEX TO EXHIBITS

No.	Description
3(i)1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 and 3.2 to XETA’s Registration Statement on Form S-1 filed June 17, 1987, File No. 33-7841).
3(i)2	Amendment No. 1 to Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 4.2 to XETA’s Post-Effective Amendment No. 1 to Registration Statement on Form S-8 filed July 28, 1999, File No. 33-62173).
3(i)3	Amendment No. 2 to Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 3(i)I to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
3(i)4	Amendment No. 3 to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.4 to XETA’s Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed June 28, 2000).
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii)(a) to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2001).
10. 1**	Stock Purchase Option dated February 1, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.9 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
10. 2**	XETA Technologies 2000 Stock Option Plan (incorporated by reference to Exhibit 10.11 to XETA’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2000).
10. 3**	Stock Purchase Option dated August 11, 2000 granted to Larry N. Patterson (incorporated by reference to Exhibit 10.14 to XETA’s Annual  Report on Form 10-K for the fiscal year ended October 31, 2000).
10.4*	HCX 5000/HCX 5000i® Authorized Distributor Agreement for 2003 dated January 1, 2003 between Hitachi Telecom (USA), Inc. and XETA Corporation.
	PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.  SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE APPLICATION FOR CONFIDENTIAL TREATMENT.
10.5	Nortel Networks Premium Partner U. S. Agreement effective June 25, 2003 between Nortel Networks, Inc. and XETA Technologies, Inc.  (incorporated by reference to Exhibit 10.1 to XETA’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003).
10.6*	Avaya Inc. Reseller Master Terms and Conditions effective as of August 6, 2003 between Avaya Inc. and XETA Technologies, Inc., including Reseller Product Group Attachment for Enterprise Communication and Internetworking Solutions Product, Reseller Product Group Attachment: Octel® Products, and Addendum for GSA Schedule Contract Sales to the Federal Government.
10.7*	Revolving Credit and Term Loan Agreement dated as of October 1, 2003 between XETA Technologies, Inc. and Bank of Oklahoma, N.A. (“BOK”)
10.8*	Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement dated October 1, 2003 granted to BOK.
10.9*	Promissory Note ($2,238,333.48 payable to BOK) dated October 1, 2003.

7

10.10*	Promissory Note ($7,500,000 payable to BOK) dated October 1, 2003.
10.11*	Promissory Note ($3,374,734.33 payable to BOK) dated October 1, 2003.
10.12*	Security Agreement dated October 1, 2003 granted to BOK.
21*	Subsidiaries of XETA Technologies, Inc.
23†	Consent of Grant Thornton LLP.
31.1†	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*  Filed with the Company’s Annual Report on Form 10-K for the year ended October 31, 2003, filed with the Securities and Exchange Commission on January 16, 2004.
**  Indicates management contract or compensatory plan or arrangement.
†   Filed herewith.

8

EX-99

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated December 5, 2003, except for the “Stock Based Compensation Plans” section of Note 1, as to which the date is June 3, 2004, accompanying the consolidated financial statements included in the Annual Report of Xeta Technologies, Inc. on Form 10-K/A Amendment No. 2 for the year ended October 31, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statements of Xeta Technologies, Inc. on Forms S-8 (File No. 033-62173, effective June 28, 2000 and File No. 333-44544, effective August 25, 2000).

/s/ GRANT THORNTON LLP          

Tulsa, Oklahoma
June 3, 2004

EX-99

Exhibit 31.1

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

I, Jack R. Ingram, certify that:
	1.	I have reviewed this annual report on Form 10-K/A No. 2  of XETA Technologies, Inc;
	2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
		a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
		b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
		a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  June 10, 2004

/s/  JACK R. INGRAM

Jack R. Ingram

Chief Executive Officer

EX-99

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, Robert B. Wagner, certify that:
	1.	I have reviewed this annual report on Form 10-K/A No. 2 of XETA Technologies, Inc;
	2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
		a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
		b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		(c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
		a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  June 10, 2004

/s/  ROBERT B. WAGNER

Robert B. Wagner

Chief Financial Officer

EX-99

Exhibit 32.1

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

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K/A No. 2 for the fiscal year ended October 31, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, Jack R. Ingram, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  JACK R. INGRAM

Jack R. Ingram

Chief Executive Officer

June 10, 2004

EX-99

Exhibit 32.2

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

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K/A No. 2 for the fiscal year ended October 31, 2003, as filed with the Securities and Exchange Commission (the “Report”), I, Robert B. Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,to my knowledge, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  ROBERT B. WAGNER

Robert B. Wagner

Chief Financial Officer

June 10, 2004