742550--1/9/2006--XETA_TECHNOLOGIES

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A key component of our strategy is our focus on the marketing of advanced communications products and applications and related services, including IP telephony systems, and this strategy may not be successful. We are investing significant resources to add Nortel products and services to our product line and our efforts may not produce satisfactory results. The financial condition of Nortel is uncertain and actions they may take could hurt our operating results. 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 telecommunications and networking equipment and services. Avaya frequently changes the incentive programs offered to its business partners. Such changes had a detrimental effect on our financial results for the last three years and could do so again in the future. 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. Hitachi has ceased manufacturing communications systems for the hospitality market, which 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 are faced with intense competition and rapidly changing technologies in the industry and market in which we operate. 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. 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 manmade 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. We are subject to a variety of other general risks and uncertainties inherent in doing business.

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742550--1/9/2006--XETA_TECHNOLOGIES_INC