-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OfULWkzHFIrvdswH5eOafboeSBGjZ0w9LPhXLVlFgZsAhRhdSHBZdNhVKFl3QsMT 7O6EOuS9Sr/jbWOrikj0qQ== 0001206774-05-000043.txt : 20050119 0001206774-05-000043.hdr.sgml : 20050119 20050118194747 ACCESSION NUMBER: 0001206774-05-000043 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20041031 FILED AS OF DATE: 20050119 DATE AS OF CHANGE: 20050118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XETA TECHNOLOGIES INC CENTRAL INDEX KEY: 0000742550 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 731130045 STATE OF INCORPORATION: OK FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16231 FILM NUMBER: 05534764 BUSINESS ADDRESS: STREET 1: 1814 WEST TACOMA CITY: BROKEN ARROW STATE: OK ZIP: 74012 BUSINESS PHONE: 9186648200 MAIL ADDRESS: STREET 1: 1814 WEST TACOMA CITY: BROKEN ARROW STATE: OK ZIP: 74012 FORMER COMPANY: FORMER CONFORMED NAME: XETA CORP DATE OF NAME CHANGE: 19920703 10-K 1 xt907918.htm

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

FORM 10-K

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

	For the fiscal year ended October 31, 2004

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. x

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, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $40,274,172.

The number of shares outstanding of the registrant’s Common Stock as of January 12, 2005 was 10,045,487 (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 12, 2005 are incorporated by reference into Part III, Items 10 through 14 hereof.

PART I

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

ITEM 1. BUSINESS

Development and Description of Business

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

Previous to 1999, our business was focused entirely in the vertical market of hospitality customers. In 1999 we expanded our business into the general commercial market as a voice and data integrator and established a nation-wide presence in this market through the acquisition of St. Louis-based U.S. Technologies Systems, Inc. (“UST”). In fiscal 2000, we rapidly expanded our business through organic growth and three smaller acquisitions. From 2001 through 2003 we battled difficult economic conditions in our industry brought about by the general economic recession that began in early 2001 and was followed by the tragic events of September 11, 2001. During this time, our revenues decreased approximately 50% and we therefore focused our efforts on cost containment and maximizing cash flows for debt reduction. In 2004, we re-initiated some of our growth strategies by expanding our sales force and acquiring a small Nortel dealer in Seattle, Washington.

Since our expansion into the general commercial market, most of our revenues have been derived from the sale and installation of Avaya Inc. (“Avaya”) products, a product-line that we have represented since 1998. In 2003, we added the Nortel (“Nortel”) product line to our product mix. Both of these manufacturers have well-respected products and each represents approximately 30% of the U.S. telephony market. We also sell Avaya and Nortel products, as well as the Hitachi product line, to the lodging market. All of these products are distributed under nationwide, non-exclusive dealer agreements we have with the manufacturers. Also, except for Hitachi products which we purchase directly from the manufacturer, we purchase these products from large distributors who provide additional pricing and volume incentives.

Our revenues grew by 12% in fiscal 2004 after being relatively flat in 2003 and 2002. Revenues for the year just ended were $58.8 million compared to $52.7 million and $53.7 million in 2003 and 2002, respectively. The increase in revenues in fiscal 2004 reflects a slight increase in demand for the communications systems and services that we sell, but overall we believe that general economic and geopolitical conditions continue to dampen our customers’ willingness to spend capital resources on communications products.

In fiscal 2004, we purchased substantially all of the assets of Bluejack Systems, LLC (“Bluejack”), a small Nortel dealer based in Seattle. We paid $600,000 for Bluejack plus future additional payments that are contingent upon the profitability, as defined in the Purchase Agreement, of the Seattle office. Using Bluejack’s operations as a genesis, we established a full branch office in Seattle to serve customers in that geographic region.

Commercial Systems Sales

We sell a broad range of communications systems and applications for the general commercial market, including government agencies. These products include: IP systems that converge voice and data over a single network, wireless systems, traditional communications systems, call center systems, and messaging systems. We sell these systems under dealer agreements with Avaya and Nortel. Both of these manufacturers hold significant portions of the communications equipment market and are migrating their customer bases to the new IP-based technology platform from traditional telephony systems. Avaya and Nortel sell a variety of IP telephony, call center, messaging, and other communications systems designed for small, medium and large enterprises. We are one of the largest Avaya dealers in the U.S. and have been a Nortel “Premium Partner” dealer since June 2003.

Sales of commercial systems were $25.9 million in fiscal 2004 compared to $21.3 million and $21.8 million in 2003 and 2002, respectively. These sales represented 44%, 40%, and 41% of total revenues during fiscal years 2004, 2003 and 2002, respectively. The 22% increase in commercial systems sales in 2004 compared to the prior year primarily reflects the addition of the Nortel product line in 2004; but also reflects improved customer acceptance of the new IP-based systems along with modest growth in the overall market for these products.

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

Hospitality Products

Communications Systems. We sell communications systems to the hospitality industry through nationwide, non-exclusive dealer agreements with Avaya, Nortel, and Hitachi. In addition to most of the features available on the commercial systems above, the systems sold to hospitality customers are equipped with lodging-specific software, which integrates with nearly all aspects of the hotel’s operations. We also offer a variety of related products such as voice mail systems, analog telephones, uninterruptible power supplies, announcement systems, and others, most of which also have lodging-specific software features. Most of these additional products are sold in conjunction with the sale of new communications systems and, with the exception of voice mail systems, are purchased from regional and national suppliers. Recently, Hitachi announced that they would no longer develop and sell communications systems for the lodging industry. Because of our strong relationships with our lodging customers and the fact that we represent the two other major manufacturers in this market, we do not believe that Hitachi’s decision to leave this market will have a material, negative impact on our operating results in the future. For a further discussion regarding this matter, see “Risk Factors” in “Management’s Discussion and Analysis” below.

Call Accounting Products. We also market a line of proprietary call accounting systems under the Virtual XL^® (“VXL”) series name. Introduced in 1998, the VXL is a PC-based system designed to operate on a hotel’s local or wide area network, and if that network is connected to the Internet, the VXL can also be accessed via an Internet connection. The VXL Series was upgraded to a rack-mounted, server-style system in 2004. The VXL systems are our latest technology in a series of call accounting products we have successfully marketed since our inception. Many of those earlier products remain in the field and are supported by our service and technical staff.

Sales of communications systems and products to the lodging industry represented 9%, 12%, and 11% of total revenues in fiscal 2004, 2003 and 2002, respectively.

Installation and Services

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

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

For our distributed products, we typically pass on the manufacturer’s limited warranty, which is generally one year in length. Labor costs associated with fulfilling the warranty requirements are generally borne by us. For Avaya products that we have sold to non-lodging customers, we attempt to sell Avaya’s post-warranty maintenance contracts, for which we earn a commission. For Avaya systems sold to lodging customers, we sell our own maintenance agreement. Nortel and Hitachi, unlike Avaya, do not have their own telephony field service forces. Therefore, for these products, we aggressively attempt to sell our own post-warranty maintenance contracts to all of our customers. In 2004, we made substantial progress in increasing the revenues from maintenance contracts sold to commercial customers. This was due primarily to the addition of the Nortel product line in 2003. The revenues from our maintenance contracts are an important part of our business model as they provide a predictable stream of profitable recurring revenue. Increasing this revenue stream is a priority for us in the next fiscal year.

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

Installation and service revenues represented 45%, 44%, and 47% of total revenues for fiscal years 2004, 2003 and 2002, respectively.

Marketing

We market our products and services primarily through our direct sales force to a wide variety of customers including large national companies, mid-sized companies, governmental units and agencies, and the hospitality industry. In addition to our direct marketing effort to customers, a very important part of our marketing effort centers on our relationships with Avaya and Nortel. As a national dealer for both manufacturers, we have certain technical and geographical capabilities that help differentiate us in the market. We aggressively market these capabilities to Avaya and Nortel. Both organizations utilize us in a variety of ways, from fulfilling certain customer orders to handling entire customer relationships. We have carefully positioned ourselves as a leading dealer by building our in-house engineering capabilities, providing nationwide implementation services, and through access to our 24-hour, 7 days-per-week service center.

Our marketing efforts to the lodging industry rely heavily on our experience and reputation. Over the course of serving this market for over 20 years, we have built strong long-term relationships with a wide range of personnel (corporate hotel chain personnel, property management officials, industry consultants, hotel owners, and on-site financial and/or operating officers) that can be the key decision makers for the purchase of hotel telecommunications equipment. We have relationships with nearly all hotel chains and major property management companies. These relationships are key to our past and future success and our lodging marketing efforts are targeted at strengthening and deepening those relationships rather than the more broad promotional efforts sometimes employed in our marketing efforts to the commercial sector.

Major Customers

During fiscal 2004 we did not have any single customer that comprised more than 10% of our consolidated revenues. However, we sell systems to hotels that are owned or managed by Marriott Hotels (Marriott). Marriott is a major customer to our lodging business representing approximately 41% of our total lodging systems sales. Marriott has been a major customer of ours since 1986 and we consider our relationship with them to be good.

Backlog

At December 1, 2004 our backlog of orders for systems sales was $1.7 million compared to $6.2 million at the same time last year. We expect this entire backlog to ship and be recognized as revenue by October 31, 2005.

Competition

Commercial. The market for communications systems, applications and services is highly competitive and subject to rapid technological change. Both Avaya and Nortel have extensive dealer organizations, including nationwide dealers like ourselves, and smaller regionally-focused dealers. Avaya also has a direct sales force that sometimes competes with us on large, national accounts. In the Nortel market, in addition to competing with their extensive dealer network, we also compete with most of the Regional Bell Operating Company’s (RBOC’s). Some of our competition, the RBOC’s in particular, have significantly greater financial, sales, marketing, technical, manufacturing and other resources. In addition to other Avaya and Nortel dealers, we also face competition from dealers of other large communications equipment suppliers, including Cisco Systems, Inc., Siemens Aktiengesellschaft, Alcatel S.A. and NEC Corporation, as well as from a number of other companies, some of which focus on particular segments of the market such as customer relationship management.

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

Manufacturing

We assemble the Virtual XL^® systems, our proprietary call accounting systems sold exclusively to the lodging industry. These systems comprise less than 2% of our total revenues. We assemble these systems from an inventory of components, parts and sub-assemblies obtained from various suppliers. These components are purchased from a variety of regional and national distributors at prices which fluctuate based on demand and volumes purchased. Some components, although widely distributed, are manufactured by a single, usually foreign, source and are therefore subject to shortages and price fluctuations if manufacturing is interrupted. We maintain adequate inventories of components to mitigate short-term shortages and believe the ultimate risk of long-term shortages is minimal. The Virtual XL^® systems are based on PC technology, which is continually and rapidly changing. As a result, some of the components originally designed for use in our systems have been phased out of production and replaced by more advanced technology. To date, these substitutions have not forced us to substantially redesign our systems and there has been minimal effect on the overall system cost. There can be no assurance given however, that future obsolescence of key components would not result in unanticipated delays in shipments of systems due to redesign and testing of assemblies.

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

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

Employees

We employed 326 and 300 employees at December 1, 2004 and 2003, respectively. There were no part-time employees.

Copyrights, Patents And Trademarks

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

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

ITEM 2. PROPERTIES

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

Our commercial channel shipping operations are primarily located in a leased facility near St. Louis, Missouri. In addition to the warehouse, this facility houses sales staff, technical design, professional services, and installation support personnel. Our Seattle branch office is located in leased office space in Bellevue, Washington a suburb of Seattle. This facility houses sales and technical personnel.

We also lease other office space throughout the U.S. for sales, consulting, and technical staff and have informal office arrangements with our regional technicians to allow for some storage of spare parts inventory.

ITEM 3. LEGAL PROCEEDINGS

the Company’s various acquisitions and were most likely loaded prior to XETA’s acquisition of these companies. Because the nature of XETA’s liability and the amount of damages due SIIA was in dispute, early settlement negotiations were unproductive. Therefore on December 1, 2003, the Company filed a declaratory judgment action in the U.S. District Court for the Northern District of Oklahoma seeking a judicial determination of liability and damages. This action is in the discovery stage. The Company is vigorously contesting this matter in court and strongly believes that its procedures regarding maintaining adequate numbers of software licenses are sound. Nevertheless, XETA has potential exposure to damages under the law for possessing unlicensed software and has recorded a loss contingency. Recently, settlement negotiations have resumed. Based upon the current status of the claim management does not believe that the ultimate damages will exceed the current recorded loss contingency in an amount that would materially impact the Company’s results of operations.

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 would 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. In October 1998, all of the cases filed against the hotels were dismissed by the court 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.

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

None.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT

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

	Name and Age		Positions With Company

	Jack R. Ingram Age 61		Chairman of the Board, Chief Executive Officer, and President

	Robert B. Wagner Age 43		Chief Financial Officer, Secretary, and Treasurer

	Larry N. Patterson Age 48		Executive Director of Operations

	Don E. Reigel Age 50		Executive Director of Sales

	Thomas A. Luce Age 48		Executive Director of Services

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

Mr. Wagner joined us in July 1988 as Chief Accounting Officer and became our Chief Financial Officer in March 1989. He was a member of the Board of Directors from March 1996 until April 2004. Mr. Wagner is a Certified Public Accountant licensed in Oklahoma and received his Bachelor of Science Degree in Accounting from Oklahoma State University.

Mr. Patterson joined us in March 2000 and serves as Executive Director of Operations. Prior to his employment with us, Mr. Patterson worked for Exxon Corporation and held various executive positions in Europe, Asia and Latin America with Exxon Company, International. He is a member of the American Management Association and is active in Organizational Development, Leadership Development and Investment Management activities. Mr. Patterson received his Bachelor of Science Degree in Engineering from Oklahoma State University.

Mr. Reigel joined us in June 1993 as PBX Product Sales Manager. He was promoted to Vice President of Marketing and Sales in June 1995; became Vice President of Hospitality Sales in December, 1999; and is currently Executive Director of Sales. Prior to his employment with us, Mr. Reigel served as a national accounts sales manager for WilTel Communications Systems. Mr. Reigel received his Bachelor of Science Degree in Business from the University of Colorado.

Mr. Luce joined us in November 1982 as Installation Director. He was later promoted to Director of Installation and Service, became Vice President of Service in June, 1986 and presently serves as Executive Director of Services.

PART II

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

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

	2004				2003

	High		Low		High		Low

Quarter Ending:
January 31	$	6.47	$	5.40	$	4.06	$	1.29
April 30		7.12		5.40		2.50		1.86
July 31		5.57		4.00		5.71		2.55
October 31		4.27		3.38		6.06		4.62

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

As of January 3, 2005, the latest practicable date for which such information is available, we had 182 shareholders of record. In addition, based upon information received as of December 30, 2004, we have approximately 4,406 shareholders who hold their stock in brokerage accounts.

EQUITY COMPENSATION PLAN INFORMATION

Plan Category	Number or securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders		558,172		$	7.69		753,333
Equity compensation plans not approved by security holders		685,400	⁽¹⁾	$	5.86		0
Total		1,243,572		$	6.68		753,333


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

ITEM 6. SELECTED FINANCIAL DATA

For the Year Ending October 31,	2004		2003			2002		2001			2000

	(Amounts in thousands, except per share data)
Results of Operations
Systems sales	$	31,341	$	27,550		$	27,852	$	52,028		$	70,231
Installation and service sales		26,493		23,339			25,390		33,105			31,220
Other revenues		993		1,792			498		921			968

Total Revenues		58,827		52,681			53,740		86,054			102,419

Cost of equipment sales		23,914		19,622			21,384		36,261			47,480
Cost of installation and services		19,120		16,548			18,803		23,616			21,627
Cost of other revenues & corporate COGS		1,530		2,193			1,956		2,759			2,482

Total Cost of Sales		44,564		38,363			42,143		62,636			71,589

Gross Profit		14,263		14,318			11,597		23,418			30,830
Operating expenses		11,652		11,210			10,459		16,069			18,452

Income from operations		2,611		3,108			1,138		7,349			12,378
Interest and other income (expense)		32		(545	)		309		(1,623	)		(1,761	)

Income before taxes		2,643		2,563			1,447		5,726			10,617
Provisions for taxes		1,035		1,005			569		2,245			4,156

Net Income	$	1,608	$	1,558		$	878	$	3,481		$	6,461

Earnings per share – Basic	$	0.16	$	0.16		$	0.09	$	0.38		$	0.77
Earnings per share – Diluted	$	0.16	$	0.16		$	0.09	$	0.36		$	0.66
Weighted Average Common Shares Outstanding		10,009		9,828			9,375		9,061			8,350
Weighted Average Common Share Equivalents		10,157		9,999			9,866		9,698			9,792

As of October 31,	2004		2003		2002		2001		2000

Balance Sheet Data:
Working capital	$	4,465	$	4,204	$	8,580	$	11,214	$	15,145
Total assets		53,556		50,673		59,384		67,285		74,149
Long term debt, less current portion		2,820		4,030		11,565		14,853		17,983
Shareholders’ equity		36,304		34,611		32,521		31,197		25,565

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

Cautionary Statement regarding Forward-Looking Statements

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

Overview

For the year ending October 31, 2004, we earned net income of $1.6 million or $.16 per diluted share on revenues of $58.8 million. These results compare to earnings of $1.6 million or $.16 per diluted share on revenues of $52.7 million last year. These results reflect a 12% increase in our revenues that was offset by declines in our gross margins. Operating expenses increased only 4% in 2004, reflecting our continued focus on cost containment. The over 3.0 percentage point reduction in gross margins was driven by a 5.1 percentage point decrease in gross margins earned on systems sales. This gross margin decline was caused in part by our decision to add the Nortel product line to our business, thereby forfeiting approximately 2.0 percentage points in loyalty rebates provided by Avaya. The remaining reduction in gross margins reflects reductions in various Avaya rebate and incentive programs during the year.

As we saw the economy begin to improve in early fiscal 2004, we cautiously began to re-initiate some growth initiatives. These initiatives included expanding our Nortel sales force and consideration of acquisition opportunities. On August 1, 2004, we purchased the assets of Bluejack Systems, LLC, (“Bluejack”) a Seattle-based Nortel dealer and structured cabling contractor. The acquisition of Bluejack provides us with a jump-start in the Seattle area for our Nortel business. We are operating the Seattle office as a branch model, meaning that most sales and service functions for Seattle customers are handled locally. We also serve the Tulsa market with a similar branch model operating philosophy and plan to expand this model as acquisition and expansion opportunities present themselves.

We continue to be very optimistic about our long-term prospects. The new IP-based communications systems continue to gain market acceptance, the U.S. economy continues to show gradual improvement, and we believe we are well positioned in the market to be successful. We spent much of fiscal 2004 expanding our infrastructure to encompass the new Nortel product portfolio and enhancing our IP telephony capabilities with Avaya. This included establishing our credentials on the Nortel product line through rigorous training programs and certification testing. We accomplished our goals in this area by achieving accreditation on all of the pertinent Nortel products. After establishing our competence on the Nortel products, we began expanding our Nortel sales resources and at year-end our sales resources were evenly split between those who focus primarily on Nortel and those who focus primarily on Avaya.

The discussion that follows provides more details regarding the factors and trends which affected our financial results, liquidity, and capital resources in fiscal 2004 when compared to the previous year.

Results of Operations

Year ending October 31, 2004 compared to October 31, 2003. Net revenues for fiscal 2004 were $58.8 million compared to $52.7 million in fiscal 2003, a 12% increase. Net income for fiscal 2004 was $1.6 million compared to $1.6 million in fiscal 2003. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2004.

Systems Sales. Sales of systems and equipment were $31.3 million in fiscal 2004 compared to $27.5 million in fiscal 2003, a 14% increase. These results reflect improved market conditions and the addition of the Nortel product line in fiscal 2004. Market acceptance of IP-based telephony and related technologies continues to improve and nearly all new systems sold are IP-based systems. We expect this trend to continue.

While the overall U.S. economy has shown signs of improvement, we continue to see mixed results as technology spending, especially on communications equipment, remains sluggish. Some customers hesitated to resume their capital spending on technology despite the advances in systems and applications that have occurred in the past few years. While we expect our systems sales to improve in fiscal 2005, no assurance can be given that customers will not continue to restrict their capital spending budgets to the lower levels experienced during the past three fiscal years.

Installation and Service Revenues. Revenues earned from installation and service related activities were $26.5 million for fiscal 2004, a 14% increase over fiscal 2003. All of our major service revenue streams showed increases compared to the prior year. These increases include increases in installation and consulting revenues that were driven by increases in systems sales and increases in revenues from maintenance contracts and services that were driven primarily by the addition of the Nortel product line.

As discussed above, our systems sales increased 14% in fiscal 2004 which resulted in improved installation, project management and programming revenues, all of which are directly associated with new systems sales. Our revenues earned from maintenance contracts increased 9% overall, but were mainly fueled by a 132% increase in revenues earned from service contracts with commercial (non-lodging) customers. This increase is directly related to the addition of the Nortel product line to our business. We are severely limited in the sale of Avaya service contracts to commercial customers because Avaya desires to maintain their systems with their own direct service force. There is no channel conflict, however, in the Nortel product line. Consequently, it is a high priority of Company management to continue to increase these revenues as they provide a recurring stream of profitable revenues to the Company. We also enjoyed a 27% increase in revenues earned from move, add, and change (MAC) and time and materials (T&M) service activities. A portion of these revenues are earned from customers who do not have service contracts, but call us regularly for services. The remaining portion of MAC and T&M revenues are earned from customers who do have service contracts with us, but need non-covered services performed. As a result, increases in contract revenues generally have a “pull-through” effect on MAC and T&M revenues. Notably, our MAC and T&M revenues earned from commercial customers increased 62% last year, again reflecting the addition of the Nortel product line to our business.

Gross Margins. Gross margins were 24.2% in fiscal 2004 compared to 27.2% in fiscal 2003. While we experienced a decline in gross margins on both systems sales and services, most of the decline in gross margins, 5.1 percentage points, was related to the gross margins on systems sales.

Gross margins on systems sales were 23.7% in fiscal 2004 compared to 28.8% in fiscal 2003. The gross margins we earn on systems sales is volatile and is affected by several factors including: 1) we sell a wide variety of products, some of which generate gross margins in excess of 50% and some of which earn gross margins of less than 20%; 2) we sell to several different customer sets, some of which have pre-negotiated contracts with Avaya which result in lower margins for us; and 3) as a distributor, we receive various forms of financial incentives from our suppliers and from the manufacturers which can vary greatly based on special promotions, product-types purchased, the end-user customer, seasonality, etc. All of these factors contribute to the volatility of our systems sales gross

margins. Specifically in fiscal 2004, approximately 2.0 percentage points of the gross margin decline was expected as a result of dropping our exclusive representation of Avaya products to the commercial sector and adding the Nortel product line. Avaya provides additional “loyalty” discounts to dealers who represent only Avaya products in the marketplace. Therefore, we knew when we added Nortel that we would lose these discounts. The remaining portion of the decline in gross margins on systems sales was not expected and related to additional changes in incentive payment and rebate programs offered and administered by Avaya. The decrease in gross margins earned on systems sales occurred mostly during our first fiscal quarter and then was relatively stable the remainder of the year. We believe therefore, that the greater part of the erosion of these gross margins is over; however, no assurance can be given that additional changes by Avaya or other market conditions will not further erode our gross margins.

The gross margins earned on installation and service revenues were 27.8% in fiscal 2004 compared to 29.1% in fiscal 2003. This decrease was directly related to the cost of starting up our service offering for the Nortel product line. This includes the hiring and training of additional technicians to service Nortel products. Most of the additional technical staff was added to support our branch offices in Tulsa and Seattle and those staff are not yet fully utilized in customer service. This fact, in conjunction with the additional costs associated with Nortel training and certifications, had a negative impact on our service margins.

A final component to our gross margins is the margins earned on other revenues and our corporate cost of goods sold expenses. Other revenues represent sales and cost of goods sold on equipment outside our normal provisioning processes and commissions earned on the sale of manufacturer service contracts. Corporate cost of goods sold represents the cost of our material logistics and purchasing functions. Corporate cost of goods sold declined 7% in fiscal 2004 compared to fiscal 2003 reflecting management’s continued focus on containment of administrative costs.

Operating Expenses. Operating expenses were $11.7 million or 19.8% of revenues in fiscal 2004 compared to $11.2 million or 21.3% of revenues in fiscal 2003. The decrease in operating expenses as a percent of sales reflects our continued focus on controlling costs and an increase in the sales and marketing incentive payments received from manufacturers that we represent. As discussed above under “Overview”, we expanded our sales force and sales management during fiscal 2004 as we began to see improvement in the U.S. economy. However, we continued to closely control our general and administrative expenses and were able hold those expenses relatively flat during fiscal 2004 despite the increase in revenues. A significant portion of our operating expenses are offset by various sales and marketing incentives provided by Avaya and Nortel under a variety of programs designed to increase the promotion and market presence of their products. The manufacturers change these programs regularly, so it is difficult to predict whether the offset to operating expenses will remain at 2004 levels in fiscal 2005.

Interest and Other Income. Interest expense consists of interest paid or accrued on our credit facility. Interest expense declined in fiscal 2004 by approximately $243,000, reflecting lower average debt levels in fiscal 2004. Also, during fiscal 2004, we capitalized interest costs of approximately $187,000 related to our Oracle implementation project compared to approximately $337,000 in fiscal 2003. During fiscal 2004, we reduced our term debt by $1.2 million through cash on hand and funds generated from operations.

Net other income in fiscal 2004 was approximately $263,000 compared to net other expense of approximately $71,000 last year. The primary reason for the change in other income and expense relates to the accrual of a contingent liability in 2003 and the partial reversal of that contingency in 2004 as more facts about the matter became available.

Tax Expense. We have recorded a combined federal and state tax provision of approximately 39% in all years presented. This rate reflects the effective federal tax rate plus the estimated composite state income tax rate.

Operating Margins. Our net income as a percent of revenues in fiscal 2004 was 2.7% compared to 3.0% in 2003. This decrease reflects lower gross margins earned in fiscal 2004. Our current business model targets an operating margin of 6%. However, we will have to realize sustained growth in our revenues, primarily through increased sales of systems to commercial customers, and hold our gross margins to reach this target.

Year ending October 31, 2003 compared to October 31, 2002. Net revenues for fiscal 2003 were $52.7 million compared to $53.7 million in fiscal 2002, a 2% decline. Net income for fiscal 2003 was $1.6 million compared to $0.9 million in fiscal 2002, a 77% increase. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2003.

Systems Sales. Sales of systems and equipment were $27.5 million in fiscal 2003 compared to $27.9 million in fiscal 2002, a 1% decrease. These results reflected the static market conditions experienced during fiscal 2003 as customers continued to defer most of their buying decisions. In the early portion of fiscal 2003, we experienced a spike in new orders, indicating that the market for our products was prepared to return to historical levels of growth. However, order rates quickly returned to fiscal 2002 levels as a high degree of pessimism returned to the overall economy reflecting concerns about the war in Iraq and future business profits.

Installation and Service Revenues. Revenues earned from installation and service related activities were $23.3 million in fiscal 2003, an 8% decrease from fiscal 2002. This decrease was due primarily to lower discretionary spending by customers on T&M work. The decrease also reflected a slow-down in our Microsoft consulting business. Most of our customers focused very heavily on cost controls during the economic downturn throughout fiscal 2003 and, as a result, deferred all service work that was not essential. Also, because most companies were not increasing their employee base, they were not spending money on expansions of their systems, movement of employees, etc., all of which generate service revenues for us.

Installation revenues were flat in fiscal 2003 compared to fiscal 2002. This result was expected given the relatively stable level of systems sales, which is the primary driver of installation revenues. Contract revenues in fiscal 2003 were consistent with fiscal 2002 levels. This revenue stream continued to be derived primarily from our lodging business, which did not expand during fiscal 2003. Service revenues from the consulting portion of our business declined slightly during fiscal 2003 as customers continued to limit their discretionary spending in this area.

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

Gross margins on systems sales were 28.8% in fiscal 2003 compared to 23.2% in fiscal 2002. A portion of this increase related to an adjustment we made during fiscal 2002 to the reserve for inventory obsolescence. During the third quarter of fiscal 2002, we increased the inventory reserve and systems cost of goods sold by $775,000. Without this adjustment, our gross margins on systems sales in fiscal 2002 would have been 26.0%. The remainder of the improvement in systems sales reflected improvements in sales quoting processes implemented during fiscal 2003. By establishing procedures to focus more closely on gross margins prior to finalizing the order and by more aggressively seeking price support from the manufacturer, we were able to significantly improve our margins on systems sales in fiscal 2003 over fiscal 2002.

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

Corporate cost of goods sold declined 8% in fiscal 2003 compared to fiscal 2002 reflecting management’s continued focus on reducing operating costs by controlling headcount and discretionary expenditures.

Operating Expenses. Operating expenses were $11.2 million or 21.3% of revenues in fiscal 2003 compared to $10.5 million or 19.5% of revenues in fiscal 2002. In fiscal 2002, we recorded an adjustment to decrease the reserve for bad debts by $700,000 which resulted in a reduction in bad debt expense. Without this adjustment, fiscal 2002 operating expenses would have been 20.8% of revenues. The remainder of the increase in operating expenses as a percentage of revenues in fiscal 2003 was related to the loss of certain marketing reimbursement programs from Avaya. Avaya replaced these programs with a different incentive system that we participated in, but the contributions received under the new incentive system only partially offset the loss of cost reimbursements under the previous program.

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

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

Operating Margins. Our net income as a percent of revenues in fiscal 2003 was 3.0% compared to 1.6% in fiscal 2003. This increase reflected higher gross margins earned in fiscal 2003 while holding operating expenses relatively constant.

Liquidity and Capital Resources

During fiscal 2004, our financial condition was relatively unchanged from the end of fiscal 2003. Our term debt was reduced $1.2 million or 23% reflecting scheduled principal payments on the notes.

Cash flows from earnings and non-cash charges were $2.5 million. Additional operating cash flows of $2.6 million were generated from reductions in inventories, sales-type leases, prepaid expenses, and from decreases in accrued liabilities and deferred taxes. Offsetting these cash flows were increases in accounts receivable of $3.4 million and a decrease in accounts payable of $1.8 million. In total, our cash used in operations was approximately $444,000. Our capital expenditures totaled $1.6 million including approximately $598,000 to acquire the net assets of Bluejack (see “Development and Description of Business” under ITEM 1. BUSINESS, above); approximately $592,000 invested in our Oracle project and approximately $466,000 to acquire other capital equipment.

As discussed above, we have continued to invest in the Oracle system and at October 31, 2004 we had capitalized $7.3 million in this project. We have segregated the cost of this asset into four groups with estimated useful lives of three, five, seven and ten years. Beginning in fiscal 2005, we will be implementing the system in our business and will begin amortizing the cost of the software according to its estimated useful life.

At October 31, 2004, the balance on our working capital revolver was $3.85 million, leaving $3.65 million available for additional borrowings. We believe that this available capacity is sufficient for our operating needs for the foreseeable future. The revolver is scheduled to expire on September 28, 2005 but we expect to renew it for another 12 month period prior to its expiration. At October 31, 2004, we were in compliance with the covenants of our debt agreements or received the appropriate waivers and we consider our relationship with our bank to be good. In addition to the available capacity under our working capital line of credit, we believe we have access to a variety of capital sources such as additional bank debt, private placements of subordinated debt, and public or private sales of additional equity. However, there are currently no plans to issue such securities.

The table below presents our contractual obligations at October 31, 2004, as well as payment obligations over the next five fiscal years:

			Payments due by period

Contractual Obligations	Total		Less than 1 year		2 – 3 Years		4 – 5 years		More than 5 years

Long-term debt	$	4,030,002	$	1,209,645	$	2,820,357	$	—	$	—
Operating leases		292,510		203,004		84,328		5,178		—
Total	$	4,322,512	$	1,412,649	$	2,904,685	$	5,178	$	—

Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” in December 2004. SFAS No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 and the Company will adopt the standard in the third quarter of fiscal 2005. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005 and the Company will adopt this standard in its third quarter of fiscal 2005. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

In January of 2003, FASB issued Financial Interpretation No. 46 “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (“FIN 46”). In December 2003, the FASB issued FIN 46R, which clarified certain issues identified in FIN 46. FIN 46R requires an entity to consolidate a variable interest entity if the entity is designated as the primary beneficiary of that variable interest entity even if the entity does not have a majority of voting interest. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception of any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied at the beginning of the first interim or annual period beginning after March 15, 2004. The Company does not have any variable interest entities; therefore the implementation of FIN 46 did not have a material impact on the Company’s operating results, financial position, or cash flows.

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 was effective for derivative contracts entered into after June 30, 2003. The adoption of SFAS 149 did not 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 was 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 did not have any effect on the Company’s operating results, financial position, or cash flows.

Application of Critical Accounting Policies

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

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

Collectibility of Accounts Receivable. We must make judgments about the collectibility of our accounts receivable to be able to present them at their net realizable value on the balance sheet. To do this, we carefully analyze the aging of our customer accounts, try to understand why accounts have not been paid, and review historical bad debt problems. From this analysis, we record an estimated allowance for receivables which we believe will ultimately become uncollectible. We reduced our estimated allowance for bad debts by $700,000 in fiscal 2002 and by $46,000 in fiscal 2003 because of better than expected collection results. There was no such adjustment made during fiscal 2004. We actively manage our accounts receivable to minimize our credit risks and believe that our current allowance for doubtful accounts is fairly stated.

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

of judgment. In the second half of fiscal 2002, we recorded increases to our provision for excess and obsolete inventories of approximately $962,000, reflecting our judgment that our provision was understated at that time. This amount was recorded as an increase to systems cost of goods sold. While there were additions to the reserve and write-offs of worthless items in fiscal 2004 and 2003, there was not a similarly large adjustment made as in fiscal 2002.

Goodwill and Other Long-lived Assets. We have a significant amount of goodwill on our balance sheet resulting from the acquisitions made in fiscal 2000, 2001, and 2004. We conduct an annual goodwill impairment review immediately after the completion of the fiscal year to determine the fair value of our reporting units. In fiscal years 2004 and 2002, we engaged an independent valuation consultant to assist us in this review. To make this assessment each year, we prepared a long-term forecast of the operating results and cash flows associated with the major reporting units of our business. We prepared this forecast in order to determine the net discounted cash flows associated with each of these units. We, or the consultant in 2002 and 2004, then compared the value of the discounted cash flows, less bank debt, to the book value of each of those units. Based on the work performed, we determined that the fair value, based on the discounted cash flows, was greater than our carrying value and therefore no impairment had occurred. There is a great deal of judgment involved in making this assessment, including the growth rates of our various business lines, gross margins, operating margins, discount rates, and the capital expenditures needed to support the projected growth in revenues.

We have recorded property, equipment, and capitalized software costs at historical cost less accumulated depreciation or amortization. The determination of useful economic lives and whether or not these assets are impaired involves significant judgment.

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

Outlook and Risk Factors

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

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

Our business is directly affected by capital spending on technology equipment in the U.S. While capital spending improved slightly during fiscal 2004 compared to the very depressed levels experienced from 2001 through 2003, demand for our products continues to be weak. We believe that many customers continue to be concerned about their ability to increase revenues and thereby increase their profitability. Accordingly, they have tried to maintain or improve profitability through cost reduction and reduced capital spending. We believe that companies may continue to be reluctant to increase spending on communications systems in the near term; therefore, we expect continued pressure on our ability to increase our revenues.

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

Although we added Nortel equipment to our product line in 2003, sales of Nortel products and services continue to be in a “ramp-up” stage. Consequently, in the near term, our financial results will continue to be heavily dependent upon the quality and reputation of Avaya’s products. As such, our success in this market will continue to depend heavily upon Avaya’s ability to develop its products on a timely basis and compete effectively with other manufacturers’ products in this market. From a longer-term perspective, we expect the Avaya product line to continue to be a material part of our business and we have no plans to diminish our Avaya related efforts in any way. Therefore, we expect to be dependent to some degree on Avaya as a significant supplier of the equipment that we resell.

Avaya frequently changes the incentive programs offered to their business partners. Such changes had a detrimental effect on our financial results for the last two years and could do so again in the future.

Avaya, like many major manufacturers, provides various financial incentive programs to support increasing the market share, promotion, and sale of its products. We receive substantial rebates through these incentive programs to offset both costs of goods sold and selling expenses. We also receive commissions from Avaya to sell their maintenance contracts. These amounts are material to our operating results. Avaya made significant changes to these programs in 2004. As a result of some of these changes, the gross margins on our systems sales were lower than they were in previous years.

We expect Avaya to continue to change their rebate programs to encourage their dealers to target certain customer segments, typically small to mid-sized firms, and to avoid certain other customer sets such as large, national customers which Avaya prefers to serve with their direct sales force. We expect our business model to be at odds with some of the goals of these incentive programs and therefore we expect to continue to experience difficulty in maintaining the level of incentive payments which we have enjoyed in prior years.

We are investing significant resources to add Nortel products and services to our product line and our efforts may not produce satisfactory results.

To extend our market reach and reduce our reliance on Avaya, we added the Nortel product line to our business in 2003. We are investing significant resources in the hiring and training of personnel to sell, design, install and maintain Nortel products. During 2004, we acquired Bluejack, a small, Seattle-based Nortel dealer to help jump start our Nortel product launch. Despite these investments, which are designed to make revenues and gross profits earned from Nortel a material part of our business, it may take longer than we expect or this effort may not be successful at all.

Revenues and gross profits earned by hotels from guest calls continue to decline resulting in hotels canceling their call accounting maintenance agreements with us.

Primarily because of the increasing use of cell phones by guests, hotels have experienced a rapid decline in their revenues and gross profits earned from long distance and other telephone-related fees. This development has severely reduced the importance of call accounting systems in hotels and as a result, many of our customers are considering reducing or eliminating their call accounting maintenance contracts with us. In fiscal 2004, we earned $4.1 million in revenues associated with these maintenance contracts. The loss or reduction in these revenues could materially and negatively impact our operating results.

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

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

Hitachi has announced that it will no longer manufacture communications systems for the hospitality market.

Hitachi, once one of the leading suppliers of traditional PBX systems to the hospitality market, has announced that it will no longer design and manufacture systems for this market. Hitachi has committed to maintaining an adequate supply of parts for their installed systems for the next ten years. We have many long-time lodging customers with significant portfolios of Hitachi systems in their hotels. We have several hundred Hitachi systems under service contract producing recurring contract revenues and gross profits for our business. Over the next ten years, all of these customers will have to transition their communications systems to new platforms presenting a risk to us that another vendor will be selected. While this risk also presents us with an opportunity to sell new systems to our existing Hitachi customers, no assurance can be given that Hitachi’s decision will not negatively impact our financial results in the future.

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

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

We expect our gross margins to vary over time.

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

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

We sell communications systems under dealer agreements with Avaya, Inc., Hitachi Telecom, (USA), Inc., and Nortel. We are a major dealer for Avaya and Hitachi and consider our relationship with both to be good. Nevertheless, if our strategic relationship with these manufacturers were to be terminated prematurely or unexpectedly, our operating results would be adversely impacted. Furthermore, these agreements require that we meet certain volume commitments to earn the pricing structure provided in the dealer agreements. Failure to meet these requirements could cause material, adverse consequences to our gross margins and overall operating results.

We are dependent upon a few suppliers.

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

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

Our ability to attract, train, motivate and retain highly skilled and qualified technical and sales personnel is critical to our success. Competition for such employees in the rapidly changing telecommunications industry is

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

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

The market for our products and services is highly competitive and subject to rapidly changing technologies. As the industry itself evolves and new technologies and products are introduced into the marketplace, new participants enter the market and existing competitors seek to strengthen their positions and expand their product/service offerings. There has been a trend toward industry consolidation, which can lead to the creation of stronger competitors who may be better able to compete as a sole-source vendor for customers. While we believe that through the expansion and transformation of the last few years, we are well-positioned to compete effectively in the marketplace, our failure to maintain or enhance this position could adversely affect our business and results of operations.

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

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

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

Our success in navigating the current market will depend heavily upon our ability to assemble the necessary information to make informed decisions and implement those decisions quickly and effectively. For the past 42 months, we have been working on a major upgrade to our technology infrastructure and information systems. This upgrade will result in a consolidation from four critical legacy systems to one. Due to constraints that we have imposed on capital spending, we have purposely slowed down the development of this system. Furthermore, at our current revenue and activity levels, conversion to this new system is not critical to our near-term success. However, we believe it is prudent to proceed with the conversion while our revenues are at these lower levels in anticipation of future growth which we believe will require upgraded and consolidated technology infrastructure. While we are taking great care to properly plan this implementation and to test the solution fully prior to the conversion, there can be no guarantees given that the conversion will not disrupt our operations.

Our targeted operating margins of 6% may not be achievable.

We believe that our current business model would support a target operating margin of 6%. This target assumes that we can: 1) generate significantly higher revenues; 2) maintain our gross margins; and 3) operate our material logistics and general and administrative functions at about the same levels as we currently do. These assumptions are not tested through past experience operating in the commercial sector of our market and may not be achievable.

Our stock price may continue to be volatile.

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

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

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

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

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

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

We are currently in litigation with the Software & Information Industry Association (“SIIA”). SIIA has alleged that have used unlicensed software in our business. Our audit of our systems determined that we had a limited number of software titles being used on our computers that were unlicensed. Many of these titles were used by employees for their personal use. We are vigorously contesting this matter in court and strongly believe that our procedures regarding maintaining adequate numbers of software licenses is sound. Nevertheless, we have recorded a contingent liability reflecting our estimate of the damages that may be paid in this litigation. If our position regarding this matter proves to be unsuccessful, there can be no assurance given that the amounts accrued will be sufficient to cover the damages assessed.

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

In addition to the specific factors discussed above, we are subject to certain risks that are inherent in doing business, such as general industry and market conditions and growth rates, general economic and political conditions, costs of obtaining insurance, unexpected death of key employees, changes in employment laws and regulations, changes in tax laws and regulations, and other events that can impact revenues and the cost of doing business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from changes in interest rates. We did not use derivative financial instruments for speculative or trading purposes during the 2004 fiscal year.

Interest Rate Risk. We are subject to the risk of fluctuation in interest rates in the normal course of business due to our utilization of variable debt. Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate (“LIBOR”) (2.00% at October 31, 2004) plus 1.25 to 2.75% or the bank’s prime rate (4.75% at October 31, 2004) less 0.0% to 1.125%. In an effort to manage the risk associated with variable interest rates, in November 2001 we entered into an interest rate swap to hedge the variability of cash flows associated with variable rate interest payments, on amortizing notional amounts of $10.0 million. The swap agreement expired on November 3, 2004 and was not renewed. The “pay fixed rates” under the swap agreement was 3.32%. The “receive floating rates” for the swap agreement was “1-month” LIBOR, resetting monthly. A hypothetical 10% increase in interest rates would have increased our interest expense by approximately $23,000 in fiscal 2004 and would not have had a material impact on our financial position or cash flows.

PART II

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements		Page

Report of Independent Registered Public Accounting Firm		F-1

Consolidated Financial Statements

Consolidated Balance Sheets - October 31, 2004 and 2003		F-2

Consolidated Statements of Operations - For the Years Ended October 31, 2004, 2003 and 2002		F-3

Consolidated Statements of Shareholders’ Equity - For the Years Ended October 31, 2004, 2003 and 2002		F-4

Consolidated Statements of Cash Flows - For the Years Ended October 31, 2004, 2003 and 2002		F-5

Notes to Consolidated Financial Statements		F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
Shareholders of XETA Technologies, Inc.

We have audited the accompanying consolidated balance sheets of XETA Technologies, Inc. (an Oklahoma corporation) and subsidiary as of October 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 subsidiary as of October 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Oklahoma City, Oklahoma
December 10, 2004

F-1

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

	October 31, 2004			October 31, 2003

ASSETS
Current assets:
Cash and cash equivalents	$	141,054		$	291,118
Current portion of net investment in sales-type leases and other receivables		439,026			979,255
Trade accounts receivable, net		9,529,377			5,794,949
Inventories, net		4,844,702			5,614,902
Deferred tax asset, net		880,605			885,752
Prepaid taxes		6,868			—
Prepaid expenses and other assets		230,293			322,699

Total current assets		16,071,925			13,888,675

Noncurrent assets:
Goodwill, net of accumulated amortization prior to adoption of SFAS 142		26,196,806			25,726,886
Intangible assets, net		217,542			—
Net investment in sales-type leases, less current portion above		296,865			419,800
Property, plant & equipment, net		10,726,855			10,466,824
Other assets		46,358			170,483

Total noncurrent assets		37,484,426			36,783,993

Total assets	$	53,556,351		$	50,672,668

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	1,209,645		$	1,209,645
Revolving line of credit		3,850,282			719,073
Lease payable		8,897			—
Accounts payable		2,452,480			3,928,878
Current unearned revenue		1,558,510			1,620,323
Accrued liabilities		2,522,343			1,869,024
Accrued taxes		—			58,134
Other liabilities		4,986			279,250

Total current liabilities		11,607,143			9,684,327

Noncurrent liabilities:
Long-term debt, less current portion above		2,820,357			4,029,738
Accrued long-term liability		144,100			144,101
Noncurrent unearned service revenue		140,172			229,910
Noncurrent deferred tax liability, net		2,540,559			1,973,575

Total noncurrent liabilities		5,645,188			6,377,324

Contingencies
Shareholders' equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued		—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,031,575 and 11,021,740 issued at October 31, 2004 and October 31, 2003, respectively		11,031			11,021
Paid-in capital		12,695,224			12,681,681
Retained earnings		25,837,870			24,229,820
Accumulated other comprehensive income (loss)		4,554			(66,846	)
Less treasury stock, at cost (1,018,788 shares at October 31, 2004 and October 31, 2003)		(2,244,659	)		(2,244,659	)

Total shareholders' equity		36,304,020			34,611,017

Total liabilities and shareholders' equity	$	53,556,351		$	50,672,668

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

F-2

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended October 31,

	2004			2003			2002

Systems sales	$	31,341,190		$	27,549,876		$	27,852,358
Installation and service revenues		26,492,810			23,338,915			25,390,142
Other revenues		993,431			1,792,512			497,778

Net sales and service revenues		58,827,431			52,681,303			53,740,278

Cost of systems sales		23,914,329			19,621,591			21,383,502
Installation and services costs		19,120,486			16,548,392			18,803,143
Cost of other revenues & corporate COGS		1,529,938			2,192,967			1,956,071

Total cost of sales and service		44,564,753			38,362,950			42,142,716

Gross profit		14,262,678			14,318,353			11,597,562

Operating expenses
Selling, general and administrative		11,569,185			11,030,671			10,279,299
Amortization		82,485			180,000			180,000

Total operating expenses		11,651,670			11,210,671			10,459,299

Income from operations		2,611,008			3,107,682			1,138,263
Interest expense		(230,819	)		(473,979	)		(887,274	)
Interest and other income (expense)		262,861			(71,139	)		1,196,250

Total interest and other income (expense)		32,042			(545,118	)		308,976
Income before provision for income taxes		2,643,050			2,562,564			1,447,239
Provision for income taxes		1,035,000			1,005,000			569,000

Net income	$	1,608,050		$	1,557,564		$	878,239

Earnings per share
Basic	$	0.16		$	0.16		$	0.09

Diluted	$	0.16		$	0.16		$	0.09

Weighted average shares outstanding		10,008,507			9,827,884			9,375,336

Weighted average equivalent shares		10,157,372			9,998,670			9,866,162

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

F-3

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common Stock				Treasury Stock					Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total

	Shares Issued		Par Value		Shares		Amount

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 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
Stock options exercised $.001 par value		9,835		10		—		—			9,535		—			—		9,545
Tax benefit of stock options		—		—		—		—			4,008		—			—		4,008
Components of comprehensive income:
Net income		—		—		—		—			—		—			1,608,050		1,608,050
Unrealized gain on hedge, net of tax of $46,034		—		—		—		—			—		71,400			—		71,400

Total comprehensive income																		1,679,450

Balance- October 31, 2004		11,031,575	$	11,031		1,018,788	$	(2,244,659	)	$	12,695,224	$	4,554		$	25,837,870	$	36,304,020

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

F-4

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

	For the Years Ended October 31,

	2004			2003			2002

Cash flows from operating activities:
Net income	$	1,608,050		$	1,557,564		$	878,239

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		822,300			971,499			1,167,226
Amortization		82,485			180,000			180,000
Loss on sale of assets		2,465			48,521			47,373
Ineffectiveness of cash flow hedge		12,473			—			—
Reversal of provision for doubtful accounts		—			(45,907	)		(748,200	)
Provision for excess and obsolete inventory		—			280,431			1,068,013
Change in assets and liabilities, net of acquisitions:
Decrease in net investment in sales-type leases & other receivables		663,164			135,311			2,093,243
(Increase) decrease in trade account receivables		(3,405,570	)		3,963,230			7,176,595
Decrease in inventories		959,786			1,906,448			139,171
(Increase) decrease in deferred tax asset		5,147			(293,109	)		421,105
(Increase) decrease in prepaid expenses and other assets		172,357			(99,146	)		168,755
(Increase) decrease in prepaid taxes		(6,868	)		1,195,539			(532,581	)
Increase (decrease) in accounts payable		(1,810,728	)		(2,190,257	)		1,571,788
(Decrease) in unearned revenue		(357,693	)		(462,367	)		(669,669	)
Increase (decrease) in accrued taxes		(19,918	)		96,352			550,919
Increase (decrease) in accrued liabilities		286,669			(260,861	)		(1,140,540	)
Increase in deferred tax liabilities		542,319			1,190,155			592,563

Total adjustments		(2,051,612	)		6,615,839			12,085,761

Net cash provided by (used in) operating activities		(443,562	)		8,173,403			12,964,000

Cash flows from investing activities:
Acquisitions, net of cash acquired		(597,791	)		—			—
Additions to property, plant & equipment		(1,059,623	)		(1,031,696	)		(2,121,298	)
Proceeds from sale of assets		19,542			2,568			48,232

Net cash used in investing activities		(1,637,872	)		(1,029,128	)		(2,073,066	)

Cash flows from financing activities:
Proceeds from issuance of debt		—			1,125			—
Proceeds from draws on revolving line of credit		30,111,338			16,083,009			16,275,000
Principal payments on debt		(1,209,384	)		(9,615,089	)		(4,288,339	)
Payments on revolving line of credit		(26,980,129	)		(15,363,936	)		(21,625,000	)
Exercise of stock options		9,545			75,000			116,250

Net cash provided by (used in) financing activities		1,931,370			(8,819,891	)		(9,522,089	)

Net increase (decrease) in cash and cash equivalents		(150,064	)		(1,675,616	)		1,368,845
Cash and cash equivalents, beginning of period		291,118			1,966,734			597,889

Cash and cash equivalents, end of period	$	141,054		$	291,118		$	1,966,734

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	180,366		$	446,786		$	970,102

Cash paid during the period for income taxes	$	525,881		$	132,011		$	409,404

Contingent consideration paid to target shareholder	$	—		$	—		$	1,000,000

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

F-5

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2004

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 that 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 dormant subsidiary of the Company.

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

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

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

Revenue Recognition

The Company earns revenues from the sale and installation of communications systems, the sale of maintenance contracts, and the sale of services on a time and materials basis. The Company typically sells communications systems under single contracts to provide the equipment and the installation services; however, the installation and any associated professional services and project management services are priced independently from the equipment based on the market price for those services. The installation of the systems sold by the Company can be outsourced to a third party either by the Company under a subcontractor arrangement or by the customer under arrangements in which vendors bid separately for the provision of the equipment from the installation and related services. Emerging Issues Task Force Issue (“EITF”) No. 00-21 “Revenue Arrangements with Multiple Delieverables” (“EITF 00-21”) addresses certain aspects of accounting by a vendor for arrangements with multiple revenue generating elements, such as those including products with installation. Under EITF 00-21, revenue is recognized for each element of the transaction based on its relative fair value. The revenue associated with delivered element should be recognized separately if it has stand-alone value to the customer, there is evidence of the fair value of the undelivered element, the delivery or performance of the undelivered element is considered probable and performance is substantially under the Company’s control and is not essential to the functionality of the delivered element. Under these guidelines, the Company recognizes systems sales revenue upon shipment of the equipment and installation services revenues upon completion of the installation of the system.

Service revenues earned from maintenance contracts are recognized monthly over the life of the related service agreement on a straight-line basis. Revenues earned from services provided on a time and material basis are recognized as those services are provided. The Company recognizes revenue from sales-type leases as discussed below under the caption “Lease Accounting.”

F-6

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.

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 that 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.

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 that 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. Management monitors the payment status of all customer balances and considers an account to be delinquint once it has aged sixty days past the due date. The allowance for doubtful accounts is adjusted based on management’s assessment of collection trends, agings of customer balances, and any specific disputes. The Company recorded a reduction in the allowance for doubtful accounts of $45,907 and $748,200 for the years ended October 31, 2003 and 2002, respectively. No such reversals were made to the provision for doubtful accounts during the year ended October 31, 2004.

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 other income. Maintenance and repair costs are expensed as incurred. Interest costs related to an investment in long-lived assets are capitalized as part of the cost of the asset during the period the asset is being prepared for use. The Company capitalized $187,000, $337,000, and $277,000 in interest costs in fiscal years 2004, 2003 and 2002, respectively.

F-7

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 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” (“SFAS 86”). 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.

Software Development Costs

The Company applies the provisions of Statement of Position (“SOP”) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). 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 $7.3 million and $6.7 million related to the software development as of October 31, 2004 and 2003, respectively. The Company has segregated the cost of the developed software into four groups with estimated useful lives of three, five, seven and ten years. Beginning in fiscal 2005, the Company will be implementing the developed software in its business and will begin amortizing the cost of the software according to its estimated useful life.

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 Accounting Principles Board 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 consolidated financial statements. Accordingly, the Company follows fixed plan accounting. XETA applies the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 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 SFAS 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. As of October 31, 2004, 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 consolidated financial statements.

	For the Year Ended October 31,

	2004			2003			2002

Pro Forma Disclosures:
NET INCOME (LOSS):
As reported	$	1,608,050		$	1,557,564		$	878,239
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(103,583	)		(388,628	)		(1,084,695	)

Pro forma	$	1,504,467		$	1,168,936		$	(206,456	)

EARNINGS (LOSS) PER SHARE:
As reported – Basic	$	0.16		$	0.16		$	0.09
As reported – Diluted	$	0.16		$	0.16		$	0.09
Pro forma – Basic	$	0.15		$	0.12		$	(0.02	)
Pro forma – Diluted	$	0.15		$	0.12		$	(0.02	)

F-8

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

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.

Unearned Revenue and Warranty

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

Most of the systems sold by the Company are manufactured by third parties. In these instances the Company passes on the 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-9

The following is a tabulation of business segment information for 2004, 2003 and 2002:

	Commercial System Sales		Lodging System Sales		Installation and Service Revenues		Other Revenue			Total

2004
Sales	$	25,897,343	$	5,443,847	$	26,492,810	$	993,431		$	58,827,431
Cost of sales		20,180,498		3,733,831		19,120,486		1,529,938			44,564,753
Gross profit		5,716,845		1,710,016		7,372,324		(536,507	)		14,262,678
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

Recently Issued Accounting Pronouncements

SFAS No. 123 (Revised 2004), “Share-Based Payment,” issued in December 2004, is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (Revised 2004) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 and the Company will adopt the standard in the third quarter of fiscal 2005. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005 and the Company will adopt this standard in its third quarter of fiscal 2005. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

In January of 2003, FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (FIN 46). In December 2003, the FASB issued FIN 46R, which clarified certain issues identified in FIN 46. FIN 46R requires an entity to consolidate a variable interest entity if the entity is designated as the primary beneficiary of that variable interest entity even if the entity does not have a majority of voting interest. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception of any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied at the beginning of the first interim or annual period beginning after March 15, 2004. The Company does not have any variable interest entities; therefore the implementation of FIN 46 did not have an impact on the Company’s operating results, financial position, or cash flows.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 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,

F-10

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 No. 149 was effective for derivative contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not 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 No. 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 No. 150 was 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 No. 150 did not have an effect on the Company’s operating results, financial position, or cash flows.

F-11

Acquisitions

On August 1, 2004, the Company acquired substantially all of the assets and liabilities of Bluejack Systems, LLC (Bluejack), a Seattle, Washington based Nortel dealer. The Company’s consolidated financial statements include the results of Bluejack’s operations since the date of the acquisition. The acquisition was made as part of the Company’s entry into the Nortel market and to establish a branch office in Seattle, a significant metropolitan area not previously served by the Company. Under the terms of the purchase agreement, the Company paid the owner of Bluejack $569,987. The Company recorded the acquisition according to the provisions of SFAS No. 141, “Business Combinations” (SFAS No. 141). Under SFAS No. 141, the acquired assets and liabilities were recorded on the Company’s books at their fair value. Included in the assets acquired was the customer list of Bluejack. The Company determined that the estimated fair value of the customer list was $227,000 and this amount was set up as a separate intangible asset on the Company’s consolidated balance sheet. This asset will be amortized over its expected useful life of 6 years. The remaining $498,000 difference between the cash paid and fair value of the net assets acquired plus approximately $27,000 in direct costs of the acquisition were recorded as goodwill. For tax purposes, the Company has recorded $752,000 in goodwill and other intangible assets which will be deductible over 15 years on a straight-line basis. Certain other pro forma disclosures required by SFAS No. 141 have been omitted because they were not material to the Company’s consolidated financial statements.

Under the terms of the purchase agreement, the former owner of Bluejack will receive additional purchase consideration over the next five years based upon the financial contribution, as defined, of the Seattle branch office. These additional payments, which will be made quarterly, will be recorded as increases to goodwill under the guidance of EITF 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (EITF 95-8). Under EITF 95-8, a variety of indicators regarding the nature of the contingent payments must be considered in determining the proper accounting treatment for those payments. According to EITF 95-8, the strongest indicators are whether the future payments are contingent upon the former owner’s continued employment with the acquiring enterprise, whether the term of employment coincides with the contingent payment period, and whether the compensation paid other than the contingent payments is reasonable in relation to the work performed and the compensation of other key employees. The Company has considered each of these factors and has determined that the future contingent payments should be recorded as additional purchase consideration. At October 31, 2004, there had been no contingent payments earned by the former owner.

Goodwill

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” on November 1, 2001. Under SFAS No. 142, goodwill recorded as a part of a business combination is not amortized, but instead is subject to at least an annual assessment for impairment by applying a fair-value-based test. Such impairment tests have been performed by management shortly after the close of its fiscal years ending on October 31, 2004, 2003 and 2002. The results of these assessments have indicated that no impairment has existed in the value of recorded goodwill. Therefore no impairment loss has been recognized.

The goodwill for tax purposes associated with the acquisition of USTI exceeded the goodwill recorded on the financial statements by $1,462,000. The Company is reducing the carrying value of goodwill each accounting period to record the tax benefit realized due to the excess of tax-deductible goodwill over the reported amount of goodwill, resulting from a difference in the valuation dates used for common stock given in the acquisition. Accrued income taxes and deferred tax liabilities are being reduced as well. The Company reduced the carrying value of goodwill by $55,576 for the impact of the basis difference for both the years ended October 31, 2004 and 2003.

The changes in the carrying value of goodwill for fiscal 2004 and 2003 are as follows:

	Commercial Systems Sales			Lodging Systems Sales		Installation and Services Revenues			Other			Total

Balance, November 1, 2002	$	17,608,268		$	—	$	7,975,082		$	199,112		$	25,782,462
Amortization of book versus tax basis difference		(41,682	)		—		(13,338	)		(556	)		(55,576	)

Balance, October 31, 2003		17,566,586			—		7,961,744			198,556			25,726,886
Amortization of book versus tax basis difference		(41,682	)		—		(13,338	)		(556	)		(55,576	)
Goodwill acquired		368,898			—		143,460			13,138			525,496

Balance, October 31, 2004	$	17,893,802		$	—	$	8,091,866		$	211,138		$	26,196,806

F-12

Other Intangible Assets

	As of October 31, 2004				As of October 31, 2003

	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Amortized intangible assets:
Software production costs	$	1,291,021	$	1,291,021	$	1,291,021	$	1,233,066
Other		402,710		185,168		190,780		134,089

Total amortized intangible assets	$	1,693,731	$	1,476,189	$	1,481,801	$	1,367,155

Aggregate amortization expense of intangible assets was $124,105, $220,525, and $219,430 for the years ended October 31, 2004, 2003 and 2002, respectively, which includes $41,620, $40,525, and $39,430 recorded as interest expense in the consolidated statements of operations for the years ended October 31, 2004, 2003 and 2002, respectively. The estimated aggregate amortization expense for each of the next five fiscal years is $37,833.

2. ACCOUNTS RECEIVABLE:

Trade accounts receivable consist of the following at October 31:

	2004		2003

Trade receivables	$	9,847,984	$	6,130,490
Less- reserve for doubtful accounts		318,607		335,541

Net trade receivables	$	9,529,377	$	5,794,949

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

	2004			2003			2002

Balance, beginning of period	$	335,541		$	345,516		$	1,298,245
Reversal of provision for doubtful accounts		—			(45,907	)		(748,200	)
Net write-offs		(16,934	)		35,932			(204,529	)

Balance, end of period	$	318,607		$	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:

	2004		2003

Raw materials	$	395,539	$	366,305
Finished goods and spare parts		5,320,972		6,430,977

		5,716,511		6,797,282
Less- reserve for excess and obsolete inventories		871,809		1,182,380

Total inventories, net	$	4,844,702	$	5,614,902

F-13

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

	2004			2003		2002

Balance, beginning of period	$	1,182,380		$	786,619	$	1,687,233
Provision for excess and obsolete inventories		—			280,431		1,068,013
Adjustments to inventories		(310,571	)		115,330		(1,968,627	)

Balance, end of period	$	871,809		$	1,182,380	$	786,619

Adjustments to inventories in 2004 and 2003 included write-offs of obsolete inventory, corrections of vendor invoices, and adjustments to reduce certain items inventory values to lower of cost or market.

4. PROPERTY, PLANT AND EQUIPMENT:

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

	Estimated Useful Lives		2004		2003

Building		20	$	2,397,954	$	2,397,954
Data processing and computer field equipment		3-5		4,587,485		4,280,916
Software development costs, work-in-process		N/A		7,280,461		6,687,540
Land		—		611,582		611,582
Office furniture		5		1,110,729		1,108,029
Auto		5		237,176		126,743
Other		3-7		546,253		511,320

Total property, plant and equipment				16,771,640		15,724,084
Less- accumulated depreciation				6,044,785		5,257,260

Total property, plant and equipment, net			$	10,726,855	$	10,466,824

5. ACCRUED LIABILITIES:

Accrued liabilities consist of the following at October 31:

	2004		2003

Commissions	$	618,291	$	371,765
Interest		21,494		13,413
Payroll		520,397		424,243
Bonuses		306,981		363,794
Vacation		504,585		436,784
Other		550,595		259,025

Total current		2,522,343		1,869,024
Accrued long-term liability		144,100		144,101

Total accrued liabilities	$	2,666,443	$	2,013,125

F-14

6. UNEARNED SERVICE REVENUE:

Unearned service revenue consists of the following at October 31:

	2004		2003

Service contracts	$	845,550	$	640,922
Warranty service		320,193		344,192
Customer deposits		229,772		488,137
Systems shipped but not installed		115,413		99,490
Other		47,582		47,582

Total current unearned revenue		1,558,510		1,620,323
Noncurrent unearned service contract revenue		140,172		229,910

Total unearned revenue	$	1,698,682	$	1,850,233

F-15

7. INCOME TAXES:

The income tax provision for the years ending October 31, 2004, 2003 and 2002, consists of the following:

	2004		2003		2002

Current provision (benefit) – federal	$	266,490	$	484,930	$	(384,790	)
Current provision (benefit) – state		67,700		97,590		(22,910	)
Deferred provision		700,810		422,480		976,700

Total provision	$	1,035,000	$	1,005,000	$	569,000

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

	Year Ended October 31,

	2004			2003			2002

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:

	2004			2003

Deferred tax assets:
Currently nondeductible reserves	$	351,059		$	453,413
Current accrued liabilities		393,760			345,021
Current prepaid service contracts		163,333			107,310
Noncurrent unamortized cost of service contracts		6,842			19,338
Current other		80,240			68,507
Noncurrent other		—			43,098

Total deferred tax asset		995,234			1,036,687

Deferred tax liabilities:
Noncurrent intangible assets		2,300,008			1,620,098
Noncurrent depreciation and sale of assets		240,539			385,436
Current depreciation and sale of assets		103,187			69,258
Current tax income to be recognized on sales-type lease contracts		4,600			16,227
Noncurrent tax income to be recognized on sales-type lease contracts		3,918			10,772
Noncurrent other		2,936			—
Current unamortized capitalized software development costs		—			3,014
Noncurrent unamortized capitalized software development costs		—			19,705

Total deferred tax liability		2,655,188			2,124,510

Net deferred tax liability	$	(1,659,954	)	$	(1,087,823	)

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. The revolving line of credit is collateralized by trade accounts receivable and inventories. At October 31, 2004 and 2003, the Company had approximately $3.850 million and $0.719 million, respectively, outstanding on the revolving line of credit. The Company had approximately $3.6 million available under the revolving line of credit at October 31, 2004. 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 28, 2005. At October 31, long-term debt consisted of the following:

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	October 31,

	2004		2003

Term loan, payable in monthly installments of $86,524, due September 30, 2006 collateralized by all assets of the Company	$	1,990,750	$	3,029,041
Real estate term note, payable in monthly installments of $14,257, due September 30, 2006, collateralized by a first mortgage on the Company’s building		2,039,252		2,210,342

		4,030,002		5,239,383
Less-current maturities		1,209,645		1,209,645

	$	2,820,357	$	4,029,738

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

2005		$	1,209,645
2006		$	2,820,357

Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (which was 2.00% at October 31, 2004) 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 4.75% at October 31, 2004) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At October 31, 2004, the Company was paying 3.875% on the revolving line of credit borrowings, 3.84% on the term loan and 3.59% 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 annual earnings before interest, taxes, depreciation and amortization, limitations on capital spending, and debt service coverage requirements. At October 31, 2004, the Company was either in compliance with the covenants of the credit facility or had received the appropriate waivers from its bank.

9. DERIVATIVES AND RISK MANAGEMENT:

The Company has an outstanding interest rate swap in a notional amount of $4.2 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 (6.75% on October 31, 2004) less 0.0% to 1.25% on the various pieces of its credit facility. SFAS No. 133, as amended, 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 recorded a current liability and accumulated other comprehensive income of $4,554 at October 31, 2004, and recorded $12,473 of ineffectiveness during the year ended October 31, 2004, which is included in interest expense in the consolidated statement of operations. No material ineffective portion of the interest rate swap existed for 2003 and 2002.

10. STOCK-BASED INCENTIVE AWARDS:

In fiscal 2004, the Company’s stockholders approved the “2004 Omnibus Stock Incentive Plan” for officers, directors and employees (“2004 Plan”). The 2004 Plan authorizes the grant of up to 600,000 shares of common stock and includes an evergreen feature so that such number will automatically increase on November 1^st of each year during the term of the 2004 Plan by three percent of the total number of outstanding shares of common stock outstanding on the previous October 31st. Awards available for issuance under the 2004 Plan include nonqualified and incentive stock options, restricted stock, and other stock-based incentive awards such as stock appreciation rights or phantom stock. The 2004 Plan is administered by the Compensation Committee of the Board of Directors. There have been no awards granted under the 2004 Plan.

F-17

In fiscal 2000, the Company’s shareholders approved a 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 Internal Revenue Service tax rules. Options granted under the previous 1988 Plan generally vested 33 1/3% per year after a 1-year waiting period. The following table summarizes information concerning options outstanding under the 2000 and 1988 Plans including the related transactions for the fiscal years ended October 31, 2002, 2003 and 2004:

	Number			Weighted Average Exercise Price		Weighted Average Fair Value of Options Granted

Balance, October 31, 2001		441,140		$	10.34
Granted		277,900			3.72	$	2.78
Forfeited		(44,300	)		9.66

Balance, October 31, 2002		674,740			7.66
Granted		5,000			3.00		1.26
Forfeited		(56,440	)		7.78

Balance, October 31, 2003		623,300			7.61
Granted		1,500			6.35		5.36
Exercised		(9,835	)		0.97
Forfeited		(56,793	)		7.96

Balance, October 31, 2004		558,172			7.69

Exercisable at October 31, 2004		330,772			10.46
Exercisable at October 31, 2003		310,123			10.55
Exercisable at October 31, 2002		185,007			4.58

The Company has also granted options outside the 1988 Plan, 2000 Plan, and 2004 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 following table summarizes information concerning options outstanding under various Officer and Director Plans including the related transactions for the fiscal years ended October 31, 2002, 2003 and 2004:

	Number			Weighted Average Exercise Price

Balance, October 31, 2001		1,450,400		$	2.90
Exercised		(465,000	)		0.25

Balance, October 31, 2002		985,400			4.15
Exercised		(300,000	)		0.25

Balance, October 31, 2003 and 2004		685,400			5.86

Exercisable at October 31, 2004		685,400			5.86

Exercisable at October 31, 2003		685,400			5.86

Exercisable at October 31, 2002		972,067			4.00

F-18

The following is a summary of stock options outstanding as of October 31, 2004:

	Options Outstanding						Options Exercisable

Range of Exercise Prices	Number Outstanding at October 31, 2004		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Number Exercisable at October 31, 2004		Weighted Average Exercise Price

$0.31-1.64		101,904	$	0.83		0.90		101,904	$	0.83
$3.63-5.81		928,568	$	5.14		5.20		702,668	$	5.63
$9.06-12.31		36,850	$	9.69		6.00		35,350	$	9.84
$15.53-18.13		176,250	$	17.54		5.40		176,250	$	17.54

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, 2004

	Income (Numerator)		Shares (Denominator)		Per Share Amount

Basic EPS
Net income	$	1,608,050		10,008,507	$	0.16

Dilutive effect of stock options				148,865

Diluted EPS
Net income	$	1,608,050		10,157,372	$	0.16

	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				170,786

Diluted EPS
Net income	$	1,557,564		9,998,670	$	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 years ended October 31, 2004, 2003 and 2002, respectively, stock options for 843,017 shares at an average exercise price of $8.40; 1,193,628 shares at an average exercise price of $7.22; and 1,001,501 shares at an average exercise price of $8.18 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

2005	$	400,767
2006		254,933
2007		65,354

		721,054
Less- imputed interest		106,671

Present value of minimum payments	$	614,383

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

During fiscal 2004, 2003 and 2002, 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, 2004.

The majority of the Company’s systems sales are derived from sales of equipment designed and marketed by Avaya or Nortel. As such, the Company is subject to the risks associated with these companies’ financial condition, ability to continue to develop and market leading-edge technology systems, and the soundness of their long-term product strategies. Both Avaya and Nortel have outsourced their manufacturing operations to single, separate manufacturers. Thus, the Company is subject to certain additional risks such as those that might be caused if the manufacturers incur financial difficulties or if man-made or natural disasters impact their manufacturing facilities. The Company purchases most of its Avaya and Nortel products from two distributors who have common ownership. Avaya has one other distributor that could quickly supply the Company’s business. Nortel products can be purchased from several distributors and the Company makes frequent purchases from those other distributors. The Company believes that both its Avaya and Nortel purchases could be quickly converted to the other available distributors without a material disruption to its business.

14. EMPLOYMENT AGREEMENTS:

The Company has two incentive compensation plans: one for sales professionals and sales management and one for all other employees. The bonus plan for sales personnel is based on either gross profit generated or a percentage of their “contribution”, defined as the gross profit generated less their direct and allocated sales expenses. The Company paid $239,200, $224,907 and $104,031 during 2004, 2003 and 2002, 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 2004, 2003 and 2002; however, the Company elected to pay partial bonuses of approximately $240,000, $240,000 and $180,000, respectively.

F-20

In conjunction with the acquisition of Bluejack in August 2004, the Company executed employment agreements with four former Bluejack executives. The employment agreements provide for a base salary and an incentive compensation plan that is generally the same as the Company’s other sales professionals.

15. CONTINGENCIES:

Lease Commitments

Future minimum commitments under non-cancelable operating leases for office space and equipment are approximately $203,000, $62,000, $22,000, $4,000 and $2,000 in fiscal years 2005 through 2009, respectively.

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. The Company conducted an audit and 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. Because the nature of XETA’s liability and the amount of damages due SIIA was in dispute, early settlement negotiations were unproductive. Therefore on December 1, 2003, the Company filed a declaratory judgment action in the U.S. District Court for the Northern District of Oklahoma seeking a judicial determination of liability and damages. This action is in the discovery stage. The Company is vigorously contesting this matter and strongly believes that its procedures regarding maintaining adequate numbers of software licenses are sound. Nevertheless, XETA has potential exposure to damages under the law for possessing unlicensed software and has recorded a loss contingency. Recently, settlement negotiations have resumed. Based upon the current status of the claim management does not believe that the ultimate damages will exceed the current recorded loss contingency in an amount that would materially impact the Company’s results of operations.

Since 1994, the Company has 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 the Company was never named as a defendant in any of these cases, several of the Company’s call accounting customers were named defendants and notified the Company that they would seek indemnification under the terms of their contracts. However, because there were other equipment vendors implicated along with the Company in the cases filed against the Company’s customers, the Company never assumed the outright defense of the customers in any of these actions. In October 1998, all of the cases filed against the hotels were dismissed by the court 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 $508,000, $457,000 and $482,000 for the years ending October 31, 2004, 2003 and 2002, 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, 2004 Quarter Ended

	January 31, 2004		April 30, 2004		July 31, 2004		October 31, 2004

	(in thousands, except per share data)
Net sales	$	16,929	$	13,189	$	13,890	$	14,819
Gross profit		3,955		3,275		3,361		3,671
Operating income		954		595		607		455
Net income		562		410		371		265
Basic EPS	$	0.06	$	0.04	$	0.04	$	0.02
Diluted EPS	$	0.06	$	0.04	$	0.04	$	0.02

	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 (loss)		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

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of fiscal year ending October 31, 2004, our principal executive officer and principal financial officer 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 ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to Directors required by this Item is incorporated by reference to the section captioned “Election of Directors” in our Proxy Statement to be filed with the Securities and Exchange Commission (the “Commission”) in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

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

Other information required by this Item is incorporated by reference to the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance—Code of Conduct” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference to the sections under the captions “Executive Compensation and Related Information,” and “Stock Performance Graph,” and to the section under the subheading “Director Compensation” under the caption “Board of Directors and Committees,” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

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

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

Other information required by this Item is incorporated by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is incorporated by reference to the section captioned “Related Transactions” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this Item is incorporated by reference to the section under the subheading “Fees and Independence” under the caption “Independent Public Accountants” in our Proxy Statement to be filed with the Commission in connection with our Annual Meeting of Shareholders to be held April 12, 2005.

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 25 of this Form 10-K.

(2)	Financial Statement Schedule - None.

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

	No.		Description

	2.1		Asset Purchase Agreement dated August 1, 2004 between XETA Technologies, Inc. and Bluejack Systems, LLC.

	2.2		Bill of Sale, Assignment and Assumption Agreement dated August 1, 2004 between XETA Technologies, Inc. and Bluejack Systems, LLC.

	3(i)		Restated Certificate of Incorporation.

	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*		XETA Technologies, Inc. 2004 Omnibus Stock Incentive Plan.

	10. 2*		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. 3*		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. 4*		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).

	10.5		HCX 5000/HCX 5000i Authorized Distributor Agreement for 2004 dated January 1, 2004 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 COMISSION WITH THE APPLICATION FOR CONFIDENTIAL TREATMENT.

	10.6		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).

	10.7		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: OctelProducts, and Addendum for GSA Schedule Contract Sales to the Federal Government (incorporated by reference to Exhibit 10.6 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.8		First Amendment to Revolving Credit and Term Loan Agreement dated as of June 7, 2004 between Xeta Technologies, Inc. and Bank of Oklahoma N.A. (“Bank”).

	10.9		Revolving Credit and Term Loan Agreement dated as of October 1, 2003 between XETA Technologies, Inc. and Bank of Oklahoma, N.A. (“BOK”) (incorporated by reference to Exhibit 10.7 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.10		Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement dated October 1, 2003 granted to BOK (incorporated by reference to Exhibit 10.8 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.11		Promissory Note ($7,500,000 payable to BOK) dated June 7, 2004.

	10.12		Promissory Note ($2,238,333.48 payable to BOK) dated October 1, 2003(incorporated by reference to Exhibit 10.9 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.13		Promissory Note ($3,374,734.33 payable to BOK) dated October 1, 2003 (incorporated by reference to Exhibit 10.11 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.14		Security Agreement dated October 1, 2003 granted to BOK (incorporated by reference to Exhibit 10.12 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	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.


		*	Indicates management contract or compensatory plan or arrangement.

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

	1.	August 4, 2004—Item 5—Closing of Bluejack Systems LLC acquisition.

	2.	August 9, 2004—Item 12—Preliminary Earnings Release for 3rd Quarter.

	3.	August 26, 2004—Item 2.02—Earnings Release for 3rd Quarter.

SIGNATURES

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

	XETA TECHNOLOGIES, INC.

January 14, 2005	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.

January 14, 2005		/s/ JACK R. INGRAM

		Jack R. Ingram, Chief Executive Officer, President, and Director

January 14, 2005		/s/ ROBERT B. WAGNER

		Robert B. Wagner, Chief Financial Officer

January 15, 2005		/s/ DONALD T. DUKE

		Donald T. Duke, Director

January 14, 2005		/s/ RONALD L. SIEGENTHALER

		Ronald L. Siegenthaler, Director

INDEX TO EXHIBITS

	No.		Description

	2.1*		Asset Purchase Agreement dated August 1, 2004 between XETA Technologies, Inc. and Bluejack Systems, LLC.

	2.2*		Bill of Sale, Assignment and Assumption Agreement dated August 1, 2004 between XETA Technologies, Inc. and Bluejack Systems, LLC.

	3(i)*		Restated Certificate of Incorporation.

	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*†		XETA Technologies, Inc. 2004 Omnibus Stock Incentive Plan.

	10. 2†		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. 3†		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. 4†		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).

	10.5*		HCX 5000/HCX 5000i® Authorized Distributor Agreement for 2004 dated January 1, 2004 between Hitachi Telecom (USA), Inc. and XETA Technologies.

			PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMISSION WITH THE APPLICATION FOR CONFIDENTIAL TREATMENT.

	10.6		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).

	10.7		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 (incorporated by reference to Exhibit 10.6 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.8*		First Amendment to Revolving Credit and Term Loan Agreement dated as of June 7, 2004 between Xeta Technologies, Inc. and Bank of Oklahoma N.A. (“BOK”).

	10.9		Revolving Credit and Term Loan Agreement dated as of October 1, 2003 between XETA Technologies, Inc. and Bank of Oklahoma, N.A. (“BOK”) (incorporated by reference to Exhibit 10.7 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.10		Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement dated October 1, 2003 granted to BOK (incorporated by reference to Exhibit 10.8 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.11*		Promissory Note ($7,500,000 payable to BOK) dated June 7, 2004.

	10.12		Promissory Note ($2,238,333.48 payable to BOK) dated October 1, 2003(incorporated by reference to Exhibit 10.9 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.13		Promissory Note ($3,374,734.33 payable to BOK) dated October 1, 2003 (incorporated by reference to Exhibit 10.11 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	10.14		Security Agreement dated October 1, 2003 granted to BOK (incorporated by reference to Exhibit 10.12 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).

	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 herewith.

†	Indicates management contract or compensatory plan or arrangement.

EX-2.1 2 xt907918ex2_1.htm

Exhibit 2.1

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made and entered into effective as of August 1, 2004 (“Effective Date”) by and between XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Purchaser”), and BLUEJACK SYSTEMS, L.L.C., a Washington limited liability company (“Seller”) and GREG FORREST (the “Seller Principal”).

Recitals

A. Seller is a supplier of converged telephony and data cabling systems, providing a full range of telecommunication, data and cable network products and services to small- and medium-sized businesses throughout the Puget Sound region and the continental United States of America (the “Business”), and the Seller Principal owns all of the issued and outstanding membership interest of Seller.

B. Seller desires to sell the Business to Purchaser as a going concern and in connection therewith to sell substantially all of Seller’s assets to Purchaser, and Purchaser desires to purchase such Business and assets, and to assume certain of Seller’s liabilities relating thereto, upon the terms and conditions set forth in this Agreement (the “Asset Purchase”).

Agreement

NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows:

ARTICLE I
TERMS AND INTERPRETATION

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

	1.1.1 “Affiliate” of, or “Affiliated” with, a specified person or entity means a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified person or entity.

	1.1.2 “Acquired Business” means the Assets acquired by Purchaser with the Assumed Liabilities.

	1.1.3 “Assets” has the meaning set forth in Section 2.1.

	1.1.4 “Assumed Liabilities” means the liabilities and obligations of the Seller or relating to the Seller’s business or operations to be assumed by Purchaser at the Closing in accordance with Section 2.5.

	1.1.5 “Branch Contribution” has the meaning set forth in Section2.2(c).

	1.1.6 “Cash Portion of the Purchase Price” has the meaning set forth in Section 2.2(a).

	1.1.7 “Closing” has the meaning set forth in Section 3.1.

	1.1.8 “Closing Date” has the meaning set forth in Section 3.1.

	1.1.9 “Closing Date Balance Sheet” has the meaning set forth in Section 2.3.

	1.1.10 “Closing Equity Certificate” has the meaning set forth in Section 2.3.

	1.1.11 “Closing Equity Value” has the meaning set forth in Section 2.3.

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

	1.1.12 “Damages” has the meaning set forth in Section 10.2.

	1.1.13 “Earnout” has the meaning assigned in Section 2.3(c).

	1.1.14 “Earnout Period” means the five-year period after the Date of Closing, as set forth in Section 2.3(c).

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

	1.1.16 “Equity Determination Period” means the thirty-day period following the Date of Closing as more particularly described in Section 2.3.

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

	1.1.18 “Excluded Assets” has the meaning set forth in Section 2.1.

	1.1.19 “Final Determination” has the meaning set forth in Section 10.7.

	1.1.20 “Financial Statements” has the meaning set forth in Section 5.6.

	1.1.21 “GAAP” means generally accepted accounting principles consistently applied for all periods involved.

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

	1.1.23 “Gross Profit” has the meaning set forth in Section 2.2(c).

	1.1.24 “Hold-Back” has the meaning set forth in Section 2.2(a).

	1.1.25 “Indemnified Party” has the meaning set forth in Section 10.5.

	1.1.26 “Indemnification Period” has the meaning set forth in Section 10.1.

	1.1.27 “Indemnifying Party” has the meaning set forth in Section 10.5.

	1.1.28 “Hold-Back” shall have the meaning set forth in Section 2.2.

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

	1.1.30 “Leases” means all leases for facilities leased by the Seller.

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

	1.1.32 “Material Contracts” has the meaning set forth in Section 5.10.

	1.1.33 “Net Worth of the Acquired Business” means the book value of the Assets acquired by Purchaser hereunder minus the book value of the Assumed Liabilities (based on values properly reflected in accordance with GAAP on the Closing Date Balance Sheet).

	1.1.34 “Non-Competition Agreement” has the meaning set forth in Section 8.9.1.

	1.1.35 “Permits” has the meaning set forth in Section 5.12.

	1.1.36 “Permitted Distributions” means withdrawals of cash, securities and personal items, at the Seller Principal’s discretion, which do not reduce Seller’s total stockholders’ equity to an amount which is less than zero.

	1.1.37 “Permitted Encumbrances” means (a) any Encumbrances reserved against in the Financial Statements, (b) Encumbrances for property or ad valorem Taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings and (c) obligations under operating and capital leases which are listed in Schedule 5.10.

	1.1.38 “Prorated Taxes” has the meaning assigned in Section 3.6.

	1.1.39 “Seattle Branch” means the Acquired Business functioning after Closing as Purchaser’s Seattle branch office, as set forth in Section 2.3(c).

	1.1.40 “Settlement Period” means the sixty-day period following the close of the Equity Determination Period, as more particularly described in Section 2.3.

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

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

	1.1.43 “Welfare Plan” means and includes each “employee welfare benefit plan” maintained by Seller (within the meaning of Section 3(1) of ERISA).

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

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

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

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

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

	(e) The term “material” shall mean, or an event shall be deemed to be “material,” if its existence produces an effect or variance of Ten Thousand dollars ($10,000) or more; and

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

ARTICLE II
PLAN OF ACQUISITION

2.1 Acquisition of the Assets. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Seller agrees to sell, convey, transfer, assign and deliver to Purchaser, and Purchaser agrees to purchase from Seller, all of Seller’s assets, properties, businesses, franchises, goodwill and rights of every kind and character, tangible or intangible, real or personal, whether owned or leased, other than the Excluded Assets (collectively, the “Assets”), free and clear of all Encumbrances other than Permitted Encumbrances. Without limiting the generality of the foregoing, the Assets shall consist of:

	(a) all accounts and notes receivable of Seller;

	(b) all inventory (including, without limitation, spare parts inventory) and work-in-progress of Seller;

	(c) all customer lists, sales records, credit data and other information relating to customers of Seller;

	(d) all rights, title and interest of Seller in, to and under all existing contracts, leases and agreements, written and verbal to which the Seller is a party;

	(e) all right, title and interest of the Seller in computer equipment and hardware used exclusively by the Seller, including, without limitation, all central processing units, terminals, disk drives, tape drives, electronic memory units, printers, keyboards, screens, peripherals (and other input/output devices), modems and other communication controllers, networking equipment, and any and all parts and appurtenances thereto, together with all software and intellectual property with such computer equipment and hardware;

	(f) all of the furniture, fixtures, equipment, machinery, tools, appliances, telephone systems, copy machines, fax machines, implements, spare parts, supplies and all other tangible personal property of every kind and description owned by Seller;

	(g) all motor vehicles and other transportation equipment of Seller;

	(h) all right, title and interest of Seller in and to and under all licenses, franchises, permits, and other governmental authorizations;

	(i) all right, title and interest of Seller in, to and under all intangible property of Seller, all goodwill associated therewith, and all rights and privileges used in the conducting of the Business and the right to recover for infringement thereon;

	(j) the name Bluejack Systems and any trade names or other assumed names under which Seller operates;

	(k) copies of Seller’s books, records, papers and instruments of whatever nature and wherever located that relate to the Business or the Assets or which are required or necessary for Purchaser to conduct the Business from and after the Closing in the manner in which it was being conducted before the Closing;

	(l) all insurance proceeds and insurance claims of Seller that relate exclusively to the Business or to all or any part of the Assets and, to the extent transferable, the benefit of and the right to enforce the covenants and warranties, if any, that the Seller is entitled to enforce with respect to the Assets against its predecessors in title, if any;

	(m) all right, title and interest of the Seller in, to and under all rights, privileges, claims, causes of action, and options relating or pertaining exclusively to the Business or the Assets; and

	(n) all other or additional privileges, rights, interests, properties and assets of Seller of every kind and description and wherever located, that are exclusively used or intended for the exclusive use in connection with the Business as presently being conducted.

	The “Excluded Assets” are the assets of the Seller listed in Schedule 2.1.

2.2 Purchase Price. The purchase price for the Assets shall be equal to the sum of the following:

		(a) $600,000 to be paid in cash at Closing (the “Cash Portion of the Purchase Price”) less $100,000 to be held-back (“Hold-Back”) and paid in accordance with Section 2.2(b) below; plus

		(b) Subject to Sections 2.3 and 2.4 below, if the Net Worth of the Acquired Business exceeds $0, such excess, if any, shall be added to the Hold-Back by Purchaser and then paid in cash at the end of the Settlement Period; provided, however, that should it be determined, pursuant to the procedures set forth in Sections 2.3 and 2.4, that Net Worth of the Acquired Business was, actually, less than $0, Purchaser shall be entitled to reimburse itself for such deficiency out of the Hold-Back before paying the balance thereof to Seller at the end of the Settlement Period; plus

		(c) An “Earnout” in the amount which is equal to thirty-two percent (32%) of Seller’s Branch Contribution during the five years immediately following the Closing (“Earnout Period”). The Earnout shall be calculated by Purchaser on a quarterly basis for each three-month period following the Closing (“Quarter”)throughout the Earnout Period. Within five business days after the public announcement of Purchaser’s earnings for the Quarter, Purchaser shall provide Seller with a written statement itemizing Purchaser’s calculation of the Branch Contribution and resulting Earnout and provide Seller with payment in the amount of seventy five percent (75%) of the calculated Earnout. The remaining Earnout balance due for the preceding four Quarters shall be reconciled annually as of the thirty-first (31^st) day of each July during the Earnout Period and shall be paid not later than the fifteenth (15^th) day of September following.

			(i) As used herein, “Branch Contribution” means the Gross Profit of the Seattle Branch, functioning after Closing as Purchaser’s Seattle branch (“Seattle Branch”), less the sales expenses of the Seattle Branch.

			(ii) “Gross Profit,” for the purpose of computing Branch Contribution, shall be the sum of: (1) for systems and equipment sales and “Other Revenues” as reported in Purchaser’s financial statements, the gross profit computed by the Purchaser’s accounting systems; plus (2) for cabling, installation and service revenues, an assumed gross profit determined by Purchaser from time-to-time based on Purchaser’s actual service and installation gross profit as reported by the Purchaser’s accounting systems; less (3) a charge of 2% of all revenues to cover the Seattle Branch’s portion of the Purchaser’s corporate cost of goods sold (material logistics functions).

			(iii) Sales expenses for purposes of computing Branch Contribution shall mean the direct operating expenses associated with the sales and sales administration of the Seattle Branch as customarily reported by the Purchaser’s accounting systems including, but not limited to salaries, wages, payroll taxes, benefit costs, office expenses, lease expenses, rent, travel costs, and certain allocated corporate overhead expenses.

			(iv) As of the Closing Date, the only allocated corporate expenses to be charged against the Branch Contribution formula shall be vacation and depreciation costs. Certain costs of the Seattle Branch, such as rent expense, that require allocation between sales expenses and other departments within Purchaser’s Seattle Branch, shall generally be allocated based upon the relative headcount of the sales and sales administration portion of the Seattle Branch compared to the total headcount of the Seattle Branch.

			(v) From time-to-time, it may be necessary to change the allocation formula or to add or subtract allocated expenses from the calculation of Branch Contribution. Such changes, other than changes due to relative headcount, shall be agreed to in writing by the Seller and the Purchaser prior to inclusion of the change in the computation of Branch Contribution.

			(vi) Seller and its representatives shall have the right for a period of thirty (30) days after receiving the annual reconciliation of Purchaser’s Earnout calculation to review Seller’s books and records and, if Seller desires, to have an independent public accountant examine such books and records, for up to an additional sixty (60) days (ninety days in all), to verify Purchaser’s calculation of the Earnout. In the event a dispute exists between the parties in relation to Purchaser’s calculation of the Earnout, the parties shall negotiate in good faith toward an agreed calculation of the Earnout.

2.3 Equity Determination. Seller shall perform and certify a physical count of its inventory as of the Closing Date at which Purchaser and its duly authorized representatives shall be entitled to be present. A balance sheet for Seller as of the Closing Date (“Closing Date Balance Sheet”) shall be delivered by Seller to Purchaser at or within fifteen (15) days after the Closing, and Purchaser shall have thirty (30) days following such delivery (“Equity Determination Period”) to review the Closing Balance Sheet to complete Purchaser’s verification that Seller’s receivables are collectible, that its inventory is in good condition and salable in the ordinary course of business, and that there have been no material changes in the assets or liabilities of Seller since May 31, 2004 (other than the Permitted Distributions). At the end of the Equity Determination Period, Purchaser shall deliver to the Seller a certificate

(“Closing Equity Certificate”) signed by an officer of Purchaser indicating its determination of the amount of Seller’s total stockholder’s equity of the Closing Date (“Closing Equity Value”) as determined by Purchaser in good faith, and, subject to Section 2.4 below, Purchaser shall pay the Seller an amount equal to the excess of Seller’s Closing Equity Value over the amount paid to the Seller pursuant to Section 2.2(b); provided that if Seller’s Closing Equity Value is less than $0, Seller shall fully reimburse Purchaser to the extent of such deficit and such obligation of Seller shall constitute an offset in favor of Purchaser against the Hold-Back and the Earnout. Seller’s books shall be closed as of the Closing Date consistent with past practice in accordance with GAAP.

2.4 Disagreement Regarding Equity Determination. Notwithstanding Section 2.3 above, Seller and its representatives shall have the right for a period of thirty (30) days after receiving the Closing Equity Certificate to review Seller’s books and records as of the Closing Date and, if Seller desires, to have an independent public accountant examine such books and records, for up to an additional sixty (60) days (ninety days in all), to verify Purchaser’s calculation of the Closing Equity Value. If Seller does not agree with Purchaser’s calculation of Closing Equity Value, the parties shall negotiate in good faith to agree upon such value and allocation, and to the extent that the Closing Equity Value is found to have been less than $0, Seller shall reimburse Purchaser the amount of such deficiency with in ten (10) days after delivery of such independent evaluation. If the independent evaluation established a Closing Equity Value which is 110% or more of the value determined by Purchaser as set forth in the Closing Equity Certificate, Purchaser shall pay all costs incurred by Seller in connection with such independent evaluation.

2.5 Assumed Liabilities. As further consideration for Asset Purchase, Purchaser shall assume and discharge those and only those liabilities and obligations of Seller described in Schedule 2.5 (“Assumed Liabilities”), which shall not include any long-term debt, including current maturities thereof, if any.

2.6 Allocation of Purchase Price. The parties to this Agreement shall allocate the Purchase Price among the Assets in accordance with the book value of Seller’s assets as reflected in the Closing Date Balance Sheet. Twenty-thousand dollars ($20,000) of the Purchase Price shall be allocated to the Non-Competition Agreement. The parties agree to file any and all applicable tax returns and other required related tax schedules in accordance with such allocation and Section 1060 of the Internal Revenue Code and will not adopt or otherwise assert tax positions inconsistent therewith. Purchaser and Seller shall each prepare and file its Form 8594 for the taxable year in which the Closing takes place, consistent with the requirements set forth in this Section 2.6.

ARTICLE III
THE CLOSING

3.1 Closing Time and Place. The consummation of the Asset Purchase and the other transactions contemplated by this Agreement (the “Closing”) shall take place as soon as reasonably practicable after every party to this Agreement shall have indicated to the other that it has satisfied or stands ready to satisfy all conditions of Closing for which it is responsible, or at such other time and place as Seller and Purchaser shall mutually agree, but not later than August 2, 2004 which date shall be referred to as the “Closing Date.” The Closing shall take place at the offices of Purchaser’s counsel, Barber & Bartz, P.C., 525 South Main, Tulsa, Oklahoma 74103-4511.

3.2 Seller’s Deliveries. At the Closing, Seller will deliver to Purchaser all of the items described in Section 8.9 hereof, including the Bill of Sale and Assignment referred to therein conveying to Purchaser all of Seller’s right, title and interest in and to all of the Assets. At or after the Closing, Seller shall execute and deliver to Purchaser such other instruments of transfer as shall be reasonably necessary or appropriate to vest in Purchaser good title to the Assets, free and clear of all Encumbrances other than Permitted Encumbrances and to comply with the purposes and intent of this Agreement.

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

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

3.5 Consents. To the extent that the assignment or transfer of any contract or right to be assigned or transferred to Purchaser as provided in this Agreement shall require the consent of the other party thereto, this Agreement shall not constitute an agreement to assign or transfer the same if any attempted assignment would constitute a breach thereof. Seller agrees that it will use its best efforts to obtain the consent of the other parties to all Material Contracts to the assignment or transfer thereof to Purchaser. Seller shall have no liability to Purchaser for failure to obtain any such third party consent provided Seller complies with its obligations under this section. Purchaser agrees that it will cooperate with and assist Seller in its efforts to obtain any such consents. If Seller is unable to obtain any necessary consent to an assignment or transfer to Purchaser of any Material Contract, Purchaser shall have the right to terminate this Agreement pursuant to Section 11.1 without liability to any party under this Agreement.

3.6 Prorations. Any paid or unpaid taxes or governmental charges or assessments which are levied or assessed based solely on time periods (e.g., property taxes but not sales or income taxes), relating to the Assets for the periods during which the Closing occurs (“Prorated Taxes”), shall not be deemed to be part of the Assumed Liabilities or Assets to be acquired by Purchaser, but shall be prorated between Seller and Purchaser, as of the Closing Date, with Purchaser bearing only that portion of such expense that the number of days after the Closing Date bears to the total number of days in the applicable period and Seller bearing only that portion of such expense that the number of days prior to the Closing Date bears to the total number of days in the applicable period. To the extent not adjusted in cash at Closing, all requests for payment of taxes properly attributable to one party that are received by the other will be promptly forwarded to the other party, which shall promptly pay the same.

ARTICLE IV
EMPLOYMENT MATTERS

4.1 Employees. Neither Purchaser nor any of its Affiliates shall have any obligation to offer employment to, or to employ, any employee of Seller, except as provided below, and neither Purchaser nor any of its Affiliates shall have any liability in respect of any salary, severance, health, welfare, retirement, or any other benefits relating to employment of such employees with Seller or its predecessors. To the extent that Purchaser offers employment to Seller’s employees and such employees accept such employment, Purchaser will credit them with time previously served with Seller in order to calculate the amount of paid time off to which they will be entitled in Purchaser’s employ. Notwithstanding the foregoing, Purchaser shall offer to enter into written employment agreements in the form set forth in the attached Schedule 4.1 with the following current employees of Seller: Fred McDermott, Timothy L. Nicholas, and Craig Y. Nishizaki.

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

4.3 Indemnification. Seller shall, defend, indemnify and hold harmless Purchaser, its corporate affiliates, and their respective directors, officers and employees, successors and assigns against and in respect of: (i) any claim for wrongful discharge or breach of any written employment contract or written plan or policy arising from any termination of the employment of any employee by Seller; (ii) any claim for severance benefits or termination pay or continued employment arising out of or resulting from any employee’s employment by Seller, including, without limitation, any claims relating to Purchaser’s obligations as a successor; (iii) any claims relating to Purchaser’s obligations as a “successor” to the Business and claims for withdrawal liability, each with respect to any multi-employer pension plans; and (iv) any liability that may arise as a result of Seller or any of its subsidiaries being a member of a “controlled group” or an “affiliated service group” (within the meaning of Sections 414(b), (c), (m) or (o) of the Code), or being under “common control” (within the meaning of Section 4001 of ERISA).

ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDER AND THE SELLER

The Seller Principal and Seller represent and warrant to Purchaser as follows:

5.1 Organization and Qualification. Seller is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Washington and is duly authorized and qualified to do business under all applicable Laws and to carry on its business in the places and in the manner as now conducted. Attached as Schedule 5.1 are true, correct, and complete copies of Seller’s Certificate of Formation and Operating Agreement, and all amendments thereto. Seller has the requisite power and authority to own, lease and operate its

assets and properties and to carry on its business as such business is currently being conducted. Seller is in good standing in each jurisdiction in which the operation of its business requires it to be registered to do business unless the failure to be so registered would not have a material adverse effect on Seller.

5.2 Authority. Seller has the requisite power and authority to enter into this Agreement and to effect the transactions contemplated hereby. The Seller Principal has the full legal right, power and authority to enter into this Agreement. Seller is member-managed and the execution, delivery and performance of this Agreement have been approved by Seller’s Members. Attached as Schedule 5.2 are true and correct copies of the Resolutions adopted and approved by all of Seller’s Members by unanimous written consent authorizing the transactions to be effected pursuant to this Agreement. No additional organizational proceeding on the part of Seller is necessary to authorize the execution and delivery of this Agreement and the consummation by Seller of the transactions contemplated hereby.

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

5.4 Non-Contravention. The execution and delivery of this Agreement by Seller and the Seller Principal do not, and the consummation by Seller and the Seller Principal of the transactions contemplated hereby will not, (i) violate or result in a breach of any provision of, or constitute a default under, (ii) result in the termination of, (iii) accelerate the performance required by, (iv) result in a right of termination or acceleration under, or result in the creation of any Encumbrances upon any of the Assets under any of the terms, conditions or provisions of, (X) Seller’s Articles of Organization or Operating Agreement, (Y) any Laws applicable to Seller or any of the Assets, or (Z) except as set forth in Schedule 5.4, any material instrument or agreement which Seller is now a party or by which Seller or any of the Assets may be bound or affected.

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

5.6 Financial Statements. Seller has delivered to Purchaser copies of Seller’s internally generated financial statements for the twelve (12) months ended December 31, 2002, and December 31, 2003 and the six-month period ended as of June 30, 2004 (collectively, the “Financial Statements”), true and correct copies of which are hereto attached as Schedule 5.6. The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis (except for the fact that footnotes have not been included) and fairly and accurately present all of Seller’s assets and liabilities as of the date thereof and the results of operations for the periods covered thereby.

5.7 Assets. Except as set forth in Schedule 5.7, Seller has good and marketable title to all of the Assets or, in the case of leased Assets, valid leasehold interests whether real, personal, mixed, tangible or intangible. All the owned Assets and the Seller’s interest in the other Assets are free and clear of restrictions on or conditions to transfer or assignment, and free and clear of Encumbrances other than Permitted Encumbrances. The Assets are all the assets and properties necessary to permit the Seller to operate the Business as currently operated. The Assets are in good working order and condition, ordinary wear and tear excepted.

5.8 Accounts and Notes Receivable. Schedule 5.8 sets forth an accurate list of the accounts and notes receivable of the Seller as of June 30, 2004. Receivables from and advances to employees, Seller, its shareholders or any entities or persons related to or Affiliates of Seller or its shareholders are separately identified in Schedule 5.8. Schedule 5.8 also sets forth an accurate aging of all accounts and notes receivable as of the June 30, 2004, showing amounts due in 30-day aging categories. The trade and other accounts receivable of the Seller are bona fide receivables, arising from the sale of goods or services in the ordinary course of business and were recorded correctly in the books and records of Seller in accordance with GAAP and to the knowledge of the Seller and the Seller Principals are collectible in the amounts shown on Schedule 5.8 net of reserves reflected in the Financial Statements. Notwithstanding the foregoing, if any receivable outstanding at the Closing Date, including receivables reflecting accrued manufacturers’ incentive payments, becomes more than sixty (60) days past due, as measured from the due date of the invoice, the Purchaser can notify the Seller of the past due status of the invoice and the Seller shall have forty-five (45) days to assist in the collection of the invoice. If, after this period, the invoice is not collected, the Purchaser can declare the invoice uncollectible and can deduct the amount of the invoice from any future Earnout payment under this Agreement.

5.9 Inventories. Except as stated in Schedule 5.9, the items of inventory being sold or produced under this Agreement exist in fact, are current, were purchased or produced in the ordinary course of business and are in the aggregate valued at the lesser of cost or fair market value.

5.10 Contracts. Set forth in Schedule 5.10 is a list of all material contracts, agreements, instruments, leases and licenses to which the Seller is a party and which are included in the Assets or to which any of the Assets is subject, all of which (“Material Contracts”) are valid and binding obligations of Seller and, to the best of Seller’s knowledge, of the other parties thereto in accordance with their respective terms and conditions. True and correct copies of all documents described in any exhibit attached to this Agreement have been made available or delivered to Purchaser. Except as otherwise indicated in Schedule 5.4 or Schedule 5.10 hereto, (i) neither the Seller nor, to the Seller’s knowledge, any other party to any such Material Contract has given notice of termination or taken any action inconsistent with the continuance of, is now in violation or breach of, or in default in complying with, any material provision thereof and (ii) the consent of any other party to such contract, agreement, instrument, lease or license is not required to validly effect the assignment, transfer or conveyance thereof from Seller to Purchaser.

5.11 Tangible Personal Property. Attached as Schedule 5.11 is a true, complete and accurate list of all material tangible personal property of Seller included in the Assets, and Seller owns all such property free and clear of all liens, claims, charges, encumbrances and security interests of any kind or nature, except as stated in Schedule 5.11. Except as otherwise set forth in Schedule 5.11, such tangible personal property is adequate for the conduct of the Business as presently conducted. At Closing, Purchaser will receive all such tangible personal property free and clear of all liens, claims, charges, encumbrances and security interests of any kind or nature, except as set forth in Schedule 5.11. To the best of Seller’s knowledge, all such tangible personal property is in good operating condition and repair (ordinary wear and tear excluded), is useable in the Business as presently conducted and has been maintained and repaired in accordance with customary industry practices, except as may otherwise be noted in Schedule 5.11.

5.12 Permits. Schedule 5.12 contains an accurate list of all material licenses, franchises, permits and other governmental authorizations held by Seller (the “Permits”). The Permits are valid, and Seller has not received any written notice that any Governmental Authority intends to cancel, terminate or decline to renew any such Permit. The Permits are all the permits that are required by Law for the operation of the businesses of Seller as currently conducted and the ownership of the Assets except any Permit the failure to have which would not have a material adverse effect. The Seller has conducted and is conducting the Business in substantial compliance with the requirements, standards, criteria and conditions set forth in the Permits.

5.13 Intangible Personal Property. Attached as Schedule 5.13 is a true, complete and accurate list of all material intangible personal property of Seller (other than Permits) as related to the Business, including all material patents, patent applications, trademarks, trademark applications and registrations therefor, options to purchase property of others and any licenses (including but not limited to software licenses as licensee) and other agreements or arrangements providing for the right to use the property of others in the conduct of the Business. Seller is not a licensor in respect of any patents, trade secrets, technical data, inventions, know-how, trademarks, trade names, copyrights or applications therefor, relating to the Business, except as stated in Schedule 5.13. Except as disclosed in Schedule 5.13, Seller owns or possesses adequate licenses or other rights to use all patents, trade secrets, technical data, trademarks, trade names or copyrights necessary to conduct the Business as now operated, and have not received notice that its use of such patents, trade secrets, technical data, trademarks, trade names or copyrights infringes the rights of others. Except as set forth in Schedule 5.13 , there are no adverse claims, liens, encumbrances, or security interests upon or affecting the items of intangible property described and, Seller is the owner of all right, title and interest in and to such intangible property.

5.14 Real Property. Attached as Schedule 5.14 is a true, complete and accurate description of all interests in real property owned, used by or leased to Seller. Seller has valid leases, not in default, as to such real property leased by it, all free and clear of all liens, mortgages, charges or encumbrances of any nature whatsoever, except as described in Schedule 5.14 and except for (a) liens for current state and local property taxes or general or special assessments not in default, and (b) such liens, encumbrances, easements, rights of way, building and use restrictions, exceptions, reservations and limitations as do not in any material respect detract from the value of the property subject thereto or interfere with or impair the present and continued use thereof in the usual and normal conduct of the Business.

5.15 Labor Relations. Seller is not bound by or subject to any arrangement with any labor union, and no employees of Seller are represented by any labor union or covered by any collective bargaining agreement nor, to Seller’s or the Seller Principal’s knowledge, is any campaign to establish such representation in progress. There is no pending nor, to Seller’s or the Seller Principal’s knowledge, threatened labor dispute involving Seller or any group of Seller’s employees nor has Seller experienced any significant labor interruptions over the past five (5) years. Except as set forth on Schedule 5.15, Seller nor the Seller Principal has no knowledge of any claims made by or disputes with any of its employees.

5.16 Trade Restrictions and Confidentiality Agreements. Schedule 5.16 sets forth all agreements containing covenants not to compete or solicit employees or to maintain the confidentiality of information to which Seller is bound or under which Seller has any rights or obligations.

5.17 Employee Compensation. Schedule 5.17 contains a description of all salary and other compensation arrangements which Seller has with its employees and contains a complete list of the names and current salary rates of and bonus commitments to each person currently employed by Seller.

5.18 Employee Benefit Plans. To the knowledge of Seller and the Seller Principal, Seller is in compliance in all material respects with all reporting and disclosure requirements applicable to it and its Pension Plans and Welfare Plans under the Code, ERISA, and all Department of Labor and Internal Revenue Service regulations promulgated thereunder. No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA or any other federal or state law is pending or, to Seller’s or the Seller Principal’s knowledge threatened, against any fiduciary of the Pension Plans or the Welfare Plans. To the Seller’s and the Seller Principal’s knowledge, no Pension or Welfare Plan, nor any fiduciary thereof, has been, or is currently, the direct or indirect subject of an audit, investigation or examination by any Governmental Authority.

	5.18.1 Pension Plan; Claims. Every Pension Plan or similar arrangement maintained by Seller, whether written or oral, is listed and described in Schedule 5.18.1. There are no outstanding liabilities of Seller to the Pension Plan (other than payroll deduction contributions not yet remitted to the Plan Trustee), and neither the Seller nor the Seller Principal knows of any potential liabilities in connection therewith. There is no action, suit or claim pending (other than for benefits in the normal course), pending or to the knowledge of Seller or the Seller Principal threatened, and neither the Seller nor the Seller Principal has any knowledge of any facts which could give rise to any action, suit or claim, against the Pension Plan or Seller, which might subject Seller to any material liability.

	5.18.2 Welfare Plans; Claims. Every Welfare Plan or similar arrangement maintained by Seller or to which it makes employer contributions with respect to its employees, whether by written or oral agreement, are listed in Schedule 5.18.2. There is no action, suit or claim (other than for benefits in the ordinary course) pending or to the knowledge of Seller or the Seller Principal threatened, and neither Seller nor the Seller Principal has any knowledge of any facts which could give rise to any action, suit or claim against any of the Welfare Plans or Seller, which might subject Seller to any material liability.

	5.18.3 Prohibited Transactions. To Seller’s and the Seller Principal’s knowledge, none of the Welfare Plans or the Pension Plan, nor any of their related trusts, nor Seller or any trustee, administrator or other “party in interest” or “disqualified person” (within the meaning of Section 3(14) of ERISA or Section 4975(e)(2) of the Code, respectively) with respect to the Pension Plan or any Welfare Plan, has engaged in any non-exempt “prohibited transaction” (within the meaning of Section 406 of ERISA or Section 4975(c) of the Code, respectively) with respect to Seller’s participation therein, which could subject the Pension Plan or any of the Welfare Plans, their related trusts, trustees, administrators or other fiduciaries, Seller, Purchaser, or any other party dealing with the Pension Plan or the Welfare Plans, to the penalties or excise tax imposed on prohibited transactions by Section 502 of ERISA or Section 4975 of the Code or which could have a material adverse effect on the assets, business or financial condition of Seller.

	5.18.4 Compliance. To the knowledge of Seller and the Seller Principal, (a) the Pension Plan and each of the Welfare Plans complies currently, and has complied in the past, both as to form and operation and in all material respects, with its own terms and with the provisions of ERISA and the Code, and all other applicable laws, rules and regulations; (b) all necessary governmental approvals and determinations for the Pension Plan have been obtained, including where applicable, a favorable determination as to its qualification under Sections 401(a), and 501(a) of the Code; and (c) nothing has occurred since the date of each such determination or recognition letter that would adversely affect such qualification. To the knowledge of the Seller and the Seller, all amounts that are currently owing to plan participants, or contributions required to be made to the Pension Plan or any of the Welfare Plans have been paid or contributed with respect to all periods prior to the Closing Date or have been provided for by adequate reserves in the Financial Statements.

	5.18.5 COBRA. To the knowledge of Seller and the Seller Principal, except as set forth in Schedule 5.18.5, Seller has complied in all material respects with the “continuation coverage requirements of group health plans” provided in Section 4980B of the Code, Sections 601 et. seq. of ERISA, the Family and Medical Leave Act of 1994, and all regulations promulgated thereunder.

	5.18.6 401(k) Plan. The Seller’s 401(k) Plan, if any, permits, or prior to Closing shall be amended to permit, employees of Seller who are hired by Purchaser to roll or directly transfer their vested account balances to a “qualified employee pension plan” at no cost to Purchaser.

	5.18.7 Miscellaneous Benefit Plan Matters. Neither Seller nor any other entity, whether or not incorporated, which is deemed to be under “common control” (as defined in Section 414 of the Code, or 4001(b) of ERISA) with Seller (“Commonly Controlled Entity”) maintains or contributes to any “employee pension benefit plan” (within the meaning of Section 3(2)(A) of ERISA) that (a) is a “defined contribution plan” described

in Section 3(34) of ERISA or Section 414(i) of the Code, or a “defined benefit plan” described in Section 3(35) of ERISA or Section 414(j) of the Code, and (b) gives rise, or will give rise, to any liability of Seller for (i) any delinquent premium payments due under Section 4007 or ERISA with respect to any such defined benefit plan, or (ii) any unpaid minimum funding contributions that would result in the imposition of a lien on any assets of Seller pursuant to Section 412(c)(11) of the Code or Section 302(c)(11) of ERISA. Neither Seller nor any “Commonly Controlled Entity” (as defined in ERISA) sponsors or sponsored, maintains or maintained, any defined benefit plan that has been, or will be, terminated in a manner that would result in any liability of Seller to the Pension Benefit Guaranty Corporation or that would result in the imposition of a lien on any assets of Seller pursuant to Section 4068 of ERISA .. At no time during the five-year period immediately preceding the first day of the year in which the Closing Date occurs has Seller or any Commonly Controlled Entity participated in or contributed to any “multi-employer plan” (within the meaning of Section 4001(a)(3) of ERISA or Section 414(f) of the Code), or had an obligation to participate in or contribute to any such multi-employer plan. No agreement subject to Section 4204 of ERISA has been entered into in connection with the Asset Purchase. None of the Welfare Plans provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer, or director of Seller.

5.19 Litigation and Legal Compliance. Except as set forth in Schedule 5.19, there is no material claim, action, suit or proceeding, pending or, to the knowledge of the Seller and the Seller Principal, threatened against or affecting Seller, at law or in equity, or before or by any Governmental Authority having jurisdiction over Seller. No written notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Seller and, to the Seller Principal’s and Seller’s knowledge, there is no basis therefor. Except to the extent set forth in Schedule 5.19, the Seller has conducted and is conducting the Business in compliance with all Laws applicable to Seller, the Assets or the operation of the Business.

5.20 Taxes. Except as set forth in Schedule 5.20, Seller has timely filed all requisite federal, state, local and other tax returns for all fiscal periods for which the applicable statute of limitations has not expired, and has duly paid in full or made adequate provision in the Financial Statements for the payment of all Taxes for all periods for which the applicable statute of limitations has not expired. Seller has duly withheld and paid or remitted all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other person or entity that required withholding under any applicable Law, including, without limitation, any amounts required to be withheld or collected with respect to social security, unemployment compensation, sales or use taxes or workers’ compensation. There are no examinations in progress or claims against Seller relating to Taxes for any period or periods prior to and including the Effective Date and no written notice of any claim for Taxes, whether pending or threatened, has been received. Seller has not granted or been requested to grant any extension of the limitation period applicable to any claim for Taxes or assessments with respect to Taxes. Seller is not a party to any tax allocation or sharing agreement and is not otherwise liable or obligated to indemnify any person or entity with respect to any Taxes. The amounts shown as accruals for Taxes in the Financial Statements as of June 30, 2004 are, and at Closing will be, sufficient for the payment of all Taxes for all fiscal periods ended on or before that date. Seller currently utilizes the accrual method of accounting for income tax purposes. Such method of accounting has not changed since the inception of Seller’s business.

5.21 Solvency. Seller is not insolvent, and will not be rendered insolvent by the transfer contemplated by this Agreement. Seller assets exceed its liabilities, and Seller is currently paying its obligations as they become due.

5.22 Change of Name. Except as set forth in Schedule 5.22, Seller has not conducted business under any name during the past five (5) years other than Bluejack Systems, L.LC.

5.23 Books and Records. The books of account, minute books, stock record books, and other records of Seller, are complete and correct in all material respects, have been maintained in accordance with sound business practices, and all of them have been made available for inspection by Purchaser.

5.24 Disclosure. Seller has fully provided Purchaser and its representatives with all the information that Purchaser has requested in analyzing whether to consummate the Asset Purchase. None of the information so provided nor any representation or warranty of Seller contained in this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make such representation, warranty or statement, in light of the circumstances under which they were made, not misleading.

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

5.26 Accuracy of Information Furnished. This Agreement and the attached schedules and exhibits are free of any untrue statements of material fact and do not omit to state a material fact necessary to make the statements contained in this Agreement and the attached schedules and exhibits not misleading. To the best of Seller’s knowledge, there is nothing which has not been set forth or disclosed in this Agreement and the attached exhibits which currently materially adversely affects the Business or the Assets.

5.27 Location. Except as to items that may be out for service or repair or with sales representatives for marketing purposes, all tangible personal property included in the Assets is currently found at the locations set forth in Schedule 5.27.

5.28 Warranty Claims. Except as set forth in Schedule 5.28, there are no warranty claims for defective work completed by the Business existing, pending or, to the knowledge of the Seller, threatened against the Business or Seller.

5.29 Management and Ownership. All of Seller’s Members are as identified in Schedule 5.29.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER

The Purchaser represents and warrants to Seller Principal and Seller as follows:

6.1 Organization and Qualification. Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of Oklahoma and is duly authorized and qualified to do business under all applicable Laws and to carry on its business in the places and in the manner as now conducted. Purchaser has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as such business is currently being conducted. Purchaser is in good standing in each jurisdiction in which the operation of its business requires it to be registered to do business unless the failure to be so registered would not have a material adverse effect on Purchaser.

6.2 Authorization of Transaction. Purchaser has full power and authority to execute and deliver this Agreement, to effectuate the transactions contemplated hereby, and to perform its obligations hereunder. To the extent required by its Articles of Incorporation, Bylaws and applicable law, the Board of Directors of Purchaser has approved this Agreement, its Exhibits and Schedules.

6.3 Enforceability. This Agreement has been duly and validly executed and delivered by Purchaser, and, assuming the due authorization, execution and delivery hereof by Seller and Seller Principal, constitutes, to the best of Purchaser’s knowledge, a valid and binding agreement of Purchaser, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity.

6.4 Non-Contravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any statute, regulation, rule, judgment, order, decree, injunction, or other restriction of any government, governmental agency or court to which Purchaser is subject, or will conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel any contract, lease, sublease, license, franchise, permit, indenture, agreement, or mortgage to which Purchaser is a party or by which it is bound.

6.5 Consents. No declaration, filing or registration with, or notice to, or authorization, consent or approval of, any Governmental Authority or third party is necessary for the execution and delivery of this Agreement by Purchaser or the consummation by Purchaser of the transactions contemplated hereby, except as may be required as set forth in Section 6.5, and such actions or filings which, if not made or obtained, as the case may be, would not have a material adverse affect.

ARTICLE VII

CERTAIN COVENANTS

7.1 Conduct of Business. Seller shall conduct the Business up to the date of Closing in the normal and regular manner, and will not enter into any contact except as may be required in the ordinary course of business. Except with respect to disclosure to their respective attorneys, financial advisors and officers and employees with a need to know, or as otherwise required by law, the parties shall insure that the existence of this Agreement is kept in strictest confidence prior to Closing, and no party shall disclose the terms hereof to any person, before Closing, without each party’s prior written consent.

7.2 Future Cooperation; Final Equity Value; Tax Matters. The Seller Principal, Seller and Purchaser shall each deliver or cause to be delivered to the other following the Closing such additional instruments as the other may reasonably request for the purpose of fully carrying out this Agreement. Purchaser will, and will cause its managers and employees to, cooperate with Seller and its representatives in their review and verification of the Earnout calculation as determined by Purchaser, pursuant to Section 2.2, and the Closing Equity Value determined by Purchaser, pursuant to Section 2.3. Seller will cooperate and use its best efforts to cause its managers and employees to cooperate with Purchaser at and after the Closing in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all tax periods prior to the Closing. Purchaser will provide Seller and the Seller Principal with access to such of Seller’s books and records as may be reasonably requested by Seller or the Seller Principal in connection with federal, state and local tax matters relating to periods prior to the Closing. The party requesting cooperation, information or actions under this Section 7.2 shall reimburse the other party for all reasonable out-of-pocket costs and expenses paid or incurred in connection therewith, which costs and expenses shall not, however, include per diem charges for employees or allocations of overhead charges.

7.3 Access. Between the date of this Agreement and the Closing Date, Seller shall give Purchaser and its authorized representatives reasonable access upon reasonable notice during reasonable business hours and in such manner as not unduly to disrupt their respective normal business activities, to any and all premises, properties, contracts, commitments, books, records and affairs of the Business and shall cause its officers and employees to furnish to Purchaser any and all financial, technical and operating data and other information pertaining to the Business as Purchaser may from time to time reasonably request; provided, however, that such access shall not include access to any item or property not related to the Business.

7.4 Vendor and Customer Introductions. Seller shall make arrangements reasonably satisfactory to Purchaser for representatives of the Purchaser to meet Seller’s vendors and customers. Seller will be permitted to have a representative at each such meeting.

7.5 Preservation and Continuity of Representations. Seller and the Seller Principal, jointly and severally, hereby covenant with Purchaser and Purchaser hereby covenants with Seller and the Seller Principal that from and after the Effective Date and through the Closing Date or the

earlier termination of the Agreement, they shall use their best efforts to ensure that all of the representations and warranties set forth in Articles V and VI hereof shall be true in all material respects as of the Closing Date as if repeated at and as of such time, and shall advise each other promptly of any material adverse change or deviation in or from any of the representations and warranties herein from the Effective Date through the Closing Date.

7.6 Effect of Purchaser’s Due Diligence. Purchaser’s due diligence review shall not relieve Seller or the Seller Principal of any duties concerning their respective representations, warranties, covenants or agreements contained in this Agreement.

7.7 Filings with SEC. Between the Effective Date and the Closing, or promptly thereafter, Purchaser may have to make certain filings with the Securities and Exchange Commission. To the extent that information concerning the Seller Principal and/or Seller is required to be included in such filings as required by applicable law, Seller and the Seller Principal shall supply or cause Seller’s auditors and other advisors to supply such information, in the manner and form reasonably requested by Purchaser, at Purchaser’s cost, promptly and in any event not later than twenty (20) days after receipt of such request.

ARTICLE VIII
CONDITIONS TO PURCHASER’S OBLIGATION TO CLOSE

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

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

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

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

8.4 Proceedings. Prior to the Closing Date, no material litigation shall have been initiated by any federal, state or local governmental or public body or department or agency thereof or any other person questioning the legality of the transactions contemplated by this Agreement which, in the opinion of counsel to Purchaser, makes it undesirable to proceed with such transactions.

8.5 Material Adverse Change. Other than planned and permitted withdrawals of cash, securities and personal items at the Seller Principal’s discretion, no material adverse change shall have occurred in the Business between August 31, 2000 and the Closing Date.

8.6 Required Permits and Consents. Purchaser shall have received (i) its own counterparts of, or effective assignment of, or temporary or interim authority to operate pending the issuance of, all Permits and (ii) all required consents satisfactory to Purchaser to assignment to Purchaser of all Material Contracts (and the agreement to any modifications reasonably requested by Purchaser).

8.7 Due Diligence. Purchaser shall have completed its due diligence examination of Seller and found the Asset Purchase to be in all respects satisfactory to Purchaser.

8.8 Board Approval. Purchaser’s Board of Directors shall have given its approval to the closing of the Asset Purchase.

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

	8.9.1 Non-Competition Agreement. The Non-Competition Agreement in the form of Exhibit 8.9.1 executed by the Seller Principal (“Non-Competition Agreement”).

	8.9.2 Supplier and Vendor Contracts. Fully executed contracts or agreements, or assignments of Seller’s existing contracts and agreements, with the suppliers and vendors of the Business deemed necessary by Purchaser to the continued operation and success of the Business as identified in Schedule 8.9.2.

	8.9.3 Bill of Sale. A duly executed the Bill of Sale and Assignment in the form of Exhibit 8.9.3.

	8.9.4 Releases. Duly recorded and filed releases of all outstanding mortgages covering any of the Assets and termination statements for all outstanding UCC financial statements, amendments and assignments covering any of the Assets.

	8.9.5 Clearance Certificate. A “tax clearance certificate” from the appropriate regulatory agencies in Washington and each other state in which Seller is qualified to do business stating that all sales and use taxes have been paid through a date no earlier than thirty (30) days prior to the Closing.

	8.9.6 Closing Certificate. A certificate in the form of Exhibit 8.9.6, dated as of the Closing Date and signed by Seller and the Seller Principal, verifying the satisfaction of the conditions set forth in Sections 8.1 through 8.5 hereof.

	8.9.7 Additional Documents. All such other certificates and documents consistent with this Agreement as Purchaser or its counsel shall have reasonably requested.

ARTICLE IX
CONDITIONS TO SELLER’S OBLIGATION TO CLOSE

Each and every obligation of Seller under this Agreement to be performed on or after the date hereof shall be subject to the representations and warranties made by Purchaser in this Agreement being correct in all material respects on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on the Closing Date and subject to the delivery of the following items by Purchaser at or before the Closing:

	(a) The Non-Competition Agreement.

	(b) In a form and content reasonably satisfactory to Seller, resolutions of the Board of Directors Purchaser duly approving and authorizing the execution, delivery and performance of this Agreement and the transactions and agreements contemplated by or referred to herein.

	(c) The Cash Portion of the Purchase Price to Seller and any instrument deemed reasonably necessary by Seller and its counsel to evidence Purchaser’s assumption of the Assumed Liabilities.

	(d) Employment Agreements for Fred McDermott, Timothy L. Nicholas and Craig Y. Nishizaki in the forms set forth in the attached Schedule 4.1.

ARTICLE X
INDEMNIFICATION

10.1 Survival of Representations and Warranties. The parties hereto agree that their respective representations, warranties, covenants, and agreements contained herein shall survive the Closing for a period of two (2) years after the Closing Date except that those covenants, representatives and warranties made by Seller with respect to Employee Benefit Plans and Taxes (Sections 5.18 and 5.20 hereof) shall survive the Closing for such periods of time that the Governmental Authority having jurisdiction over the subject matter of those covenants, representations and warranties may be empowered to assess a liability or deficiency with respect to any of the matters covered thereby (the “Indemnification Period”).

10.2 Indemnification by the Seller. Subject to the other provisions of this Article X, the Seller and the Seller Principal agree to save and indemnify Purchaser against, and hold it harmless from, any and all liabilities, of every kind, nature and description, fixed or contingent, including without limitation reasonable attorney fees and expenses incurred in connection with

any action, claim or proceeding relating to such liabilities (“Damages”), arising from the breach of any of his representations, warranties, covenants, or agreements, contained herein or in the Exhibits or Schedules hereto, a claim for which is asserted in writing by Purchaser during the Indemnification Period.

10.3 Indemnification by Purchaser. Purchaser agrees to save and indemnify the Seller against and to hold him harmless from any and all Damages arising from the breach of any of Purchaser’s representations, warranties, covenants or agreements contained herein or the Exhibits hereto, including, but not limited to, failure by Purchaser to pay Assumed Liabilities described in Schedule 2.5, a claim for which is asserted in writing by Seller during the Indemnification Period.

10.4 Claims. All claims for Damages shall be computed net of the present value of all readily ascertainable future tax benefits associated therewith. No claim shall be made for matters adequately covered by insurance, nor may any party recover punitive damages as part of its Damages.

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

10.6 Extension of Time. To the extent that an Indemnified Party delivers written notice of a claim for Damages against an Indemnifying Party prior to the expiration of the Indemnification Period, reasonably identifying the basis for the claim and the amount of any reasonably ascertainable Damages, the Indemnification Period shall be extended for such claim until such claim is resolved by a Final Determination.

10.7 Final Determination. For the purposes of this Agreement, a “Final Determination” shall exist when (i) the parties agree in writing upon the amount, or (ii) a court of competent jurisdiction shall have made a determination on the merits with respect thereto and appeal therefrom shall not have been taken within a timely fashion from the date of such

determination. The asserting party will assign to the other party any claims against which the asserting party has been indemnified and paid as provided herein, as to which there may be claims against persons other than the Seller, and the other party in all respects shall be subrogated to the rights of the asserting party in connection therewith.

10.8 Exclusivity. The remedies contained in this Article X, including any remedy arising out of, relating to, in the nature of, or caused by the violation or any breach of a representation, warranty or covenant contained in this Agreement or with respect thereto, shall be exclusive of all other statutory or common law remedies available to any party; provided, however, that nothing set forth herein shall prohibit any party from seeking specific performance or injunctive relief for any actual or threatened breach of this Agreement.

ARTICLE XI
TERMINATION

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

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

	(b) By Purchaser if, through no fault of Purchaser, any of the conditions set forth in Article VIII shall not have been fulfilled, or shall become incapable of fulfillment, on or prior to August 2, 2004, and shall not have been waived;

	(c) By Purchaser or Seller, if the Closing Date shall not have occurred on or prior to August 2, 2004 (or such later date as shall have been approved by the parties), unless such failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants, agreements and conditions hereof to be performed or observed by such party at or before the Closing Date;

	(d) By Purchaser or Seller, if any court of competent jurisdiction or other governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall not have been withdrawn within thirty (30) days after the date on which such order, decree, ruling or other action was first issued or taken, or by reason of any litigation or proceeding pending or threatened to be instituted by any person or governmental body, which, in either case in the good faith judgment of its Board of Directors will in all likelihood result in an order, decree or ruling enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or

	(e) By Purchaser or Seller, if any representation or warranty given or made in this Agreement or any attachment by the other was untrue in any material respect as of the date given or made or as of the Closing Date, in light of the circumstances under which such representation or warranty was given or made, or if any covenant given or made in or pursuant to this Agreement, and performable by the other before and as a condition to the Closing is breached and such breach is not promptly cured after notice.

11.2 Effect. In the event of termination or abandonment by reason of Section 11.1, this Agreement shall forthwith become void and there shall be no liability of one party to the other by reason of this Agreement unless the reason for termination or abandonment was caused by the action, the failure to act, the misrepresentation, omission or breach by the party to be charged with such liability with respect to a material aspect of the contemplated transaction.

ARTICLE XII
MISCELLANEOUS

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

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

12.3 Brokers and Agents. Other than the Seller’s tax and business advisor, Robert Staudacher, each party hereto represents and warrants that it employed no broker or agent in connection with the transactions contemplated by this Agreement. Each party agrees to indemnify each other party against all loss, cost, damages or expense arising out of claims for fees or commissions of brokers employed or alleged to have been employed by such indemnifying party.

12.4 Notices. All notices and communications required or permitted hereunder shall be in writing and may be given by depositing the same in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party, as follows:

	If to Purchaser, addressed to them at:

			XETA Technologies, Inc.
			1814 West Tacoma
			Broken Arrow, Oklahoma 74012-1406
			Attn: Jack Ingram, Chief Executive Officer
			Ph.: (918) 664-8200 Fax: (918) 664-6876

	with a copy (which shall not constitute notice) to:

		Barber & Bartz, P.C.
		525 South Main, Suite 800
		Tulsa, Oklahoma 74103-4511
		Attn: Ron B. Barber, Esq.
		Ph.: (918) 599-7755 Fax: (918) 599-7756

If to the Seller, addressed as follows:

		Bluejack Systems, L.L.C.
		13102 Northup Way
		Bellevue, Washington 98005-2003
		Attn: Greg Forrest, Member
		Ph.: (206) 274-7306 Fax: (206) 219-7309

	or the Seller Principal, addressed as follows:

		Greg Forrest
		5130 188^th Place N.E.
		Redmond, Washington 98052
		Ph.: (_____) __________ Fax: (______) __________

	with a copy (which shall not constitute notice) to:

		Andrew M. Brackbill
		Attorney at Law
		1725 Westlake Avenue North, Suite 101
		Seattle, WA 98109
		Ph.: (206) 217-9500 Fax: (206) 217-9402

or such other address as any party hereto shall specify pursuant to this Section 12.4 from time to time.

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

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

12.7 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Oklahoma applicable to contracts to be entered into and fully performed in the State of Oklahoma by residents of the State of Oklahoma.

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

12.9 Expenses. Each party shall pay its own expenses in connection with this Agreement and the transactions contemplated by this Agreement. Seller shall indemnify Purchaser against any claims of third parties for brokerage commissions or finders fees in connection with the transactions contemplated by this Agreement insofar as such claims are alleged to be based on arrangements made by Seller or any authorized agent thereof. Purchaser shall indemnify Seller against any such claim of third parties for brokerage commissions or finders’ fees in connection with the transactions contemplated by this Agreement insofar as they are alleged to be based on arrangements made by Purchaser. Purchaser represents that no such arrangements exist. All sales, use or other tax, duty or recording cost, if any, imposed upon the transfer of the assets and business to be acquired by Purchaser pursuant to this Agreement shall be paid by Seller.

12.10 Confidential Information. Each party agrees it and its representatives shall hold in strict confidence, and shall not use for its own account or for the account of others, nor divulge or disclose to any person without a need to know, any information and documents received from the other party and, if the transactions herein contemplated are not consummated, each party will continue to hold such information and documents in strict confidence and shall return to such other party all such documents then in such receiving party’s possession (including the Schedules and Exhibits to this Agreement) without retaining copies thereof; provided, that each party’s obligations under this Section 12.10 to refrain from such use and to maintain such confidentiality shall not apply to any information or documents that are in the public domain when furnished by the other or to be disclosed required by applicable law .

12.11 Publicity. Seller and Purchaser each agree that, without the written consent of the other, it will not issue a press release or otherwise publicly disclose the transactions contemplated by this Agreement (including but not limited to the Purchase Price) except as may be required by law. Any public announcement of this Asset Purchase will be made by Purchaser and Seller jointly and simultaneously, and the wording of any such announcement will be mutually agreed upon unless, in the reasonable judgment of counsel for Purchaser, any laws, rules or regulations to which Purchaser is subject (including the rules of NASDAQ) mandate other wording, in which event such other laws, rules or regulations as interpreted by Purchaser and its counsel shall control; provided, however, that from and after the Closing, Purchaser shall be entitled to issue press releases or otherwise publicly disclose its acquisition of the Business.

12.12 Equitable Relief. Each party recognizes that the other is likely to suffer irreparable damage if the provisions of Sections 12.10 or 12.11 are not specifically enforced. In the event of a dispute concerning any of these sections, each party agrees that the other may, without posting bond or security, obtain a temporary or permanent injunction restraining the consummation of any action or transaction prohibited thereby pending determination of such dispute. The provisions of Sections 12.10 and 12.11 shall likewise be enforceable by a decree of

specific performance. In the event of litigation relating to such provisions, if the court determines that either party or any of its employees, agents or representatives has breached any provision thereof, the injured party shall be entitled to recover from the breaching party its reasonable fees, costs, and expenses (including attorney fees) incurred in connection with the prosecution of any equitable or legal proceedings and any appeal therefrom.

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

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

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

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

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

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

“Purchaser”		“Seller”

XETA TECHNOLOGIES, INC.		BLUEJACK SYSTEMS, L.L.C.


By	/s/ JACK INGRAM	By	/s/ GREG FORREST

	Jack Ingram,		Greg Forrest,
	President and Chief Executive Officer		Managing Member

		“Seller Principal”


			/s/ GREG FORREST

			Greg Forrest, individually

EX-2.2 3 xt907918ex22.htm

Exhibit 2.2

BILL OF SALE, ASSIGNMENT,
AND ASSUMPTION AGREEMENT

THIS BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT (this “Bill of Sale and Assumption”), dated as of August 1, 2004 (the “Closing Date”), is made and delivered by and between BLUEJACK SYSTEMS, L.L.C., a Washington limited liability company (“Seller”), and XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Assignee”).

This Bill of Sale and Assumption is being executed and delivered pursuant to the terms of that certain Asset Purchase Agreement dated effective of even date herewith (the “Acquisition Agreement”), by and among Seller, Assignee and GREG FORREST, Seller’s sole member.

Recitals:

WHEREAS, the Acquisition Agreement provides, among other things, for Seller’s sale, transfer and assignment, and Assignee’s purchase, of all or substantially all of Seller’s assets and for Assignee’s assumption of only certain of its liabilities;

WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Acquisition Agreement.

NOW, THEREFORE, pursuant to the Acquisition Agreement, in consideration for the premises and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Seller hereby sells, transfers, assigns, conveys and delivers to Assignee, its successors and assigns forever, all right, title and interest and good and valid title in and to the Assets, absolutely free and clear of all Encumbrances.

2. Seller hereby acknowledges receipt of that portion of the Purchase Price due and payable as of the Closing Date.

3. Assignee hereby assumes and agrees to pay, perform or otherwise discharge all of the Assumed Liabilities and no others.

4. Seller and Assignee shall each execute and deliver to the other party hereto all such further instruments, assignments, assurances and other documents as such party may reasonably request in connection with its performance under this Bill of Sale and Assumption and the transactions contemplated hereby and by the Acquisition Agreement.

5. Seller, for itself and its successors and assigns, covenants and agrees to warrant and defend the transfer, assignment and conveyance of the Assets to Assignee and its successors and assigns against all claims and demands whatsoever.

6. This Bill of Sale and Assumption shall be subject to the terms of the Acquisition Agreement. In the event of conflict between the provisions of this Bill of Sale and Assumption and the provisions of the Acquisition Agreement, the provisions of the Acquisition Agreement shall govern.

7. This Bill of Sale and Assumption, and the sale, transfer, conveyance, assignment, assumption, and delivery provided for herein, shall be effective as of the Closing Date.

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

IN WITNESS WHEREOF, the undersigned has executed this Bill of Sale and Assumption as of the Closing Date first written above.

	BLUEJACK SYSTEMS, L.L.C.

	By	/s/ GREG FORREST

		Greg Forrest, Sole Member

	XETA TECHNOLOGIES, INC.

	By	/s/ JACK INGRAM

		Jack Ingram, President and Chief Executive Officer

EX-3.(I) 4 xt907918ex3i.htm

Exhibit 3(i)

File in Duplicate
Filing Fee: $50.00

RESTATED CERTIFICATE OF
INCORPORATION OF XETA TECHNOLOGIES, INC.

TO THE SECRETARY OF STATE OF OKLAHOMA:

We, the undersigned authorized officers of XETA Technologies, Inc., formerly XETA Corporation, a corporation organized under the laws of the State of Oklahoma upon filing its original Certificate of Incorporation with the Secretary of State on June 4, 1981, which Certificate was subsequently amended, and restated on April 8, 1987, and further amended on July 30, 1999, April 17, 2000, June 27, 2000 and June 30, 2000, do hereby restate said Certificate of Incorporation, which Restated Certificate of Incorporation was duly adopted by the Board of Directors in accordance with the provisions of Section 1080.B of "The Oklahoma General Corporation Act" as follows:

The name of the Corporation is:

XETA Technologies, Inc.

The address of its registered office in the State of Oklahoma is 525 South Main Street, Suite 800, Tulsa, Oklahoma 74103.

III

The name of its registered agent is Ron B. Barber at 525 South Main Street, Suite 800, Tulsa, Oklahoma 74103.

The duration of the Corporation is perpetual.

The purposes for which the Corporation is formed are:

		(a) To engage in research and development, purchase, sale, leasing, both as lessor and lessee, import, export, license, distribution, design, manufacture, or the servicing of telephone communication interfaces or of any product, machine, or apparatus, appliance, merchandise, and property of every kind and description, ideas, systems, procedures, and services of any nature, including, without limiting the generality of the foregoing, all types of products which possess an internal intelligence for recognizing and correlating any type of data or information to be processed, pattern interpretation, recognition and memory systems and equipment, optical scanning, analog and digital computers, components, and all types of electrical, mechanical, electromechanical, and electronic products and systems such as for analysis of visible, radar, sonar, or other inputs, voice recognition and identification of voice elements, and magnetic storage discs and drums;

		(b) To acquire, own, hold, improve, develop, operate, exploit, sell, convey, assign, lease, exchange, transfer, dispose of, pledge, mortgage, create security interests in, deal in, and loan or borrow money upon, alone or in conjunction with others, real and personal property, tangible and intangible of every kind, character and description, or in any interest therein, and all kinds and forms of security, shares of capital stock, bonds, debentures, coupons, mortgages, notes, bills of exchange, acceptances, assignments, accounts, certificates, interim receipts, warrants and fees, evidences of indebtedness, obligations, trust certificates issued, or created by, or being claims against any corporation, association, partnership, syndicate, entity or person, or governmental, municipal or public subdivision or authority; and

		(c) To do, to the extent a corporation organized under the “General Corporation Act” of the State of Oklahoma may now or hereafter lawfully do, either as principal or agent, and either alone or in conjunction with other corporations, firms or individuals, all and everything necessary, suitable, convenient or proper for or in connection with or incident to the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated or designed directly or indirectly to promote the interests of this Corporation or to enhance the value of its properties; and in general, to do any and all things, and exercise any and all powers, rights and privileges which a corporation may now or hereafter be organized to do or to exercise under the “General Corporation Act” of the State of Oklahoma or under any act amendatory thereof, supplemental thereto, or substituted therefor.

The foregoing clauses shall be construed as and shall be powers as well as purposes, and the matters expressed in each clause shall, unless herein otherwise expressly provided, be in no wise limited by reference to or inference from the terms of any other clause, but shall be regarded as

independent powers and purposes; and the enumeration of specific powers and purposes shall not be construed to limit or restrict, in any manner, the meaning of general terms or the general powers of this Corporation, nor shall the expression of one thing be deemed to exclude another not expressed, although it be of like nature. This Corporation shall be authorized to exercise and enjoy all other powers, rights and privileges granted by the “General Corporation Act” of the State of Oklahoma to corporations organized thereunder and all powers conferred by all acts heretofore or hereafter amendatory of or supplemental to that statute, and the enumeration of certain powers as herein specified is not intended as exclusive of or as a waiver of any of the powers, rights or privileges granted or conferred by that statute now or hereafter in force; provided, however, that nothing herein contained shall be deemed to authorize or permit this Corporation to carry on any business, to exercise any power or to do any act in violation of the Constitution and laws of the State of Oklahoma.

The total authorized number of shares which the Corporation shall have authority to issue shall consist of 50,500,000 shares, 50,000,000 shares of which shall be classified as Common Shares of the par value of $.001 per share, and 500,000 shares of which shall be classified as Preferred Shares, $.10 par value per share.

VII

All common stock shall be non-assessable. On all matters requiring a vote of the shareholders, each holder of common stock shall be entitled to one vote per share of common stock held by such shareholder.

The Board of Directors shall have full authority, subject to limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Oklahoma, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of Preferred Stock and of each such series and the qualifications, limitations or restrictions thereof.

The authority of the Board with respect to the Preferred Stock and each series thereof shall include, but not be limited to, determination of the following:

	(a) The number of shares constituting a series and the distinctive designation of that series;

	(b) The dividend rate on the shares, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative right of priority, if any, of payment of dividends on such shares;

	(c) Whether the shares shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

	(d) Whether the shares shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

	(e) Whether or not the shares shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

	(f) Whether the shares shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

	(g) The rights of the shares in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights or priority, if any, of payment of shares; and

	(h) Any other relative rights, preferences and limitations of the shares.

VIII

A quorum at all meetings of shareholders shall consist of the holders of one third of the outstanding shares entitled to be voted at such meeting, present in person or by proxy. Any meeting may be adjourned from time to time, and the shareholders present at a duly called or held meeting at which a quorum is initially present may continue to transact business until adjournment, notwithstanding the withdrawal of shareholders resulting in a number of remaining shareholders less than the number required to originally constitute a quorum.

At any regular or special meeting duly convened after notice to the shareholders or the Board of Directors, as the case may be, setting out the purpose of such meeting, the Bylaws may be adopted, altered, amended or repealed by the affirmative vote of the shareholders entitled to exercise fifty-one percent (51%) of the voting power of the Corporation, or by the Board of Directors; provided, however, that the fact that such power is conferred upon the Directors shall not divest the shareholders of the power, nor limit their power to adopt, alter, amend or repeal Bylaws.

The affairs of the Corporation shall be managed by the Board of Directors. The number of members of the initial Board of Directors of the Corporation shall be four (4). The number of members of succeeding Boards of Directors shall be as provided by the Bylaws of the Corporation and shall consist of a minimum of one (1) Director.

These Articles of Incorporation may be adopted, altered, amended or repealed at any regular or special meeting duly convened after notice to the shareholders setting out the purpose of such meeting, by a vote of the shareholders entitled to exercise fifty-one percent (51%) of the voting power of the Corporation.

IN WITNESS WHEREOF, the undersigned Corporation has caused this Restated Certificate of Incorporation to be executed in its name by its President and Chief Executive Officer, and attested by its Secretary this 30 day of April, 2004.

	XETA TECHNOLOGIES, INC.

	By:	/s/ JACK R. INGRAM

		Jack R. Ingram, President

ATTEST:

/s/ ROBERT B. WAGNER

Robert B. Wagner, Secretary

[SEAL]

ACKNOWLEDGMENT

STATE OF OKLAHOMA	)
	)	ss.
COUNTY OF TULSA	)

Before me, the undersigned, a notary public in and for said County and State, on this 30 day of April, 2004, personally appeared Jack R. Ingram, to me known to be the identical person who, first being duly sworn, subscribed the name of the maker thereof to the foregoing Restated Certificate of Incorporation as its President and Chief Executive Officer, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth.

My Commission Expires:	/s/ LA TISHA O’NEAL

	Notary Public
05/04/07

EX-10.1 5 xt907918ex101.htm

Exhibit 10.1

XETA TECHNOLOGIES, INC.

2004 OMNIBUS STOCK INCENTIVE PLAN

1. Establishment and Purpose.

There is hereby adopted the XETA Technologies, Inc. 2004 Omnibus Stock Incentive Plan (the “Plan”). The Plan shall be in addition to the XETA Technologies 2000 Stock Option Plan. The Plan is intended to promote the interests of the Company and the stockholders of the Company by providing officers, other employees of the Company, directors who are not employees of the Company, and other persons who are expected to make a long-term contribution to the success of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the Company and/or to acquire a proprietary interest in the long-term success of the Company, thereby aligning their interest more closely to the interest of stockholders.

2. Definitions.

As used in the Plan, the following definitions apply to the terms indicated below:

(a)	“Award Agreement” shall mean the written agreement between the Company and a Participant evidencing an Incentive Award.

(b)	“Board of Directors” shall mean the Board of Directors of the Company.

(c) “Cause,” when used in connection with the termination of a Participant’s employment by the Company, shall mean (i) the Participant’s willful and continued failure to substantially perform his duties (other than any such failure resulting from the Participant’s incapacity due to physical or mental impairment); (ii) the willful conduct of the Participant which is demonstrably and materially injurious to the Company or a Subsidiary, monetarily or otherwise, or (iii) the conviction of the Participant for a felony by a court of competent jurisdiction. The Committee shall determine whether a termination of employment is for Cause.

(d)	“Change in Control” shall mean any of the following occurrences:

	(i)	any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities;

	(ii)	during any period of not more than two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board of Directors or nomination for election was approved by a vote of at least two-thirds (²/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof;

	(iii)	the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as herein above defined) acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or

	(iv)	the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

(e)	“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(f)	“Committee” shall mean the Compensation Committee of the Board of Directors. The Committee shall consist of two or more persons each of whom is an “outside director” within the meaning of Section 162(m) of the Code and a “Non-Employee Director” within the meaning of Rule 16b-3 under the Exchange Act (or who satisfies any other criteria for administering employee benefit plans as may be specified by the Securities and Exchange Commission in order for transactions under such plan to be exempt from the provisions of Section 16(b) of the Exchange Act).

	(g)	“Company” shall mean XETA Technologies, Inc., an Oklahoma corporation.

	(h)	“Common Stock” shall mean the common stock of the Company, $0.001 par value per share.

	(i)	“Disability” shall mean: (1) any physical or mental condition that would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company or a Subsidiary of the Company and applicable to such Participant or, if such long-term disability plan is not applicable to the Participant, then a “permanent and total disability” which enables the Participant to be eligible for and receive a disability benefit under the Federal Social Security Act ; or (2) when used in connection with the exercise of an Incentive Stock Option following termination of employment, disability within the meaning of Section 22(e)(3) of the Code.

	(j)	“Effective Date” shall mean the date upon which this Plan is adopted by the Board of Directors.

	(k)	“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

	(l)	“Executive Officer” shall have the meaning set forth in Rule 3b-7 promulgated under the Exchange Act.

	(m)	“Exercise Date” shall mean the date on which a Participant may exercise an Incentive Award.

	(n)	“Fair Market Value” of a share of Common Stock, as of a date of determination, shall mean (i) the closing sales price per share of Common Stock on the national securities exchange on which such stock is principally traded for the last preceding date on which there was a sale of such stock on such exchange, or (ii) if the shares of Common Stock are not listed or admitted to trading on any such exchange, the closing price as reported by the Nasdaq Stock Market for the last preceding date on which there was a sale of such stock on such exchange, or (iii) if the shares of Common Stock are not then listed on the Nasdaq Stock Market, the average of the highest reported bid and lowest reported asked prices for the shares of Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System for the last preceding date on which there was a sale of such stock in such market, or (iv) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as determined by the Committee in good faith.

	(o)	“Incentive Award” shall mean an Option, Tandem SAR, Stand-Alone SAR, Restricted Stock grant, Phantom Stock grant or Stock Bonus granted pursuant to the terms of the Plan.

	(p)	“Incentive Stock Option” shall mean an Option that is an “incentive stock option” within the meaning of Section 422 of the Code.

	(q)	“Issue Date” shall mean the date established by the Company on which shares of Restricted Stock shall be registered in the name of the Participant pursuant to the terms of Section 10(e) of the Plan.

	(r)	“Non-Qualified Stock Option” shall mean an Option that is not an Incentive Stock Option.

	(s)	“Option” shall mean an option to purchase shares of Common Stock granted pursuant to Section 7 of the Plan.

	(t)	“Participant” means any person who is both eligible to receive an Incentive Award pursuant to the Plan (as set forth in Section 5) and to whom an Incentive Award is granted pursuant to the Plan, and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be.

	(u)	“Phantom Stock” shall mean the right, granted pursuant to Section 11 of the Plan, to receive in cash the Fair Market Value of a share of Common Stock.

	(v)	“Plan” shall mean this 2004 Omnibus Stock Incentive Plan, as amended from time to time.

	(w)	“Reference Value” shall mean, with respect to Stand-Alone SARs, the greater of the Fair Market Value or the value given by the Compensation Committee.

	(x)	“Restricted Stock” shall mean a share of Common Stock that is granted pursuant to the terms of Section 10 hereof and that is subject to the restrictions set forth in Section 10 of the Plan.

	(y)	“Rule 16b-3” shall mean Rule 16b-3 promulgated under the Exchange Act.

	(z)	“Section 162(m)” shall mean Section 162(m) of the Code and the regulations promulgated thereunder.

	(aa)	“Securities Act” shall mean the Securities Act of 1933, as amended from time to time.

	(ab)	“Stand-Alone SAR” shall mean a stock appreciation right granted pursuant to Section 9 of the Plan that is not related to any Option.

	(ac)	“Stock Bonus” shall mean a bonus payable in shares of Common Stock granted pursuant to Section 12 of the Plan.

	(ad)	“Subsidiary” shall mean a “subsidiary corporation” within the meaning of Section 424(f) of the Code.

	(ae)	“Tandem SAR” shall mean a stock appreciation right granted pursuant to Section 8 of the Plan that is related to an Option.

	(af)	“Termination of employment,” or words of similar import, in the Plan shall be deemed, (i) when applied to non-employee Directors, to mean “termination of service as a director,” and (ii) when applied to employee-Directors, to mean “termination of service as an employee and a director.” Reference to “termination of employment,” or words of similar import, in the Plan shall not be deemed to apply to persons who were not employees or a director of the Company or a Subsidiary of the Company.

	(ag)	“Vesting Date” shall mean the date established by the Committee on which an Incentive Award may vest.

3.	Stock Subject to the Plan.

	(a)	Shares Available for Awards.

		The maximum number of shares of Common Stock reserved for issuance under the Plan shall be 600,000 shares (subject to adjustment as provided herein). The total number of shares reserved for issuance hereunder may be authorized but unissued Common Stock or authorized and issued Common Stock held in the Company’s treasury or acquired by the Company for the purposes of the Plan. The Committee may direct that any stock certificate evidencing shares issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares pursuant to the Plan. The grant of a Tandem SAR shall not reduce the number of shares of Common Stock with respect to which Incentive Awards may be granted pursuant to the Plan. Upon the exercise of any Tandem SAR, the related Option shall be canceled to the extent of the number of shares of Common Stock as to which the Tandem SAR is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Incentive Awards under the Plan. Subject to adjustment under Section 3(c) below, the maximum number of shares of Common Stock that may be issued under the Plan shall be increased as of November 1 each year, beginning November 1, 2004, by three percent (3%) of the total number of shares of Common Stock that are issued and outstanding on the immediately

		preceding October 31^st. Any provision herein to the contrary notwithstanding, the maximum number of shares of Common Stock that may be issued pursuant to Incentive Stock Options granted hereunder shall not exceed 600,000, subject to adjustment under Section 3(c) below.

	(b)	Individual Limitation.

		The total number of shares of Common Stock subject to Incentive Awards (including Incentive Awards payable in cash but denominated as shares of Common Stock, i.e., Stand-Alone SARs and Phantom Stock), awarded to any employee during any tax year of the Company, shall not exceed 250,000 shares. Determinations under the preceding sentence shall be made in a manner that is consistent with Section 162(m) of the Code.

	(c)	Adjustment for Change in Capitalization.

		In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Common Stock, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Participants under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of stock that may thereafter be issued in connection with Incentive Awards, (ii) the number and kind of shares of stock issued or issuable in respect of outstanding Incentive Awards, and (iii) the exercise price, grant price, or purchase price relating to any Incentive Award; provided that, with respect to Incentive Stock Options, such adjustment shall be made in accordance with Section 424 of the Code.

	(d)	Re-Use of Shares.

		The following shares of Common Stock shall again become available for Incentive Awards: any shares subject to an Incentive Award that remain unissued upon the cancellation, surrender, exchange or termination of such award for any reason whatsoever; any shares of Restricted Stock forfeited; and any shares in respect of which a stock appreciation right is settled for cash.

4.	Administration of the Plan.

The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Incentive Awards; to determine the persons to whom and the time or times at which Incentive Awards shall be granted; to determine the type and number of Incentive Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Incentive Award; to determine whether, to what extent, and under what circumstances an Incentive Award may be settled, canceled, forfeited, exchanged, or surrendered; to grant Incentive Awards in replacement of Incentive Awards previously granted under the Plan or under any other plan of the Company, including without limitation a grant of Stock Options or Restricted Stock in exchange for a Participant’s agreement to cancel a higher-priced stock option or options previously granted to such Participant; to subject shares of Stock to which an Award may relate to rights of repurchase or rights of refusal in favor of the Company under the circumstances and upon the terms set forth in an Award Agreement; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting the Company or the financial statements of the Company (to the extent in accordance with Section 162(m)of the Code, if applicable), or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the Plan and any Incentive Award; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of Award Agreements; and to make all other determinations deemed necessary or advisable for the administration of the Plan.

The Committee may, in its absolute discretion and without amendment to the Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted under the Plan becomes exercisable, waive or amend the operation of Plan provisions respecting exercise after termination of employment, or otherwise adjust any of the terms of such Option or Stand-Alone SAR (provided, however, that with respect to Incentive Stock Options, no such change shall be made that would cause the Incentive Stock Options to become Non-Qualified Stock Options unless both the Participant and the Company expressly agree to such change), and (ii) accelerate the Vesting Date or Issue Date, or waive any condition imposed hereunder, with respect to any share of Restricted Stock or Phantom Stock or otherwise adjust any of the terms applicable to such share.

No member of the Committee shall be liable for any action, omission or determination relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any action, omission or determination relating to the Plan, if, in either case, such action, omission or determination was taken or made by such member, director or employee in good faith and in a manner such member, director or employee reasonably believed to be in or not opposed to the best interests of the Company.

5.	Eligibility.

The persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be all employees and directors of the Company and its Subsidiaries and such other persons whom the Committee determines are expected to make a contribution to the Company. The Committee may grant Incentive Awards to any, all or none of such eligible persons at any time, from time to time, during the term of the Plan.

6.	Awards Under the Plan; Award Agreement.

The Committee may grant Options, Tandem SARs, Stand-Alone SARs, shares of Restricted Stock, shares of Phantom Stock and Stock Bonuses, in such amounts and with such terms and conditions as the Committee shall determine, subject to the provisions of the Plan.

Each Incentive Award granted under the Plan (except an unconditional Stock Bonus) shall be evidenced by an Award Agreement that shall contain such provisions as the Committee may in its sole discretion deem necessary or desirable. By accepting an Incentive Award, a Participant thereby agrees that the award shall be subject to all of the terms and provisions of the Plan and the applicable Award Agreement.

7.	Options.

	(a)	Identification of Options.

		Each Option shall be clearly identified in the applicable Award Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option.


	(b)	Exercise Price.

		Each Award Agreement with respect to an Option shall set forth the amount (the “option exercise price”) payable by the grantee to the Company upon exercise of the Option. The Option exercise price per share shall be set by the Committee in its discretion on a case by case basis, but in the case of an Incentive Stock Option shall not be less than the Fair Market Value of a share of Common Stock on the date of grant.

	(c)	Term and Exercise of Options.

		(i)	Unless the applicable Award Agreement provides otherwise, an Option shall become cumulatively exercisable as to 25 percent of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the

			expiration date of each Option; provided, however, that no Incentive Stock Option shall be exercisable more than 10 years after the date of grant. Unless the applicable Award Agreement provides otherwise, no Option shall be exercisable prior to the first anniversary of the date of grant.

		(ii)	An Option shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. An Option may also be exercised electronically by notifying the Company’s agent, pursuant to the methods then in use by that agent. Such notice shall specify the number of shares of Common Stock with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. Payment for shares of Common Stock purchased upon the exercise of an Option shall be made on the effective date of such exercise by one or a combination of the following means: (i) in cash, by certified check, bank cashier’s check or wire transfer; (ii) by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the full amount of the exercise price, (iii) by delivering shares of Common Stock owned by the Participant for at least six months with appropriate stock powers, (iv) by any other means which the Committee, in its sole discretion, determines to provide legal consideration for the Common Stock and to be consistent with the purposes of the Plan, or (v) any combination of the foregoing forms. In determining the number of shares of Common Stock necessary to be delivered to or retained by the Company, such shares shall be valued at their Fair Market Value as of the Exercise Date.

		(iii)	Certificates for shares of Common Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or other person entitled to receive such shares, and delivered to the Participant or such other person as soon as practicable following the Effective Date on which the Option is exercised. In the event of an exercise by way of electronic means, no actual Certificates need be issued.

(d)	Limitations on Incentive Stock Options.

	(i)	To the extent that the aggregate Fair Market Value of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (or any Subsidiary of the Company) shall exceed $100,000, or such higher value as may be permitted under Section 422 of the Code, such Options shall be treated as Non-Qualified Stock Options. Such Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted.

	(ii)	No Incentive Stock Option may be granted to an individual if, at the time of the grant, such individual owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company unless (i) the exercise price per share of such Incentive Stock Option is at least 110 percent of the Fair Market Value of a share of Common Stock of the Company, or of its parent or subsidiary corporation, at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted.

(e)	Effect of Termination of Employment.

	(i)	Unless the applicable Award Agreement provides otherwise, in the event that the employment of a Participant with the Company or a Subsidiary of the Company shall terminate for any reason other than death, Disability or Cause, (i) Options granted to such Participant, to the extent that they are exercisable at the time of such termination, shall remain exercisable until the date that is three months (or 120 days in the case of a “Non-Qualified Stock Option”) after such termination, on which date they shall expire, and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

	(ii)	Unless the applicable Award Agreement provides otherwise, in the event that the employment of a Participant with the Company or a Subsidiary of the Company shall terminate on account of the Disability or death of the Participant (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the first anniversary of such termination, on which date they shall expire, and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

	(iii)	Unless an applicable Award Agreement issued after the date hereof provides otherwise, if a Participant’s employment with the Company or a Subsidiary of the Company is terminated for Cause, all unexercised Options held by the Participant shall immediately be forfeited.

(f)	Effect of Change in Control.

	Upon the occurrence of a Change in Control, (i) Options granted to a Participant, to the extent that they were exercisable at the time of a Change in Control, shall remain exercisable until their expiration notwithstanding the provisions of Section 7(e)(1) and (2) of the Plan, and (ii) Options granted to such Participant, to the extent they were not exercisable at the time of a Change in Control, shall expire at the close of business on the date of such Change in Control. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term. Any vested, exercisable Options outstanding at the time of a Change in Control shall be cashed out, converted to options of the acquiring entity, assumed by the acquiring entity or otherwise disposed of in the manner provided in any shareholder-approved agreement or plan governing or providing for such Change in Control (“Change in Control Agreement”); provided that any such cash-out, conversion, assumption or disposition of the Options shall not deprive the Option holder of the inherent value of his Options, measured solely by the excess of the Fair Market Value of the underlying Option shares immediately prior to the Change in Control over the Option exercise price, without the holder’s consent. In the absence of such governing provisions in a Change in Control Agreement, the Committee in its sole discretion may on a case by case basis require any vested, exercisable Options that remain outstanding upon a Change in Control to be cashed out and terminated in exchange for a lump sum cash payment, shares of the acquiring entity or a combination thereof equal in value to the fair market value of the Option, measured in the manner described above, immediately prior to the Change in Control. Any non-vested Options shall terminate upon a Change in Control unless: (i) otherwise provided in the Change in Control Agreement or in a written agreement, such as a severance agreement, between the Company and the Participant; or (ii) the Committee in its sole discretion on a case by case basis elects in writing to waive termination and/or accelerate vesting.

8.	Tandem SARs.

The Committee may grant in connection with any Option granted hereunder one or more Tandem SARs relating to a number of shares of Common Stock less than or equal to the number of shares of Common Stock subject to the related Option. A Tandem SAR may be granted at the same time as, or, in the case of a Non-Qualified Stock Option, subsequent to the time that, its related Option is granted.

	(a)	Benefit Upon Exercise.

		The exercise of a Tandem SAR with respect to any number of shares of Common Stock shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Common Stock on the Exercise Date over (ii) the option exercise price per share of the related Option. Such payment shall be made as soon as practicable after the effective date of such exercise.

	(b)	Term and Exercise of Tandem SAR.

		(i)	A Tandem SAR shall be exercisable only if and to the extent that its related Option is exercisable.

		(ii)	The exercise of a Tandem SAR with respect to a number of shares of Common Stock shall cause the immediate and automatic cancellation of its related Option with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Section 8(b)(2)), with respect to a number of shares of Common Stock shall cause the automatic and immediate cancellation of any related Tandem SARs to the extent that the number of shares of Common Stock remaining subject to such Option is less than the number of shares then subject to such Tandem SAR. Such Tandem SARs shall be canceled in the order in which they become exercisable.

		(iii)	No Tandem SAR shall be assignable or transferable otherwise than together with its related Option, and any such transfer or assignment will be subject to the provisions of Section 20 of the Plan.

		(iv)	A Tandem SAR shall be exercisable by delivering notice to the Company’s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. A Tandem SAR may also be exercised electronically by notifying the Company’s agent, pursuant to the methods then in use by that agent. Such notice shall specify the number of shares of Common Stock with respect to which the Tandem SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option to which the Tandem SAR is related. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise.

9.	Stand-Alone SARs.

	(a)	Benefit Upon Exercise.

		The exercise of a Stand-Alone SAR with respect to any number of shares of Common Stock shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Common Stock on the Exercise Date over (ii) the Reference Value of the Stand-Alone SAR. Such payments shall be made as soon as practicable after the effective date of such exercise.

	(b)	Term and Exercise of Stand-Alone SARs.

		(i)	Unless the applicable Award Agreement provides otherwise, a Stand-Alone SAR shall become cumulatively exercisable as to 25 percent of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the expiration date of each Stand-Alone SAR. Unless the applicable Award Agreement provides otherwise, no Stand-Alone SAR shall be exercisable prior to the first anniversary of the date of grant.

		(ii)	A Stand-Alone SAR shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary, no less than one business day in advance of the effective date of the proposed exercise. A Stand-Alone SAR may also be exercised electronically by notifying the Company’s agent, pursuant to the methods then in use by that agent. Such notice shall specify the number of shares of Common Stock with respect to which the Stand-Alone SAR is being exercised, and the effective date of the proposed exercise, and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise.

	(c)	Effect of Termination of Employment.

		The provisions set forth in Section 7(e) with respect to the exercise of Options following termination of employment shall apply as well to the exercise of Stand-Alone SARs.

	(d)	Effect of Change in Control.

		Upon the occurrence of a Change in Control, (i) Stand-Alone SARs granted under the Plan, to the extent exercisable at the time of a Change in Control, shall remain exercisable until their expiration notwithstanding the provisions of Section 7(e) of the Plan that are incorporated into this Section 9, and (ii) Stand-Alone SARs not exercisable at the time of a Change in Control shall expire at the close of business on the date of such Change in Control. Any vested, exercisable Stand-Alone SARs shall, upon a Change in Control, be cashed out, converted, assumed or otherwise disposed of in the same manner as applies to Options under Section 7(f).

10.	Restricted Stock.

	(a)	Issue Date and Vesting Date.

		At the time of the grant of shares of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Issue Date and/or Vesting Date for each class. If the grantee is employed by the Company or a Subsidiary of the Company on an Issue Date (which may be the date of grant), the specified number of shares of Restricted Stock shall be registered in the grantee’s name and evidenced in accordance with the provisions of Section 10(e) of the Plan. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) of the Plan are satisfied, and except as provided in Section 10(g) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) of the Plan shall lapse.

	(b)	Conditions to Vesting.

		At the time of the grant of shares of Restricted Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate.

	(c)	Restrictions on Transfer Prior to Vesting.

		Prior to the vesting of a share of Restricted Stock, no transfer of a Participant’s rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, shall be permitted. Immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant.

(d)	Dividends on Restricted Stock.

	The Committee in its discretion may require that any dividends paid on shares of Restricted Stock shall be held in escrow until all restrictions on such shares have lapsed.

(e)	Restricted Stock Certificates.

	Each Restricted Stock Award may be evidenced in such a manner as the Committee deems appropriate, including, without limitation, book entry registration or issuance of a stock certificate or certificates and by a Restricted Stock Award Agreement setting forth the terms of such Restricted Stock award. To the extent a stock certificate is issued, the Secretary of the Company shall hold such certificates for the Participant’s benefit until the Vesting Date or until the Restricted Stock is forfeited to the Company. The Company shall not cause a stock certificate to be issued in the name of a Participant prior to the Vesting Date unless it has received a stock power duly endorsed by the Participant in blank with respect to such shares. Each such stock certificate shall bear the following legend:

		The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the 2004 Omnibus Stock Incentive Plan of XETA Technologies, Inc. and an Award Agreement entered into between the registered owner of such shares and XETA Technologies, Inc. A copy of such Plan and Award Agreement is on file in the office of the Secretary of XETA Technologies, Inc., 1814 West Tacoma, Broken Arrow, Oklahoma 74012.

	Such legend shall not be removed until such shares vest pursuant to the terms of the applicable Award Agreement.

(f)	Consequences of Vesting.

	Upon the vesting of a share of Restricted Stock pursuant to the terms of the applicable Award Agreement, the restrictions of Section 10(c) of the Plan shall lapse, except as otherwise provided in the Award Agreement. Reasonably promptly after a share of Restricted Stock vests, the Company shall cause to be delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Section 10(e) of the Plan.

(g)	Effect of Termination of Employment.

	(i)	Subject to such other provision as the Committee may set forth in the applicable Award Agreement, and to the Committee’s amendment authority pursuant to Section 4 of the Plan, upon the termination of a

		Participant’s employment by the Company or any Subsidiary of the Company for any reason other than Cause, any and all shares that have not vested as of the date of such termination shall be immediately forfeited by the Participant and transferred to the Company, provided that if the Committee, in its sole discretion and within thirty (30) days after such termination of employment notifies the Participant in writing of its decision not to terminate the Participant’s rights in such shares, then the Participant shall continue to be the owner of such shares subject to such continuing restrictions as the Committee may prescribe in such notice. If shares of Restricted Stock are forfeited in accordance with the provision of this Section 10, the Company shall also have the right to require the return of all dividends paid on such shares, whether by termination of any escrow arrangement under which such dividends are held or otherwise.

	(ii)	In the event of the termination of a Participant’s employment for Cause, all shares of Restricted Stock granted to such Participant that have not vested as of the date of such termination shall be immediately forfeited by the Participant and transferred to the Company, together with any dividends paid on such shares.

(h)	Effect of Change in Control.

	Upon the occurrence of a Change in Control, (i) all restrictions on outstanding vested shares shall immediately lapse, and (ii) all outstanding shares of Restricted Stock that have not theretofore vested shall immediately expire and be cancelled unless the Committee in its sole discretion on a case by case basis, in writing, elects to waive such expiration and cancellation

(i)	Special Provisions Regarding Restricted Stock Awards.

	The Committee may designate on a case-by-case basis whether Restricted Stock Awards are intended to be “performance based compensation” within the meaning of Code Section 162(m). The vesting of Restricted Stock so designated shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, limited to and based on one or more of the following criteria: specified levels of or increases in the Company’s (i) return on equity, (ii) earnings per share, (iii) total earnings, (iv) earnings growth, (v) return on capital, (vi) return on assets, (vii) economic value added, (viii) earnings before interest and taxes, (ix) sales growth, (x) gross margin return on investment, (xi) increase in the FMV of the shares, (xii) share price (including, but not limited to, growth measures and total shareholder return), (xiii) net operating profit, (xiv) net income, (xv) cash flow (including, but not limited to, operating cash flow and free cash flow),

		(xvi) cash flow return on investments (which equals net cash flow divided by total capital), (xvii) internal rate of return, or (xviii) increase in net present value or expense targets. Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. Such shares shall be released from restrictions only after the attainment of such performance measures have been certified by the Committee.

11.	Phantom Stock.

	(a)	Vesting Date.

		At the time of the grant of shares of Phantom Stock, the Committee shall establish a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) of the Plan are satisfied, and except as provided in Section 11(d) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest.

	(b)	Benefit Upon Vesting.

		Upon the vesting of a share of Phantom Stock, the Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount equal to the sum of (i) the Fair Market Value of a share of Common Stock on the date on which such share of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with respect to a share of Common Stock during the period commencing on the date on which the share of Phantom Stock was granted and terminating on the date on which such share vests.

	(c)	Conditions to Vesting.

		At the time of the grant of shares of Phantom Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate.

	(d)	Effect of Termination of Employment.

		(i)	Subject to such other provisions as the Committee may set forth in the applicable Award Agreement, and to the Committee’s amendment authority pursuant to Section 4 of the Plan, shares of Phantom Stock that have not vested, together with any dividends credited on such shares, shall be forfeited upon the Participant’s termination of employment for any reason other than Cause.

		(ii)	In the event of the termination of a Participant’s employment for Cause, all shares of Phantom Stock granted to such Participant that have not vested as of the date of such termination shall immediately be forfeited, together with any dividends credited on such shares.

	(e)	Effect of Change in Control.

		Upon the occurrence of a Change in Control, all outstanding shares of Phantom Stock that have not theretofore vested shall immediately expire and be cancelled unless the Committee in its sole discretion on a case by case basis, in writing, elects to waive such expiration and cancellation.

	(f)	Special Provisions Regarding Phantom Stock Awards.

		The Committee may designate on a case by case basis whether Phantom Stock Awards are intended to be “performance based compensation” within the meaning of Code Section162 (m). The grant of Phantom Stock so designated shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, limited to and based on one or more of the following criteria: specified levels of or increases in the Company’s (i) return on equity, (ii) earnings per share, (iii) total earnings, (iv) earnings growth, (v) return on capital, (vi) return on assets, (vii) economic value added, (viii) earnings before interest and taxes, (ix) sales growth, (x) gross margin return on investment, (xi) increase in the FMV of the shares, (xii) share price (including, but not limited to, growth measures and total shareholder return), (xiii) net operating profit, (xiv) net income, (xv) cash flow (including, but not limited to, operating cash flow and free cash flow), (xvi) cash flow return on investments (which equals net cash flow divided by total capital), (xvii) internal rate of return, or (xviii) increase in net present value or expense targets. Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. Such shares shall be released from restrictions only after the attainment of such performance measures have been certified by the Committee.

12.	Stock Bonuses.

	In the event that the Committee grants a Stock Bonus, a certificate for the shares of Common Stock comprising such Stock Bonus shall be issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is payable.

13.	Rights as a Stockholder.

	No person shall have any rights as a stockholder with respect to any shares of Common Stock covered by or relating to any Incentive Award until the date of issuance of a stock certificate with respect to such shares. Except as otherwise expressly provided in Section 3(c) of the Plan, no adjustment to any Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued.

14.	No Special Employment Rights; No Right to Incentive Award.

	Nothing contained in the Plan or any Award Agreement shall confer upon any Participant any right with respect to the continuation of employment by the Company or any Subsidiary of the Company or interfere in any way with the right of the Company or any Subsidiary of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant. No person shall have any claim or right to receive an Incentive Award hereunder. The Committee’s granting of an Incentive Award to a Participant at any time shall neither require the Committee to grant any other Incentive Award to such Participant or other person at any time or preclude the Committee from making subsequent grants to such Participant or any other person.

15.	Securities Matters.

	(a)	The Company shall be under no obligation to effect the registration pursuant to the Securities Act of any interests in the Plan or any shares of Common Stock to be issued hereunder or to effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing shares of Common Stock pursuant to the Plan unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded. The Committee may require, as a condition of the issuance and delivery of certificates evidencing shares of Common Stock pursuant to the terms hereof and of the applicable Award Agreement, that the recipient of such shares make such covenants, agreements and representations, and that such certificates bear such legends, as the Committee, in its sole discretion, deems necessary or desirable.

	(b)	The transfer of any shares of Common Stock hereunder shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of such shares is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of Common Stock are traded.

		The Committee may, in its sole discretion, defer the effectiveness of any transfer of shares of Common Stock hereunder in order to allow the issuance of such shares to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Committee shall inform the Participant in writing of its decision to defer the effectiveness of a transfer. During the period of such deferral in connection with the exercise of an Option, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.

16.	Withholding Taxes.

	Whenever cash is to be paid pursuant to an Incentive Award, the Company (or its agent) shall have the right to deduct there from an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. Whenever shares of Common Stock are to be delivered pursuant to an Incentive Award, the Company (or its agent) shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. With the approval of the Committee, a Participant may satisfy the foregoing requirement, with respect to all or any portion of the shares to be delivered pursuant to an Incentive Award, by electing to have the Company (or its agent) withhold from delivery shares of Common Stock having a fair market value equal to the minimum amount of tax to be withheld. Such shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined (the “Tax Date”). Fractional share amounts shall be settled in cash.

17.	Notification of Election Under Section 83(b) of the Code.

	If any Participant shall, in connection with the acquisition of shares of Common Stock under the Plan, make the election permitted under Section 83(b) of the Code (i.e., an election to include in gross income in the year of transfer the amounts specified in Section 83(b)), such Participant shall notify the Company of such election within 10 days of filing notice of the election with the Internal Revenue Service, in addition to any filing and a notification required pursuant to regulation issued under the authority of Code Section 83(b).

18.	Notification Upon Disqualifying Disposition Under Section 421(b) of the Code.

	Each Award Agreement with respect to an Incentive Stock Option shall require the Participant to notify the Company of any disposition of shares of Common Stock issued pursuant to the exercise of such Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), within 10 days of such disposition.

19.	Amendment or Termination of the Plan.

	The Board of Directors may, at any time, suspend or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that stockholder approval shall be required if and to the extent the Board of Directors determines that such approval is appropriate for purposes of satisfying Section 162(m) or 422 of the Code or to the extent such approval is required by the rules of Nasdaq or any stock exchange on which the Common Stock is listed. Nothing herein shall restrict the Committee’s ability to exercise its discretionary authority pursuant to Section 4 of the Plan, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant’s rights under any outstanding Incentive Award.

20.	Transfers Upon Death; Non-Assignability.

	Upon the death of a Participant, outstanding Incentive Awards granted to such Participant may be exercised only by the executor or administrator of the Participant’s estate or by a person who shall have acquired the right to such exercise by will or by the laws of descent and distribution. No transfer of an Incentive Award by will or the laws of descent and distribution shall be effective to bind the Company unless the Committee shall have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Incentive Award.

	During a Participant’s lifetime, an outstanding Incentive Award granted to such Participant may only be exercised by the Participant or, in the case of the Participant’s Disability, by the Participant’s legal guardian or attorney-in-fact, and shall not otherwise be transferable. Notwithstanding the foregoing, and subject to the Committee’s sole discretion and any conditions as the Committee may prescribe, a Participant may, with respect to an outstanding Option (unless such Option is an Incentive Stock Option and the Committee and the Participant intend that it shall retain such status), upon providing written notice to the Secretary of the Company, elect to transfer such Option to members of his or her immediate family (including, but not limited to, children, grandchildren, spouse and any other persons included in the definition of “family member” in the General Instructions to Form S-8) or to trusts for the benefit of such immediate family members or to partnerships in which such family members are the only partners; provided, however, that no such transfer by any Participant may be made in exchange for consideration.

21.	Expenses and Receipts.

	The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with any Incentive Award will be used for general corporate purposes.

22.	Failure to Comply.

	In addition to the remedies of the Company elsewhere provided for herein, failure by a Participant (or beneficiary or transferee) to comply with any of the terms and conditions of the Plan or the applicable Award Agreement, unless such failure is remedied by such Participant (or beneficiary or transferee) within ten days after notice of such failure by the Committee, shall be grounds for the cancellation and forfeiture of such Incentive Award, in whole or in part, as the Committee, in its absolute discretion, may determine.

23.	Effective Date and Term of Plan.

	The Plan became effective on the Effective Date, but the Plan (and any grants of Incentive Awards made prior to stockholder approval of the Plan) shall be subject to the requisite approval of the stockholders of the Company. In the absence of such approval, any such Incentive Awards shall be null and void. Unless earlier terminated by the Board of Directors, the right to grant Incentive Awards under the Plan will terminate on the tenth anniversary of the Effective Date. Incentive Awards outstanding at Plan termination will remain in effect according to their terms and the provisions of the Plan.

24.	Applicable Law.

	Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of Oklahoma, without reference to the principles of conflicts of law.

25.	Participant Rights.

	No Participant shall have any claim to be granted any Incentive Award under the Plan, and there is no obligation for uniformity of treatment for Participants. Except as provided specifically herein, a Participant or a transferee of an Incentive Award shall have no rights as a stockholder with respect to any shares covered by any award until the date of the issuance of a Common Stock certificate to him for such shares.

26.	Unfunded Status of Awards.

	The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Incentive Award, nothing contained in the Plan or any Award Agreement shall give any such Participant any rights that are greater than those of a general creditor of the Company.

27.	No Fractional Shares.

	No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Committee shall determine whether cash, other Incentive Awards, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.

28.	Beneficiary.

	A Participant may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Participant, the executor or administrator of the Participant’s estate shall be deemed to be the Participant’s beneficiary.

29.	Interpretation.

	The Plan is designed and intended to comply with Rule 16b-3 promulgated under the Exchange Act and, with Section 162(m) of the Code, and all provisions hereof shall be construed in a manner to so comply.

EX-10.5 6 xt907918ex105.htm

Exhibit 10.5

HCX5OO0/HCX5OOOi^®

AUTHORIZED DISTRIBUTOR

AGREEMENT for 2004

by and between

HITACHI TELECOM (USA), INC.

and

XETA TECHNOLOGIES

AUTHORIZED DISTRIBUTOR AGREEMENT
TABLE OF CONTENTS

	Page

Master Agreement/Communication	2
Appointment	2
Product Definition	2
Term	3
Sales Promotion and Services	3
Forecast and Reports	3
Orders, Delivery	4
Prices	5
Payment and Additional Delivery Terms	5
Maintenance and Service	6
Training	8
Claims	8
Toll Fraud/Disclaimer	9
Limited Warranty	9
Repair Out of Warranty	10
Repair and Return Procedure	10
Inspection and Testing	10
Product Marking	11
Force Majeure	11
Advertising and Media Relations	11
Trademarks	11
Patents	12
Confidentiality	13
Indemnification by DISTRIBUTOR	14
Limitations	14
Termination	14
Export Control Provisions	15
Relationship of Parties	16
Notices	16
Nonassignment	17
Arbitration Clause	17
Waiver	17
Miscellaneous	18
Applicable Law	18
Execution	18
Exhibit A - Product Definition
Exhibit B - Distributor Requirements
Exhibit C - System Quantities and Discounts
Exhibit D - Sales and Shipping Forecast Form
Exhibit E - Return Material Authorization

AUTHORIZED DISTRIBUTOR AGREEMENT

AGREEMENT made this 1st day of January 2004, by and between HITACHI TELECOM (USA), INC., a Delaware corporation having an office at 3617 Parkway Lane, Norcross, GA, 30092 (hereinafter referred to as “HITEL’) and XETA TECHNOLOGIES, a corporation having an office at 1814 West Tacoma, Broken Arrow, OK 74012 (hereinafter referred to as “DISTRIBUTOR”).

WITNESSETH

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

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

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

1. MASTER AGREEMENT/COMMUNICATION

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

2. APPOINTMENT

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

3. PRODUCT DEFINITION

The term PRODUCTS, as used herein, shall refer only to PRODUCTS as identified in Exhibit A.

4. TERM

The term of the Agreement shall commence on January 1, 2004 and shall continue until December 31, 2004. At the written request of either party given at least ninety (90) days prior to the expiration of the Agreement, both parties may negotiate in good faith and for a reasonable period for an extension of the term of this Agreement. Expiration shall not affect any liabilities occurring prior thereto, including, but not limited to, obligations with respect to payment and delivery in connection with orders accepted prior to expiration.

5. SALES PROMOTION AND SERVICES

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

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

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

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

6. FORECAST AND REPORTS

Within thirty (30) days from the signing of this Agreement, DISTRIBUTOR shall inform HITEL of DISTRIBUTOR’S public business plan for PRODUCTS. DISTRIBUTOR shall also, (i) provide quarterly updates to said annual business plan no later than two (2) weeks before the beginning of each calendar quarter, (ii) keep HITEL informed of its activities relating to

PRODUCTS, (iii) furnish HITEL with information relative to the number of proposals offered, the progress of potential sales orders and the reason for lost sale(s) and (iv) on a quarterly basis, furnish HITEL with information summarizing significant marketing activities, trends and conditions in DISTRIBUTOR’s Territory.

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

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

7. ORDERS, DELIVERY

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

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

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

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

(e) A delivery schedule shall be established by HITEL for each order submitted by DISTRIBUTOR and accepted by HITEL within ten (10) business days of acceptance by HITEL. Delivery may be made in installments. Default or delay by HITEL in delivering or shipping the whole or any part or installment of any order shall not affect any other portion thereof, nor shall it affect any other order between the parties. DISTRIBUTOR may cancel the order without penalty if HITEL is unable to ship the complete order (or a sufficient part or installment of the order so that PRODUCTS may be resold) within sixty (60) days of the delivery schedule established by HITEL at the time of acceptance of such order.

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

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

(h) DISTRIBUTOR may, pursuant to the terms and conditions of this Agreement, order and HITEL shall provide spare parts, software and third level technical support as required for the maintenance of PRODUCT for a period of nine (9) years from the ship date of PRODUCT, provided that DISTRIBUTOR is, at all times, in full compliance with this Agreement and HITEL has not terminated this Agreement due to DISTRIBUTOR’s material breach.

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

8. PRICES

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

9. PAYMENT AND ADDITIONAL DELIVERY TERMS

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

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

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

It is understood by the parties hereto that the ability of DISTRIBUTOR to make the payments contemplated hereunder is of the essence of this Agreement and in the event that DISTRIBUTOR does not make the payments in accordance with the terms and conditions of this Agreement, for any reason or cause, including without limitation, by virtue of any regulation or order of any government authority, HITEL, in addition to whatever other remedies may be available to it, may elect to terminate this Agreement immediately.

Delivery terms for all PRODUCTS shall be FOB HITEL’s designated shipping point. Any orders, which at DISTRIBUTOR’S request, are not shipped within sixty (60) days of acceptance by HITEL shall be subject to a storage charge as described in HITEL price guides.

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

10. MAINTENANCE AND SERVICE

(a) DISTRIBUTOR shall be responsible for the installation, timely maintenance and service to users of PRODUCTS; and shall perform such responsibilities in a satisfactory manner to maintain and enhance HITEL’s and the PRODUCTS’ respective good name and reputations. Maintenance, services and consultation as provided by DISTRIBUTOR technicians at customer locations are referred to as first level support. Maintenance, services and consultation as provided by DISTRIBUTOR technical experts at a centralized location providing support to the first level support technicians are referred to as second level support. Both first and second level support is the responsibility of DISTRIBUTOR. For this purpose, DISTRIBUTOR shall maintain or have contracted with a number of competent Hitachi Certified technicians, as defined in Exhibit B, who are readily accessible to end users. DISTRIBUTOR shall, at its own expense, maintain the technical level of its staff to provide PRODUCT technical support in performing all of its activities under the Agreement. DISTRIBUTOR shall also maintain an adequate inventory of parts and equipment, in accordance with Exhibit E hereof, to maintain satisfactory operation of PRODUCTS being used by its customers, without relying upon urgent supplies from HITEL.

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

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

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

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

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

(g) HITEL will only accept calls for assistance from HITEL Certified Technicians currently registered with HITEL by an Authorized DISTRIBUTOR and only if the system in question is equipped for remote access and the technician has ready access to spare parts.

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

11. TRAINING

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

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

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

12. CLAIMS

Risk of loss and/or damage shall pass to DISTRIBUTOR upon delivery by HITEL, at HITEL’s designated shipping point. The issuance of a clean bill of lading by the railroad or trucker or the issuance of a clean receipt by the freight agent designated by DISTRIBUTOR, upon such delivery, shall constitute conclusive proof that the package(s) containing PRODUCTS were not damaged at the time of delivery to DISTRIBUTOR and that the number of packages delivered were those set forth on such bill of lading or receipt. Any claim for shortages or damage to PRODUCTS shall be made by DISTRIBUTOR to HITEL (2002 says and, except for those claims covered by the warranty hereinafter set forth, shall be made by DISTRIBUTOR to HITEL) within thirty (30) days after delivery by the railroad, trucker or freight agent, as the case may be. Such claims shall be in writing, shall specify the items under claim and the nature of the damages, and all other details as may be reasonably required by HITEL to consider such claim. HITEL or its representatives shall have the right to inspect and/or test the PRODUCTS covered by such claim. If, in the reasonable opinion of HITEL, such claim is justified, HITEL shall have the right, at its option, to promptly repair or replace the PRODUCTS or part, or issue a credit for the invoice value thereof.

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

13. TOLL FRAUD/DISCLAIMER

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

14. LIMITED WARRANTY

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

(a) HITEL is promptly notified in writing of any warranty claim: and

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

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

(d) DISTRIBUTOR complies in all respects with the procedures for implementing HITEL’s warranty protections set forth in HITEL’s Return Material Authorization (RMA) program description. A copy of the current RMA program description is attached as Exhibit E.

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

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

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

15. REPAIR OUT OF WARRANTY

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

16. REPAIR AND RETURN PROCEDURE

The repair and return procedure for handling repairs of PRODUCTS both in and out of warranty (Sections—14 and 15) is set forth in HITEL’s Return Material Authorization (RMA) program description. The RMA program description is available to DISTRIBUTOR upon request and may be changed by HITEL upon thirty (30) days written notice by HITEL. A copy of the current RMA program description is attached as Exhibit E.

17. INSPECTION AND TESTING

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

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

18. PRODUCT MARKING

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

19. FORCE MAJEURE

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

20. ADVERTISING AND MEDIA RELATIONS

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

21. TRADEMARKS

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

22. PATENTS

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

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

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

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

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

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

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

(c) DISTRIBUTOR shall indemnify and hold HITEL and its supplier(s) harmless against any expense or liability from claims of patent infringement of any patents related to PRODUCTS sold hereunder arising from: (i) HITEL’s compliance with specifications or instructions furnished by DISTRIBUTOR; (ii) use of any PRODUCT hereunder in connection with a manufacturing or other process; or (iii) use of any PRODUCT in combination with products not supplied by HITEL.

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

23. CONFIDENTIALITY

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

	(i) any source code and internal (programmers’) documentation for any software disclosed to DISTRIBUTOR;
	(ii) non-public financial information concerning HITEL;
	(iii) HITEL’s or Hitachi, Ltd. research and development;
	(iv) HITEL’s pricing or marketing plans;
	(v) technical support information, materials and documentation concerning the operation, design and functionality of PRODUCTS;
	(vi) HITEL’s customer lists; and
	(vii) any information designated as confidential in writing.

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

Information shall not be deemed confidential information or know-how if it is:

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

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

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

(e) approved in writing by HITEL for release.

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

24. INDEMNIFICATION BY DISTRIBUTOR

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

25. LIMITATIONS

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

26. TERMINATION

26.1 This Agreement will terminate:

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

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

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

(d) As provided elsewhere in this Agreement.

26.2 After termination:

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

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

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

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

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

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

27. EXPORT CONTROL PROVISIONS

The obligations of DISTRIBUTOR under this paragraph shall survive any termination of this Agreement.

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

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

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

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

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

28. RELATIONSHIP OF PARTIES

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

29. NOTICES

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

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

30. NONASSIGNMENT

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

31. ARBITRATION CLAUSE

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

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

32. WAIVER

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

33. MISCELLANEOUS

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

(b) This Agreement, including all Exhibits hereto, is intended to be the sole and complete statement of the obligations of the parties relating to the subject mailer hereof, and supersedes all previous understandings, agreements, negotiations and proposals as to this Agreement. Any pre-printed or other terms and conditions on DISTRIBUTOR’s order form or HITEL’s confirmation or acknowledgement form shall be of no force or effect. Except as otherwise provided herein, no provisions of this Agreement shall be deemed waived, amended or modified by any party unless such waiver, amendment or modification shall be in writing and duly signed by both parties hereto. The paragraph headings are for purposes of convenience only.

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

34. APPLICABLE LAW

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

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

HITACHI TELECOM (USA), INC.		XETA TECHNOLOGIES

By:	/s/T. SHIMIZU	By:	/s/L. N. PATTERSON

Title:	President	Title:	Exec. Director

EXHIBITS

for

HCX5000IHCX50001®

AUTHORIZED DISTRIBUTOR

AGREEMENT for 2004

by and between

HITACHI TELECOM (USA), INC.

and

XETA TECHNOLOGIES

EXHIBIT A

PRODUCT DEFINITION

The term “PRODUCT” as used in this Agreement means the digital HCX5100 and HCX5000i PBX systems, and all related software. The HCX systems above referred include both hardware and software required to enable the systems to function according to their respective specifications. All PRODUCT software is licensed to DISTRIBUTOR pursuant to the terms and conditions of this Agreement, including this Exhibit A, and shall not be deemed to be sold to or purchased by DISTRIBUTOR.

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

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

SHRINK-WRAP LICENSE AGREEMENT

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

Hitachi Telecom (USA), Inc. (“Licensor”) hereby grants to you, and you hereby accept the non-exclusive right to use the Program Diskettes and the computer programs contained therein in machine-readable, object code form only (collectively referred to as the “Software”), and the accompanying documentation only as authorized in this License Agreement. The Software may be used only on a single computer which is owned, leased, or otherwise controlled by you solely for the purpose of your own internal business operation. You may NOT distribute copies of the Software or related documentation to others. You shall use any documentation provided by Licensor only in conjunction with your business use of the Software. This License is restricted to use within the United States and Canada and is not transferable except as expressly provided herein.
You may NOT transfer the Software and License to another person or company unless:
1. you receive the prior written consent of Licensor, and
2. the person or company to whom you are transferring it agrees to accept the terms and conditions of this License and does so in a writing signed by that party. If you transfer the Software, you must at the same time either transfer all copies, whether in printed or machine readable form, to the same party or destroy any copies not transferred. This includes all portions of the Software contained or merged into other programs.
You agree to reproduce and include the copyright notice on any copy, modification or portion merged into another program.
You acknowledge and agree that the Software is a proprietary, unpublished product of Licensor, protected under U.S. copyright law and trade secret laws of general applicability. You further acknowledge and agree that all right, title and interest in and to the Software is and shall remain with Licensor. This License does not convey to you an interest in or to the Software but only a limited right of use revocable in accordance with the terms of this License. You hereby agree that Licensor may hold you liable or responsible for any violation of this License.

A-2

YOU MAY NOT USE, COPY, SUBLICENSE, ASSIGN OR TRANSFER THE LICENSE OR THE SOFTWARE IN WHOLE OR IN PART, EXCEPT AS EXPRESSLY PROVIDED FOR IN THIS LICENSE. YOU MAY NOT MODIFY, TRANSLATE, ADAPT, REVERSE ENGINEER, DECOMPILE, DISASSEMBLE, OR CREATE DERIVATIVE WORKS BASED ON THE SOFTWARE OR RELATED DOCUMENTATION. IF YOU TRANSFER POSSESSION OF ANY COPY, MODIFICATION OR MERGED PORTION OF THE SOFTWARE TO ANOTHER PARTY WITHOUT PRIOR WRITTEN CONSENT OF LICENSOR, YOUR LICENSE IS AUTOMATICALLY TERMINATED.
Any attempt to sublicense, assign or transfer any of the rights under this License, except as expressly provided for in this License, will void any of Licensor’s duties or obligations hereunder.

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

LIMITED WARRANTY
THE SOFTWARE IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT LICENSOR) ASSUME THE ENTIRE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION. SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE OTHER RIGHTS, WHICH VARY, FROM STATE TO STATE.
Licensor does not warrant that the functions contained in the Software will meet your requirements or that the operation of the Software will be uninterrupted or error free.

LIMITATIONS OF REMEDIES
Licensor’s entire liability to you or any other party for any loss or damages resulting from any claim, demands, or actions arising out of or relating to this License and your exclusive remedy shall be:
1. the replacement of any media which is returned to Licensor, or
2. if Licensor is unable to deliver a replacement media free from defects in materials and workmanship, you may terminate this License by returning any copies of the Software.

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

A-3

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

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

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

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

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

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

SOFTWARE UPDATE DOWNLOAD AGREEMENT

This Software Update Download Agreement is provided by Hitachi Telecom (USA), Inc. (“Hitel”) only to its Authorized Distributors, in good standing, subject to the terms and conditions of the Authorized Distributor Agreement, including all licensing terms contained or referred to in Exhibit A thereto, and the following. You are not an Authorized Distributor unless

A-4

you are a party to a current HCX5000/HCX5000i Authorized Distributor Agreement with Hitel. By downloading each software update, you represent and warrant that: you are a Hitel HCX5000/HCX5000i Authorized Distributor in good standing under a current Authorized Distributor Agreement; and, you have read, understood and will comply with all of the terms and conditions hereof.

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

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

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

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

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

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

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

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

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

Signed:	/s/ L. N. PATTERSON		Date:	Feb 26, 2004

A-5

EXHIBIT B

DISTRIBUTOR REQUIREMENTS

1. GEOGRAPHICAL COVERAGE

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

REGION

2. REQUIRED SUPPORT CAPABILITIES

(a) Technical Assistance Center

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

	XETA TECHNOLOGIES
	1814 W. Tacoma
	Broken Arrow, OK
	74012-1406

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

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

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

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

(e) Immediately upon termination or separation from DISTRIBUTOR’s employ of any such listed certified technician, DISTRIBUTOR is required to notify HITEL in writing of such termination or separation, Until such written notice is received, HITEL may provide such technician with the services for which they were previously authorized and HITEL will in no way be responsible for the actions of such terminated technician. Upon receipt of such written notice, HITEL will remove said technician’s name from its approved list until such time as said technician has been employed and re-registered with HITEL by the same or another Authorized Distributor. The charge by HITEL to Authorized Distributors for re-registration of certified technicians shall be One Hundred Twenty Five ($125.00) Dollars per individual re-registered.

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EXHIBIT B DISTRIBUTOR REQUIREMENTS (cont)

HITACHI CERTIFIED TECHNICIANS

Distributor:	Xeta Technologies	Date:	Feb 1, 2004

Contract Year:	Jan-Dec 2004

Technician Name	City, State	HCX ID #



See Attached

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

B-3

Xeta Technologies
Hitachi Certified Employees

*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*


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

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EXHIBIT C

SYSTEM QUANTITIES AND DISCOUNTS

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

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

Table 1

	Commitment ($)		Discount

	*		*

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

	OTHER DISCOUNTS. The following discounts to list prices also apply:

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

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

- Parts Orders:

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

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

- Sub-component orders	0%

- Material Return Authorization Repair and Return	0%


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

C-2

Confidential	30 / 60 / 90 / 120+ Days Distributor Sales and Shipping Projection.

	Authorized Distributor Agreement – EXHIBIT D

Distributor_____________	Date________________		New
Customer Information	System Information	Probability to Ship Within	Const.

	Customer Name	City	St	System	S/W	Lines	Dollars	C	L	Comments	This Mo.	31-60	61-90	91-120	121+Days	Y or N

1											0%	0%	0%	0%	0%
2											0%	0%	0%	0%	0%
3											0%	0%	0%	0%	0%
4											0%	0%	0%	0%	0%
5											0%	0%	0%	0%	0%
6											0%	0%	0%	0%	0%
7											0%	0%	0%	0%	0%
8											0%	0%	0%	0%	0%
9											0%	0%	0%	0%	0%
10											0%	0%	0%	0%	0%
11											0%	0%	0%	0%	0%
12											0%	0%	0%	0%	0%
13											0%	0%	0%	0%	0%
14											0%	0%	0%	0%	0%
15											0%	0%	0%	0%	0%
16											0%	0%	0%	0%	0%
17											0%	0%	0%	0%	0%
18											0%	0%	0%	0%	0%
19											0%	0%	0%	0%	0%
20											0%	0%	0%	0%	0%
21
22
23
24
25
26

		C – Have Contract Signed	Is This Site New Construction
Please use the codes & percentages as shown in the color coded boxes.		L – Lease (Financing) Completed	Yes (Y) or No (N)

Include all available	HCX5100 =	5100	XX% - Proposed, waiting for customer reaction
Hitel Products	HCX5000i =	5000i	50% - Working, positive reaction from customer
	Software Upgrades =	Upg	55% - Distributor has verbal agreement from customer
	System Add On	Add	60% - Customer has contract for signature
	coaXmedia =	Coax	70% - Distributor has signed contract
	Paradyne =	Par	80% - distributor has contract, leasing is secure or downpayment issued
	Call@Vantage =	Call	90% - Distributor has contract / leasing is secured or downpayment issued, site is ready for install
	Digital Speech	Dig	95% - Order is in house at Hitachi & scheduled for shipment
	Innovations	Inn	100% - System has shipped
	SciTec	Sci	LOST – Proposed system lost to (List system name & distributor in comment section)
Confidential	Suite Speed	SS

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EXHIBIT E

HITEL PRODUCTS RETURN MATERIAL AUTHORIZATION POLICY

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

EXHIBIT E

RETURN MATERIAL AUTHORIZATION PROCEDURE

FOR HITEL PRODUCT ONLY

I.	GENERAL

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

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

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

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

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

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

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

8.	HITEL will only provide advance replacement parts in limited situations described herein under RMA DEFINTIONS.

II.	RMA DEFINITIONS

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

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

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

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

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

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

		1.	Adequate spares are available on site to troubleshoot the system.
		2.	A Distributor’s HITEL certified technician is troubleshooting the system on site; and HITEL’s PBX Technical Support personnel, working with the Distributor’s certified technician, declare the part to be DOA.
		3.	Adequate time is available to troubleshoot the system.

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

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

	b.	The return of loaned equipment.

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

6.	DOA Advance Replacement Parts. DOA advance replacement parts are available only under RMA DOA conditions. This allows a Distributor to order replacement parts and when the RMA DOA parts are returned, HITEL will issue a credit against the parts order upon receipt and inspection of the parts. Credit will be issued only if the Distributor has contacted Hitachi Telecom (USA), Inc.’s PBX Technical Support Department who has verified that parts are defective as described in Section 4 above. Parts to be returned must match with the same quantity, serial numbers and bar code labels as the parts originally shipped.

E-2

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

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

	b.	Equipment with missing parts.

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

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

	e.	Equipment modified by other than certified Hitel personnel.

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

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

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

	c.	Manual, drawings, faceplates and floppy diskettes.

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

III.	PROCEDURE FOR ALL RETURN MATERIAL AUTHORIZATIONS

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

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

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

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

E-3

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

	NOTE:		In all instances, Distributor must enclose, for each returned part, a detailed report stating the problem with that part.

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

		Hitachi Telecom (USA), Inc.
		Return Material Authorization #_____________
		3617 Parkway Lane
		Norcross, GA 30092

	NOTE:		Those items hand carried are to be delivered to the receiving department at the Warehouse. These items must follow Packing Returns as stated in item 8 below.

7.	RMA Repair and Return — HITEL will use reasonable efforts to ship repaired parts to the Distributor within thirty (30) days of receipt of the defective part. Exceptions to this thirty (30) day period are SelecSets and “out-of-warranty parts” which will normally be returned within sixty (60)days of receipt of the defective part. When a part cannot be repaired within the standard time period, Hitel will notify Distributor so that Distributor may elect to continue or suspend repair. In the case of disposal of suspended repair items, the Distributor must supply HITEL with a written disposal authorization.

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

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

RMA PROCEDURE - DEC 2002.doc

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

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9.	Charge for RMA Services. Repair fees or charges for each case are shown in Appendix C and D.

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

	NOTE:	Items received with missing external parts (doors, cables, cords handsets, etc) will be returned complete and all replaced external parts will be billed over and above the repair price.

IV.	FUNCTIONS

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

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

	-RMA number	-Repair Price
	-Salesman	-Unit price
	-Issue date	-Ship to
	-Distributor	-Bill to
	-Purchase Order Number	-Terms
	-Quantity	-Comments
	-Description	-Insurance
	-Sub Description	-Freight carrier
	(New and Used part number) -Serial number if applicable	-RMA Type

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

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

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

E-5

		-Issue date
		-Parts received date
		-Description
		-RMA number
		-Part code
		-Detailed reason
		-Comments
		-Approval
		-Shipment or disposal instructions

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

4.	RMA Invoicing.

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

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

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EX-10.8 7 xt907918ex108.htm

Exhibit 10.8

FIRST AMENDMENT TO REVOLVING
CREDIT AND TERM LOAN AGREEMENT

This First Amendment to Revolving Credit and Term Loan Agreement is dated as of June 7, 2004, between XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Borrower”), and BANK OF OKLAHOMA, NA (“Bank”).

RECITALS

A. Reference is made to the Revolving Credit and Term Loan Agreement dated as of October 1, 2003 (“Credit Agreement) between Borrower and Bank, pursuant to which currently exists: (i) a term loan in the amount of $3,374,734.33, with a current outstanding principal balance of $2,509,895.72 (“Term Loan”), (ii) a real estate loan in the amount of $2,238,333.48, with a current outstanding principal balance of $2,124,796.94 (“Real Estate Loan”), and (iii) a revolving line of credit in the amount of $7,500,000 (“Revolving Line”). Terms used herein shall have the meanings ascribed them in the Credit Agreement unless otherwise defined herein.

B. Borrower has requested that Bank extend the commitment of the Revolving Line an additional three hundred and sixty-four (364) days; and Bank has agreed to accommodate such request, subject to the terms and conditions set forth below.

AGREEMENT

For valuable consideration received, it is agreed as follows:

1. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is herby amended as follows:

	1.1. The Revolving Line Note, attached to the Credit Agreement as Schedule “1.49” is hereby replaced by the $7,500,000 Promissory Note in form and content as set forth on Schedule “1.1” attached hereto (“Renewal Note”).

	1.2. Section 1.53 (Termination Date) is hereby amended to reflect that the date “December 31, 2004” shall now mean and read “September 28, 2005”.

2. CONDITIONS PRECEDENT. Borrower shall deliver to Bank at or before closing:

	2.1. This Amendment and all schedules hereto;

	2.2. the Renewal Note; and

	2.3. Any other instruments, documents or agreements reasonably requested by Bank in connection herewith.

3. Borrower Ratification. Borrower hereby ratifies and confirms the Credit Agreement, Security Agreement and all other instruments, documents and agreements executed by Borrower in connection with the Credit Agreement, and acknowledges and agrees that they remain in full force and effect, binding and enforceable against the Borrower in accordance with their terms.

4. Representations. Borrower represents and warrants that (i) no Event of Default exists under the Credit Agreement or any instruments, documents or agreements executed by Borrower in connection therewith (collectively, the “Loan Documents”), and (ii) all representations and warranties made in the Loan Documents remain true and correct as of the date hereof. Borrower further represents and warrants that all authority documents delivered to Bank in connection with the Credit Agreement remain in full force and effect and have not been modified or changed whatsoever.

5. Governing Law and Binding Effect. This document shall be governed by and construed in accordance with the laws of the State of Oklahoma, and shall inure to the benefit of and be binding upon the parties hereto, their successors and assigns.

6. No Change. Except as expressly amended hereby, the Credit Agreement, and all instruments, documents and agreements executed and/or delivered by Borrower to Bank in connection therewith, shall remain in full force and effect and unchanged.

7. Costs, Expenses and Fees. Borrower agrees to pay all costs, expenses and fees incurred by Bank or otherwise in connection herewith, including, without limitation, all reasonable attorney fees, costs and expenses of Riggs, Abney, Neal, Turpen, Orbison & Lewis.

8. Multiple Counterparts. This Amendment may be executed in multiple counterparts.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

	“Borrower”

	XETA TECHNOLOGIES, INC.

	By	/s/ ROBERT B. WAGNER

	Name	/s/ Robert B. Wagner
	Title	CFO

	“Bank”

	BANK OF OKLAHOMA, N.A.

	By	/s/ STEPHEN R. WRIGHT

		Stephen R. Wright, Senior Vice President

EX-10.11 8 xt907918ex1011.htm

Exhibit 10.11

PROMISSORY NOTE

$7,500,000	June 7, 2004 Tulsa,
	Oklahoma

FOR VALUE RECEIVED, the undersigned, XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Maker”), promises to pay to the order of BANK OF OKLAHOMA, N.A. (“Lender”), at its offices in Tulsa, Oklahoma, the principal sum of Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000) or, if less, the aggregate sum of advances made by Lender to Maker under the Revolving Credit and Term Loan Agreement dated October 1, 2003 (“Credit Agreement”) between Maker and Lender, payable as follows (all capitalized terms used but not defined herein shall have the meanings given in the Credit Agreement):

	a.	Principal. Principal shall be payable on September 28, 2005.

	b.	Interest. Interest shall be payable on the first day of each month, commencing the 1^stday of July, 2004, and at maturity. Interest shall accrue on the principal balance outstanding hereunder and on any past due interest hereunder at a rate at all times equal to the Note Rate (defined below).

“Note Rate” shall mean a rate at all times equal to the Adjusted Prime Rate or the Adjusted LIBOR Rate, as elected by Maker pursuant to a properly made Interest Rate Election (defined below), provided, that at the end of any applicable Interest Period (defined below), the Note Rate shall revert to the Adjusted Prime Rate unless a new Interest Rate Election has been properly made by Maker. The Adjusted Prime Rate and the Adjusted LIBOR Rate shall be calculated, on any date of determination thereof, as follows:

Funded Debt to Cash Flow	Adjusted LIBOR Rate	Adjusted Prime Rate

Greater than or equal to 2.50 to 1	LIBOR Rate plus 2.50%	Prime Rate minus .375%
Greater than or equal to 2.0 to 1 but less than 2.5 to 1	LIBOR Rate plus 2.00%	Prime Rate minus .375%
Greater than or equal to 1.50 to 1 but less than 2.0 to 1	LIBOR Rate plus 1.75%	Prime Rate minus .875%
Greater than or equal to 1.0 to 1 but less than 1.5 to 1	LIBOR Rate plus 1.50%	Prime Rate minus 1.125%
Less than 1.0 to 1	LIBOR Rate plus 1.25%	Prime Rate minus 1.125%

The Adjusted LIBOR Rate and Adjusted Prime Rate shall be recalculated on not less than a quarterly basis, on the date on which the Lender is in receipt of Maker’s most recent financial statements (and, in the case of the year-end financial statements, audit report) for the fiscal quarter then ended (“Pricing Date”). From the date of this Agreement to the first recalculation, the Adjusted LIBOR Rate shall be set at the LIBOR Rate plus 1.75 percent (1.75%), and the Adjusted Prime Rate shall be set at the Prime Rate minus .875 percent (-.875%). The Note Rate shall be established based on the ratio of Funded Debt to Cash Flow for the most recently completed fiscal quarter and

the Note Rate established on a Pricing Date shall remain in effect until the next Pricing Date. If the Maker has not delivered its financial statements by the date such financial statements (and, in the case of the year-end financial statements, audit report) are required to be delivered under the Credit Agreement, until such financial statements and audit report are delivered, the Note Rate shall be the Prime Rate minus one and one hundred twenty-five thousandths of one percent (1.125%). If the Maker subsequently delivers such financial statements before the next Pricing Date, the Note Rate established by such late delivered financial statements shall take effect from the date of delivery until the next Pricing Date. In all other circumstances, the Note Rate established by such financial statements shall be in effect from the Pricing Date that occurs immediately after the end of the fiscal quarter covered by such financial statements until the next Pricing Date. Each determination of the Note Rate made by the lender in accordance with the foregoing shall be conclusive and binding on the Maker and the Lender if reasonably determined. Any change in the Note Rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective.

“Funded Debt’ (for purposes of this Note) shall mean all interest bearing debt.

“Cash Flow” (for purposes of this Note) shall mean EBITDA less Cash Taxes.

“Interest Rate Election” means written notice from Maker to Lender no earlier than twenty (20) days and no later than five (5) days prior to the contemplated effective date, substantially in form and content as set forth on Exhibit “A” hereto, whereby Maker may elect from time to time that interest shall accrue hereunder at the Adjusted Prime Rate or the Adjusted LIBOR Rate.

“LIBOR Rate” means the London Interbank Offered Rate composite rate per annum for U.S. Dollars for the applicable Interest Period which appears on the LIBOR 01 page of the Reuters information service on the day the Interest Rate Election is received by Lender. The LIBOR Rate shall remain fixed during the applicable Interest Period.

“Interest Period” shall mean a period of time equal to the lesser of (i) at the election of the Maker, thirty (30), sixty (60), or ninety (90) days; or (ii) the number of days between the contemplated effective date specified by the Maker in the applicable Interest Rate Election and the maturity date hereunder.

“Prime Rate” shall mean a fluctuating interest rate per annum as in effect from time to time, which interest rate per annum shall at all times be equal to the rate of interest announced publicly from time to time (whether or not charged in each instance), by JP Morgan Chase Bank, at New York, New York (“Rate Bank”), as its base rate or general reference rate. Each change in the Prime Rate (or any component thereof) shall become effective hereunder without notice to Maker (which notice is hereby expressly waived by Maker), on the effective date of each such change. Should the Rate Bank abolish or abandon the practice of announcing or publishing a Prime Rate, then the Prime Rate used during the remaining term of this Note shall be that interest rate or other general reference rate then in effect at the Rate Bank which, from time to time, in the reasonable judgment of Bank, most effectively approximates the initial definition of the “Prime Rate” Maker acknowledges that Lender may, from time to time, extend credit to other borrowers at rates of interest varying from, and having no relationship to, the Prime Rate. The rate of interest payable upon the indebtedness evidenced by this Note shall not, however, at any time exceed the maximum rate of interest permitted under the laws of the State of Oklahoma for loans of the type and character evidenced by this Note.

If any payment shall be due on a Saturday or Sunday or upon any other day on which state or national banks in the State of Oklahoma are closed for business by virtue of a legal holiday for such banks, such payment shall be due and payable on the next succeeding banking day and interest shall accrue to such day. All interest due hereon shall be computed on the actual number of days elapsed (365 or 366) based upon a 360-day year.

All payments under this Note shall be made in legal tender of the United States of America or in other immediately available funds at Lender’s office described above, and no credit shall be given for any payment received by check, draft or other instrument or item until such time as the holder hereof shall have received credit therefor from the holder’s collecting agent or, in the event no collecting agent is used, from the bank or other financial institution upon which said check, draft or other instrument or item is drawn.

From time to time the maturity date of this Note may be extended or this Note may be renewed, in whole or in part, or a new note of different form may be substituted for this Note and/or the rate of interest may be changed, or changes may be made in consideration of loan extensions, and the holder, from time to time, may waive or surrender, either in whole or in part, any rights, guarantees, security interests or liens given for the benefit of the holder in connection herewith; but no such occurrences shall in any manner affect, limit, modify or otherwise impair any rights, guarantees or security of the holder not specifically waived, released or surrendered in writing, nor shall any maker, guarantor, endorser or any person who is or might be liable hereon, either primarily or contingently, be released from such liability by reason of the occurrence of any such event. The holder hereof, from time to time, shall have the unlimited right to release any person who might be liable hereon; and such release shall not affect or discharge the liability of any other person who is or might be liable hereon.

If any payment required by this Note to be made is not made when due, or if any default occurs under any loan agreement or under the provisions of any mortgage, security agreement, assignment, pledge or other document or agreement which provides security for the indebtedness evidenced by this Note, the holder hereof may, at its option, without notice or demand, declare this Note in default and all indebtedness due and owing hereunder immediately due and payable. Interest from the date of default on such principal balance and on any past due interest hereunder shall accrue at the rate of five percent (5%) per annum above the nondefault interest rate accruing hereunder. The Maker and any endorsers, guarantors and sureties hereby severally waive protest, presentment, demand, and notice of protest and nonpayment in case this Note or any payment due hereunder is not paid when due; and they agree to any renewal, extension, acceleration, postponement of the time of payment, substitution, exchange or release of collateral and to the release of any party or person primarily or contingently liable without prejudice to the holder and without notice to the Maker or any endorser, guarantor or surety. Maker and any guarantor, endorser, surety or any other person who is or may become liable hereon will, on demand, pay all costs of collection, including reasonable attorney fees of the holder hereof in attempting to enforce payment of this Note and reasonable attorney fees for defending the validity of any document securing this Note as a valid first and prior lien.

Upon the occurrence of any default hereunder, Lender shall have the right, immediately and without further action by it, to set off against this Note all money owed by Lender in any capacity to the Maker or any guarantor, endorser or other person who is or might be liable for payment hereof, whether or not due, and also to set off against all other liabilities of Maker to Lender all money owed by Lender in any capacity to Maker, and Lender shall be deemed to have exercised such right of setoff and to have made a charge against such money immediately upon the occurrence of such default even though such charge is made or entered into the books of Lender subsequently thereto.

The holder of this Note may collect a late charge not to exceed an amount equal to five percent (5%) of the amount of any payment which is not paid within ten (10) days from the due date thereof, for the purposes of covering the extra expenses involved in handling delinquent payments. This late charge provision shall not be applicable in the event the holder hereof, at its option, elects to receive interest at the increased rate as provided hereunder in the event of default.

This Note is given for an actual loan of money for business purposes and not for personal, agricultural or residential purposes, and is executed and delivered in the State of Oklahoma and shall be governed by and construed in accordance with the laws of the State of Oklahoma.

This Note constitutes an extension and renewal of the $7,500,000 Revolving Line Note dated October 1, 2003 from Maker to Lender.

	XETA TECHNOLOGIES, INC.

	By	/s/ ROBERT B. WAGNER

	Name	/s/ Robert B. Wagner
	Title	CFO

EXHIBIT “A”

(Interest Rate Election Notice)

Bank of Oklahoma, N.A.
P. O. Box 2300
Tulsa, Oklahoma 74192-2344
Attn: Mr. Stephen R. Wright, Senior Vice President

Re:

Revolving Credit and Term Loan Agreement (“Loan Agreement”) dated October 1, 2003, between XETA TECHNOLOGIES, INC. (“Borrower”) and BANK OF OKLAHOMA, N.A. - Interest Rate Election

Ladies and Gentlemen:

Please be advised that no Initial Default or Matured Default exists under the Loan Agreement, and the Borrower hereby provides the following interest rate election:

A. Revolving Line. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

B. Term Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

C. Real Estate Loan. (Insert applicable information as to the (i) Adjusted Prime Rate or (ii) Adjusted LIBOR Rate, including requested interest rate period)

	“Borrower”

	XETA TECHNOLOGIES, INC., an Oklahoma corporation

	By:	/s/ ROBERT B. WAGNER

	Name:	/s/ Robert B. Wagner
	Title:	/s/ CFO

Date Received by Bank of Oklahoma:____________________

EX-21 9 xt907918ex21.htm

EXHIBIT 21

Subsidiaries of the Company

XETACOM, Inc., an Oklahoma corporation

EX-23 10 xt907918ex23.htm

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated December 10, 2004, accompanying the consolidated financial statements included in the Annual Report of Xeta Technologies, Inc. on Form 10-K for the year ended October 31, 2004. 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, File No. 333-44544, and File No. 333-116745).

/s/ GRANT THORNTON LLP

Oklahoma City, Oklahoma
January 13, 2005

EX-31.1 11 xt907918ex311.htm

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 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

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

Dated: January 14, 2005


/s/ JACK R. INGRAM

Jack R. Ingram Chief Executive Officer

EX-31.2 12 xt907918ex312.htm

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, Robert B. Wagner, certify that:

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

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

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

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

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

b) 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: January 14, 2005

/s/ ROBERT B. WAGNER

Robert B. Wagner
Chief Financial Officer

EX-32.1 13 xt907918ex321.htm

Exhibit 32.1

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

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended October 31, 2004, 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, 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 January 14, 2005

EX-32.2 14 xt907918ex322.htm

Exhibit 32.2

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

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended October 31, 2004, as filed with the Securities and Exchange Commission (the “Report”), I, Robert B. Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

	/s/ ROBERT B. WAGNER

	Robert B. Wagner Chief Financial Officer January 14, 2005

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