Preliminary Note Regarding Forward-Looking Statements

In the following discussion, we make forward-looking statements relating to future events and our future performance and results. All statements other than those that are purely historical may be forward-looking statements. Forward-looking statements generally include words such as "expects," "anticipates," "may", "plans," "believes," "intends," "projects," "estimates," "targets," "may," "should" and similar words or expressions. Such statements are not guarantees of performance, but rather reflect our current expectation, estimates, and forecasts about the industry and markets in which we operate, and our assumptions and beliefs based upon information currently available to us. These statements are subject to risks and uncertainties that are difficult to predict or are beyond our control. Examples of these risks include: the U.S. economic crisis and its impact on capital spending trends in our markets; the tightening of credit availability in the U.S.; the recent bankruptcy filing by Nortel Networks; the financial condition of our suppliers in general and changes by them in their distribution strategies and support; our ability to maintain and improve upon current gross profit margins; unpredictable revenue levels from quarter to quarter; continuing acceptance and success of the Mitel product and services offering; intense competition and industry consolidation; dependence upon a few large wholesale customers in our Managed Services offering; and the availability and retention of revenue professionals and certified technicians, and other . These and other risks and uncertainties are discussed under the heading "Risk Factors" under Part I of the Company's Form 10-K for the fiscal year ended October 31, 2008 (filed with the Commission on January 23, 2009), and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report. Because of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, we caution investors to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

Overview

Strategy.

In fiscal 2009 we have adopted five primary strategies: continue to acquire market share through aggressive sales activities; take advantage of Avaya's new channel-centric go-to-market strategy; focus on fast growing applications such as unified communications; focus on industry verticals such as hospitality, healthcare and education; and augment growth through targeted acquisitions.

In addition to these strategies, senior management initiated an internal program to improve operational methods and practices. The purpose of this effort is to identify internal opportunities to reduce costs. These efforts are ongoing, and include development of new and refined processes; organize back office activities for improved labor utilization; use internal systems and technologies to automate routine activities; and review workforce utilization to ensure appropriate staffing composition.

Special Considerations.

On January 14, 2009 Nortel Networks Corporation filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. This filing was the culmination of Nortel's efforts to "put [Nortel] on sound financial footing once and for all" as stated publicly by Nortel's president and chief executive, Mike Zafirovski. Nortel is one of our major suppliers and represents a significant portion of our business. As such this filing is of considerable concern. Presently we expect our post-petition relationship with Nortel to continue without interruption. However, management clearly recognizes the potential impact of Nortel's filing on the Company's financial performance. In response we are closely monitoring developments associated with the filing and will respond appropriately as new information becomes available.

Nortel currently owes XETA approximately $685,000 in pre-petition accounts receivable at January 31, 2009. At this filing the bankruptcy is in its early stages and Nortel has not filed its reorganization plan. This limits our ability to assess the probability of recovering pre-petition amounts due. As of January 31,

2009, we have recorded $350,000 as an additional reserve against possible bad debts. This provision represents one-half of the unsecured claim. We are carefully following developments in the bankruptcy case and will assert our legal rights and defenses as appropriate.

Operating Summary.

In the first quarter of fiscal 2009, we earned net income of $2,000 on revenues of $18.58 million compared to net income of $389,000 on revenues of $17.95 million in the first fiscal quarter of 2008. These results reflect a cautionary bad debt provision of $350,000 in response to Nortel's bankruptcy filing and the challenges posed by macroeconomic conditions.

Financial Position Summary.

Since October 31, 2008, our financial condition improved and we generated positive cash flows from operations. We discuss these and other financial items in more detail under "Financial Condition" below.

The following discussion presents additional information regarding our financial condition and results of operations for the three month period ended January 31, 2009 and 2008 and should be considered in conjunction with our above comments as well as the "Risk Factors" section below.

Financial Condition

Our financial condition improved during the first fiscal quarter of 2009 as our working capital grew by 6% to $9.9 million. In addition we generated $525,000 in cash flows from operations. These cash flows included non-cash charges of $1.66 million, a decrease in accounts receivable of $1.59 million, and an increase in deferred tax liabilities of $210,000. These increases were partially offset by a decrease in accounts payable of $1.30 million, an increase in inventory of $883,000 and other changes in working capital items, which netted a decrease in cash of $113,000. We increased borrowings on our working capital line of credit of $656,000 and received proceeds from the sale of capital assets of $5,000. We used cash to reduce our mortgage balance through scheduled principal payments by $43,000; to purchase capitalized service contracts of $750,000; to fund other financing and investing activities of $85,000; and to acquire capital assets of $219,000. Of these expenditures, $114,000 was spent on capital equipment as part of normal replacement of our Information Technology infrastructure and headquarters facility improvements. The remaining $99,000 was spent on our Oracle implementation. Non-cash charges included depreciation of $225,000; amortization of $322,000; stock-based compensation of $70,000; a loss on the sale of assets of $4,000; a provision for doubtful accounts receivable of $365,000; and a provision for obsolete inventory of $26,000.

As noted above, our deferred tax liabilities increased $210,000 during the first fiscal quarter of 2009 and the balance of our noncurrent deferred tax liabilities was $5.7 million at January 31, 2009. Most of this balance and the increase in this account are due to the difference in accounting for Goodwill between generally accepted accounting principles ("GAAP") and the U.S. tax code. Under GAAP, Goodwill is not amortized, but instead is evaluated for impairment. This evaluation is conducted as conditions warrant, but not less than annually under the guidelines set forth in SFAS No. 142, "Goodwill and Other Intangible Assets". For tax purposes, Goodwill is amortized on a straight-line basis over 15 years. As a result, the Company receives a tax deduction of approximately 1/15th of its Goodwill balance each year in its tax return. This difference between no amortization expense being recorded in the GAAP-based operating statements and approximately $1.8 million in deductions taken on the tax return is recognized in the balance sheet as additional noncurrent deferred tax liabilities. The amount recorded is the difference multiplied by the effective tax rate. This difference is recorded as a noncurrent item because under GAAP deferred taxes are recorded as current or noncurrent based on the classification of the asset or liability which generated the deferred tax item. The deferred tax liability associated with accounting for Goodwill will not be reduced unless the Company records an impairment charge to Goodwill in a future accounting period.

At January 31, 2009 the balance on our working capital revolver was $3.2 million, with $4.3 million additional borrowings available. We believe that this capacity is sufficient to support our operating requirements for the foreseeable future. The working capital revolver and the mortgage on our headquarters facility are scheduled to mature on September 30, 2009. We expect to renew these instruments for 12-month and 36-month periods, respectively, prior to their expiration. Given current credit market conditions, it is

likely that such renewals could result in higher borrowing costs and/or reduced availability for unsecured borrowings. In addition to the available capacity under our working capital line of credit, we believe we may have access to a variety of capital sources such as bank debt, private placements of subordinated debt, and public or private sales of equity.

Results of Operations

In the first quarter of fiscal 2009 our revenues increased $630,000 or 4% compared to the first quarter of 2008, and our net income decreased $387,000 or 99%. These results reflect higher sales in our major revenue categories. However, the impact of these increased revenues was offset by a $350,000 bad debt provision in response to Nortel's bankruptcy filing. The narrative below provides further explanation of these results.

Systems Sales.

In the first quarter of fiscal 2009, systems sales increased approximately $872,000 or 11% compared to the same period last year. This increase includes a $267,000 or 4% increase in sales of systems to commercial customers and a $605,000 or 36% increase in sales of systems to hospitality customers. The increase in sales to commercial customers primarily reflects the maturation of our backlog at the conclusion of fiscal 2008. These revenues were balanced across a number of large projects shipped during the last one-third of the quarter.

The quarterly growth in sales of systems to hospitality customers reflects our continued success in this niche market. Results support our strategy to expand the revenues associated with our Mitel product offering. The Mitel product line provides us with the opportunity to work with hotel chains and property management companies that have standardized on the Mitel product line. In addition, the Mitel offering is well-suited to properties of 150 rooms and below. This presents us an avenue to aggressively pursue system sales opportunities in this property category. We are pleased with our hospitality results and will continue to exploit opportunities across this segment. While we anticipate continued success in the hospitality market, given economic conditions, we expect future revenue performance at or below historical levels.

Services Revenues.

Our services revenues increased $268,000 or 3% in the first quarter compared to
the same period last year.  Services revenues consist of the following:



                            For the Three Months Ended
                                   January 31,
                               2009             2008
Contract & T&M            $     6,975,000    $ 7,208,000
Implementation                  2,186,000      2,042,000
Cabling                           832,000        475,000
Total Services revenues   $     9,993,000    $ 9,725,000

Contract and time-and-materials (T&M) revenues decreased 3% in the first quarter. This performance reflects relatively flat growth in our wholesale services programs and a modest decline in T&M service revenues. We believe these revenues were influenced by general economic conditions as customers reduced spending on non-critical services. Also, we experienced some customer churn in our wholesale services business during the quarter.

Implementation revenues increased 7% in the first fiscal quarter. We attribute this to increasing demand for complex communication systems. These projects require significant fee-generating design and engineering services provided by our Professional Services Organization ("PSO"). As the market continues to displace conventional communication platforms and adopt complex systems, we anticipate continued growth in this area of our business through the fee-based utilization of these highly skilled technical resources.

Cabling revenues increased 75% in the first fiscal quarter. This increase is attributed primarily to revenues associated with a small number of major cabling projects. We are pleased with the beneficial growth

provided by these projects and continue to aggressively market our national cabling capabilities. However, no assurance can be given that subsequent periods will produce similar performance.

Gross Margins.

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



                                 For the Three Months
                                        Ended
                                     January 31,
Gross Margins                      2009          2008
Systems sales                           26.1 %     25.0 %
Services revenues                       30.1 %     26.7 %
Other revenues                      -7,869.4 %     89.0 %
Corporate cost of goods sold            -2.0 %     -2.2 %
Total                                   25.9 %     25.6 %

Gross margins on systems sales in the first fiscal quarter improved slightly over last year exceeding our target of 23% to 25% for systems revenues. These results are due primarily to strong margins in our hospitality business. We continue to receive considerable pricing support from our manufactures in the form of project-specific discounts and incentive rebates. These incentives are material to our gross margins and we work diligently to maximize this support; however, no assurance can be given that future support will continue at historical levels.

The gross margins earned on Services revenues reflect improved results in this area of our business. The contributing factors associated with these improved results center on a 43% growth in cabling revenues, a reduction in fixed costs, and the use of third party Quality Service Partners to maximize margins on these revenues. In addition we benefited from improved utilization of our PSO and realized favorable results from cost containment efforts.

The final component of our gross margins is the margins earned on other revenues and our corporate cost of goods sold. We earn the majority of other revenues from the sale of Avaya maintenance contracts on which we earn either a commission or gross profit. We have no continuing service obligation associated with these revenues and gross profits. In the first quarter we experienced a dramatic drop in other revenues as compared to the first quarter of 2008. The decline was expected as we benefitted from record levels of commissions earned from Avaya throughout 2008 as customers purchased or renewed Avaya service contracts at a higher than normal pace in anticipation of manufacturer price increases for these services. We expect revenues on this element of our business to return to historical norms in 2009. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, the customer type as defined by Avaya, and the number of years that customers contract for services. Other revenues may also include sales and cost of goods sold on equipment or services outside our normal provisioning processes. These revenues vary in both sales volume and gross margins earned. Corporate cost of goods sold represents our material logistics and purchasing functions that support all of our revenue segments.

Operating Expenses.

Our total operating expenses increased $913,000 or 24% in the first quarter of
fiscal 2009 compared to the first quarter of fiscal 2008.  Operating expenses
were 25.7% of revenues in the first quarter compared to 21.5% in the first
quarter last year.  The growth in operating expenses in the quarter over quarter
comparison reflects several factors:



†          Significant bad debt provision in response to the Nortel bankruptcy
filing

†          Increased expenditures to support the Oracle platform

†          Increased board of director fees to support the addition of
independent membership to the board

†          Increased legal fees to support litigation and board activities

†          Increased non-cash charges related to stock compensation expense for
equity grants provided to management and key employees

†          Increased amortization of: Oracle platform in association with its

For the quarter operating expenses were impacted by all of the factors listed above. Unfortunately these expenses grew faster than our revenues due in part to the bad debt provision associated with the Nortel bankruptcy. However, even considering the Nortel provision, operating expenses were higher than our targets. We are targeting operating expenses of 18% to 20% of revenues over the next two to four years as we realize economies of scale.

Interest Expense and Other Income.

Net interest and other expense was $19,000 in the first quarter of fiscal 2009 compared to $85,000 in net interest and other expense in the first quarter of fiscal 2008. This decrease reflects both lower interest rates, and a reduction in borrowings.

Tax Provision.

The tax provision reflects the effective Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred. Generally, we expect our tax provision rate to be approximately 40%.