742550--1/7/2008--XETA_TECHNOLOGIES

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Avaya was recently acquired by private investors who may materially alter Avaya s strategies, including their vendor incentive programs, which might be detrimental to our operating results. The financial condition of Nortel is uncertain and actions they may take could hurt our operating results. Microsoft Corporation has announced it is entering the unified communications market, which could result in significant disruption to the current communications market landscape. We are faced with intense competition fueled by rapid changes in the technologies and markets in which we operate. Revenues and gross profits earned by hotels from guest calls continue to decline, which may result in hotels canceling their call accounting maintenance agreements with us. The success of our business depends significantly upon our ability to retain and recruit highly skilled personnel. The technology we sell is highly complex and changes rapidly, increasing our reliance upon the manufacturers for technical assistance and increasing the risk that our inventories on hand will become obsolete. Our business is directly affected by capital spending trends in the United States and, in particular, market conditions for communications and networking equipment and services. The loss of either our Elite designation or Platinum Level status with Nortel and Avaya, respectively, could negatively impact our ability to differentiate our products and services in the market. The introduction of new products could result in reduced revenues, reduced gross margins, reduced customer satisfaction, and longer collection periods. Compliance with new corporate governance regulations may require a material increase in our operating expenses beginning in fiscal 2008. A significant portion of our expected growth in services revenues is dependent upon our relationship with a few wholesale customers. Hitachi s decision to cease manufacturing communications systems for the hospitality market has caused some uncertainty with respect to our future relationship with our Hitachi installed base of hospitality customers. 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. We expect our gross margins to vary over time. If our dealer agreements with the original equipment manufacturers are terminated prematurely or unexpectedly, our business could be adversely affected. We are dependent upon a few suppliers. We might have to record a significant goodwill impairment loss in the event our business was to suffer a severe decline. If our business grows significantly over the next three years, the successful completion of our Oracle implementation project will be critical to our ability to effectively and efficiently operate our business in the future; implementation of the system will significantly increase our amortization expense. If industry consolidation continues, it may become more difficult to compete in our market. Our stock price may continue to be volatile Our business is subject to the risks of tornadoes and other natural catastrophic events and to interruptions caused by man-made problems such as computer viruses or terrorism. 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.

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742550--1/7/2008--XETA_TECHNOLOGIES_INC