<PAGE>

================================================================================

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

 |X|    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the quarterly period ended JUNE 30, 2003  or

 | |    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        For the transition period from ______________ to ______________

                         Commission File Number 1-10346

                          MICROTEL INTERNATIONAL, INC.
             (Exact Name of Registrant as Specified in Its Charter)

                DELAWARE                                77-0226211
      (State or Other Jurisdiction of                (I.R.S. Employer
      Incorporation or Organization)                Identification No.)

                          9485 HAVEN AVENUE, SUITE 100
                       RANCHO CUCAMONGA, CALIFORNIA 91730
                    (Address of Principal Executive Offices)

                                 (909) 987-9220
              (Registrant's Telephone Number, Including Area Code)

                                 NOT APPLICABLE
         (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

     Indicate by check 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 preceding 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 | |

    Indicate by check whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No |X|

     As of August 11, 2003, there were 23,427,324 shares of the issuer's common
stock, $0.0033 par value, outstanding.

================================================================================



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
                                    FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

         Condensed Consolidated Balance Sheets as of June 30, 2003
             (unaudited) and December 31, 2002.............................. F-1

         Condensed Consolidated Statements of Operations for the Three
             and Six Months Ended June 30, 2003 and 2002 (unaudited)........ F-2

         Condensed Consolidated Statements of Other Comprehensive Income for the
             Three and Six Months Ended June 30, 2003 and 2002 (unaudited).. F-3

         Condensed Consolidated Statements of Stockholders' Equity for the
             Six Months Ended June 30, 2003 (unaudited)..................... F-4

         Condensed Consolidated Statements of Cash Flows for the Six
             Months Ended June 30, 2003 and 2002 (unaudited)................ F-5

         Notes to Condensed Consolidated Financial Statements (unaudited)... F-6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.................................. 2

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
         MARKET RISK......................................................... 17

ITEM 4.  CONTROLS AND PROCEDURES............................................. 17

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS................................................... 18

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 18

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES..................................... 18

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 18

ITEM 5.  OTHER INFORMATION................................................... 18

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.................................... 19

SIGNATURES .................................................................. 20

EXHIBITS FILED WITH THIS FORM 10-Q........................................... 21

                                       1



<PAGE>

                         PART I - FINANCIAL INFORMATION

<TABLE>
ITEM 1. FINANCIAL STATEMENTS

<CAPTION>
                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                                              June 30,  December 31,
                                                               2003        2002
ASSETS                                                       ---------   ---------
<S>                                                          <C>         <C>
Current assets:                                             (unaudited)
   Cash and cash equivalents                                 $    513    $    254
   Accounts receivable, net of allowance for doubtful
     accounts of $150 and $130, respectively                    5,290       5,356
   Inventories                                                  6,978       7,505
   Prepaid and other current assets                               492         343
                                                             ---------   ---------
Total current assets                                           13,273      13,458
Property, plant and equipment, net                                346         588
Goodwill, net of accumulated amortization of
   $1,055 and $1,050, respectively                              2,369       2,346
Other assets                                                      544         394
                                                             ---------   ---------
                                                             $ 16,532    $ 16,786
                                                             =========   =========

LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                             $  2,952    $  3,475
   Current portion of long-term debt                              246         318
   Accounts payable                                             3,460       3,897
   Accrued expenses                                             1,965       1,807
                                                             ---------   ---------
Total current liabilities                                       8,623       9,497
Long-term debt, less current portion                              907         927
Other liabilities                                                 314         348
                                                             ---------   ---------
Total liabilities                                               9,844      10,772
                                                             ---------   ---------

Convertible redeemable Series A Preferred Stock,
   $10,000 unit value. Authorized 200 shares;
   issued and outstanding 0 shares and 25 shares,
   respectively (aggregate liquidation
   preferences of $0 and $250, respectively)                       --         282

Stockholders' equity:
   Preferred stock, authorized 10,000,000 shares;
     Convertible Series B Preferred Stock, $0.01
     par value; issued and outstanding 1,000 shares
     and 64,000 shares, respectively (aggregate
     liquidation preferences of $8 and $410, respectively)          7         400
   Common stock, $0.0033 par value. Authorized
     50,000,000 shares; issued and outstanding
     23,427,000 and 21,535,000, respectively                       77          71
   Additional paid-in capital                                  25,593      24,900
   Accumulated deficit                                        (18,644)    (19,042)
   Accumulated other comprehensive loss                          (345)       (597)
                                                             ---------   ---------
Total stockholders' equity                                      6,688       5,732
                                                             ---------   ---------
                                                             $ 16,532    $ 16,786
                                                             =========   =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                      F-1



<PAGE>

<TABLE>
                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

<CAPTION>
                                          Three Months Ended        Six Months Ended
                                                June 30,                June 30,
                                         ---------------------   ---------------------
                                           2003         2002       2003        2002
                                         ---------   ---------   ---------   ---------
                                           (in thousands, except per share amounts)
<S>                                      <C>         <C>         <C>         <C>
Net sales                                $  6,834    $  6,118    $ 12,502    $ 10,938
Cost of sales                               4,005       3,608       7,532       6,899
                                         ---------   ---------   ---------   ---------
Gross profit                                2,829       2,510       4,970       4,039
Operating expenses:
   Selling, general and administrative      1,918       1,855       3,616       3,720
   Engineering and product development        246         259         467         497
                                         ---------   ---------   ---------   ---------
Income (loss) from operations                 665         396         887        (178)
Other income (expense):
   Interest expense                          (117)        (94)       (213)       (184)
   Other income                               (47)         19         (61)         23
                                         ---------   ---------   ---------   ---------
Income (loss) before income taxes             501         321         613        (339)
Income tax expense                            142          66         210         105
                                         ---------   ---------   ---------   ---------
Net income (loss)                        $    359    $    255    $    403    $   (444)
                                         =========   =========   =========   =========
Earnings (loss) per share:
   Net income (loss):
     Basic                               $   0.02    $   0.01    $   0.02    $  (0.02)
                                         =========   =========   =========   =========
     Diluted                             $   0.02    $   0.01    $   0.02    $  (0.02)
                                         =========   =========   =========   =========

     See accompanying notes to condensed consolidated financial statements.

                                      F-2
</TABLE>



<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

                                                   Three Months     Six Months
                                                  Ended June 30,  Ended June 30,
                                                  --------------  --------------
                                                   2003    2002    2003    2002
                                                  ------  ------  ------  ------
                                                          (in thousands)
Net income (loss)                                 $ 359   $ 255   $ 403   $(444)
Other comprehensive income (loss) net of tax:
   Foreign currency translation adjustment          224     382     252     344
                                                  ------  ------  ------  ------
Comprehensive income (loss)                       $ 583   $ 637   $ 655   $(100)
                                                  ======  ======  ======  ======

     See accompanying notes to condensed consolidated financial statements.

                                      F-3



<PAGE>

<TABLE>
                                 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                        SIX MONTHS ENDED JUNE 30, 2003
                           CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                  (UNAUDITED)
                                                (IN THOUSANDS)

<CAPTION>
                                               Convertible                                                   Accumulated
                                            Preferred Stock         Common Stock     Additional                 Other
                                          -------------------  --------------------   Paid-In   Accumulated Comprehensive
                                           Shares     Amount    Shares     Amount     Capital    Deficit     Income (Loss)   Total
                                          --------- ---------  ---------  ---------  ---------  -----------  ------------  ---------
<S>                                            <C>  <C>          <C>      <C>        <C>        <C>          <C>           <C>
Balance at December 31, 2002                    64  $    400     21,535   $     71   $ 24,900   $  (19,042)  $      (597)  $  5,732
Preferred Series A conversions                  --        --      1,263          4        283           --            --        287
Preferred Series B conversions                 (63)     (393)       629          2        391           --            --         --
Foreign currency translation adjustment         --        --         --         --         --           --           252        252
Accretion of redeemable preferred stock         --        --         --         --         --           (5)           --         (5)
Warrants issued for services                    --        --         --         --         19           --            --         19
Net profit                                      --        --         --         --         --          403            --        403
                                          --------- ---------  ---------  ---------  ---------  -----------  ------------  ---------
Balance at June 30, 2003                         1  $      7     23,427   $     77   $ 25,593   $  (18,644)  $      (345)  $  6,688
                                          ========= =========  =========  =========  =========  ===========  ============  =========

                    See accompanying notes to condensed consolidated financial statements.

                                                     F-4
</TABLE>



<PAGE>

<TABLE>
                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                     SIX MONTHS ENDED JUNE 30, 2003 AND 2002
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<CAPTION>
                                                                  Six months ended June 30,
                                                                     2003           2002
                                                                 ------------   ------------
                                                                       (in thousands)
<S>                                                              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                $       403    $      (444)
Adjustments to reconcile net income (loss) to cash
   provided by operating activities:
     Depreciation and amortization                                       167            149
     Provision for doubtful account                                       40             24
     Provision for obsolete/slow moving inventory                        317            281
     Warrants issued for services                                         19
     Changes in operating assets and liabilities:
       Accounts receivable                                                17            (52)
       Inventories                                                       174           (292)
       Other assets                                                     (213)           (47)
     Accounts payable and accrued expenses                              (312)          (157)
                                                                 ------------   ------------
Cash provided by (used in) operating activities                          612           (538)
                                                                 ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                         (2)           (72)
   Cash collected on note receivable                                       6             14
                                                                 ------------   ------------
Cash provided by (used in) investing activities                            4            (58)
                                                                 ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase (decrease) in notes payable and long-term debt          (616)           188
                                                                 ------------   ------------
Cash provided by (used in) financing activities                         (616)           188
                                                                 ------------   ------------

Effect of exchange rate changes on cash                                  259            217

Net increase (decrease) in cash and cash equivalents                     259           (191)

Cash and cash equivalents at beginning of period                         254            604
                                                                 ------------   ------------

Cash and cash equivalents at end of period                       $       513    $       413
                                                                 ============   ============

Cash paid for:
     Income tax                                                  $        33    $        13
                                                                 ============   ============
     Interest                                                    $       210    $       181
                                                                 ============   ============

     See accompanying notes to condensed consolidated financial statements.
</TABLE>

                                      F-5



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

         MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation ("CXR Telcom"), CXR, S.A.S.
("CXR France") and XET Corporation, formerly XIT Corporation ("XET"). XET and
its subsidiaries design, develop, manufacture and market digital and rotary
switches and power supplies and subsystem assemblies. CXR Telcom and CXR France
design, develop, manufacture and market transmission and network access products
and communications test equipment. The Company conducts its operations out of
various facilities in the United States, France, England and Japan and organizes
itself in two product line segments: electronic components and communications
equipment.

BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States.

         The unaudited condensed consolidated financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of June 30, 2003 and December 31, 2002 and the results of operations
and cash flows for the related interim periods ended June 30, 2003 and 2002.
However, these results are not necessarily indicative of results for any other
interim period or for the year ending December 31, 2003. It is suggested that
the accompanying condensed consolidated financial statements be read in
conjunction with the Company's audited consolidated financial statements
included in its 2002 annual report on Form 10-K.

STOCK-BASED COMPENSATION

         In December 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment
of SFAS 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 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. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Bulletin Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant over the amount an employee must pay to acquire the stock. The Company has
adopted the disclosure provisions of SFAS No. 148 for its financial reports.

                                      F-6



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

Because this standard involves disclosures only, the adoption of this standard
did not have a material impact on the Company's results of operations, financial
position or liquidity.

         The following table sets forth the net income (loss), net income (loss)
available for common stockholders and earnings (loss) per share amounts for the
periods presented as if the Company had elected the fair value method of
accounting for stock options for all periods presented:

                                         Three Months Ended   Six Months Ended
                                              June 30,            June 30,
                                         ------------------  ------------------
                                           2003      2002      2003      2002
                                         --------  --------  --------  --------
                                        (in thousands, except per share amounts)
Net income (loss)
       As reported                       $   359   $   255   $   403   $  (444)
       Pro forma                         $   346   $   247   $   380   $  (460)

Net income (loss) available for
   common stockholders (less
   accretion of preferred stock)
       As reported                       $   357   $   252   $   398   $  (450)
       Pro forma                         $   344   $   244   $   375   $  (466)

Basic earnings (loss) per share
       As reported                       $  0.02   $  0.01   $  0.02   $ (0.02)
       Pro forma                         $  0.02   $  0.01   $  0.02   $ (0.02)

Diluted earnings (loss) per share
       As reported                       $  0.02   $  0.01   $  0.02   $ (0.02)
       Pro forma                         $  0.01   $  0.01   $  0.02   $ (0.02)

         The above calculations include the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income (loss) in future periods. The calculations were based on a
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 93%; risk-free interest rate of 2%-3%; expected lives of
7 years.

                                      F-7



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

(2) EARNINGS (LOSS) PER SHARE

         The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                             Three Months Ended     Six  Months Ended
                                                  June 30,               June 30,
                                            --------------------  --------------------
                                               2003       2002       2003      2002
                                            ---------  ---------  ---------  ---------
                                             (in thousands, except per share amounts)
<S>                                         <C>        <C>        <C>        <C>
NUMERATOR:
Net income (loss)                           $    359   $    255   $    403   $   (444)

Less:  accretion of the excess of the
  redemption value over the carrying  value
  of redeemable preferred stock                    2          3          5          6
                                            ---------  ---------  ---------  ---------
Income (loss) attributable to common
  stockholders                              $    357   $    252   $    398   $   (450)
                                            =========  =========  =========  =========

DENOMINATOR:
Weighted average number of common shares
  outstanding during the period               21,865     21,129     21,705     20,902

Incremental shares from assumed
  exercises or conversions of warrants,
  options and preferred stock                  1,643      2,361      1,753         --
                                            ---------  ---------  ---------  ---------
Adjusted weighted average shares              23,508     23,490     23,458     20,902
                                            =========  =========  =========  =========
Basic earnings (loss) per share             $   0.02   $   0.01   $   0.02   $  (0.02)
                                            =========  =========  =========  =========
Diluted earnings (loss) per share           $   0.02   $   0.01   $   0.02   $  (0.02)
                                            =========  =========  =========  =========
</TABLE>

         The computation of diluted loss per share for the six-months ended June
30, 2002 excludes the effect of incremental common shares attributable to the
exercise of outstanding common stock options and warrants because their effect
was antidilutive due to losses incurred by the Company or such instruments had
exercise prices greater than the average market price of the common shares
during the periods presented. As of June 30, 2002, there were 440,000 shares of
common stock underlying options and warrants that were anti-dilutive and
2,305,000 shares of common stock underlying shares of convertible preferred
stock.

                                      F-8



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

(3)  INVENTORIES

         Inventories consist of the following.

                                          June 30, 2003       December 31, 2002
                                           -----------          -----------
Raw materials                              $2,524,000           $2,904,000
Work-in-process                             2,758,000            2,988,000
Finished goods                              1,696,000            1,613,000
                                           -----------          -----------
                                           $6,978,000           $7,505,000
                                           ===========          ===========

(4) REPORTABLE SEGMENTS

         The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
United States, European and Asian markets and designs, manufactures and markets
digital switches and power supplies. The communications equipment segment
operates principally in the United States and European markets and designs,
manufactures and distributes voice and data transmission and networking
equipment and communications test instruments.

         The Company evaluates performance based upon profit or loss from
operations before income taxes, exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments. There were no intersegment sales during the six-month
periods ended June 30, 2003 and 2002.

         The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.

         There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's audited consolidated financial statements included in its 2002 annual
report on Form 10-K. Selected financial data for each of the Company's operating
segments is shown below:

                                           Six months ended   Six months ended
                                            June 30, 2003      June 30, 2002
                                            -------------      -------------
Sales to external customers:
    Electronic Components                   $  7,849,000       $  6,502,000
    Communications Equipment                   4,653,000          4,436,000
                                            -------------      -------------
                                            $ 12,502,000       $ 10,938,000
                                            =============      =============

Segment pretax profits (losses)
    Electronic Components                   $  1,659,000       $  1,372,000
    Communications Equipment                     (33,000)          (770,000)
                                            -------------      -------------
                                            $  1,626,000       $    602,000
                                            =============      =============

                                      F-9



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

                                            June 30, 2003     December 31, 2002
                                            -------------      -------------
Segment assets
    Electronic Components                   $  9,719,000       $  9,445,000
    Communications Equipment                   6,713,000          6,773,000
                                            -------------      -------------
                                            $ 16,432,000       $ 16,218,000
                                            =============      =============

         The following is a reconciliation of the reportable segment income
(loss) and assets to the Company's consolidated totals:

                                               Six months ended Six months ended
                                                June 30, 2003    June 30, 2002
                                                 -----------      -----------
Pretax Income
    Total income for reportable segments         $1,626,000       $  602,000
    Unallocated amounts:
       Unallocated general corporate expenses     1,013,000          941,000
                                                 -----------      -----------
    Consolidated income (loss) before
       income taxes                              $  613,000       $ (339,000)
                                                 ===========      ===========

                                             June 30, 2003     December 31, 2002
                                             -------------      -------------
Assets
    Total assets for reportable segments     $ 16,432,000       $ 16,218,000
    Other assets                                  100,000            568,000
                                             -------------      -------------
 Total consolidated assets                   $ 16,532,000       $ 16,786,000
                                             =============      =============

(5) NEW CXR FRANCE CREDIT FACILITY

         As of June 30, 2003, CXR France had credit facilities with several
lenders with balances totaling up to approximately $873,000 in the aggregate.
Each credit facility has a specified repayment term. However, each lender has
the right to demand payment in full at any time prior to the scheduled maturity
date of a particular credit facility. Because CXR France has experienced a
substantial reduction in revenue, some of its lenders have made reductions in
the total available credit. Banque Hervet reduced availability to $78,000 from
$159,000 effective December 31, 2002. On February 10, 2003, Societe Generale
notified CXR France that CXR France had to pay back its credit line balance by
April 30, 2003. Societe Generale agreed to an alternative pay back schedule for
the full balance owed as of March 31, 2003 so that $54,000 was due by May 31,
2003 and another $54,000 was due by June 30, 2003. The overdraft loan from
Societe Generate has been paid off in accordance with the bank's demand. There
is a $12,000 balance outstanding that will be paid off upon the collection of
certain receivables. Accordingly, the Company sought alternative financing
sources in France to replace all of the lenders to the Company's French
operations.

         On April 8, 2003, CXR France obtained a credit facility from IFN
Finance. The new credit line is for a maximum of $1,371,000, based on the
exchange rate in effect at June 30, 2003 for the conversion of euros into United

                                      F-10



<PAGE>

                          MICROTEL INTERNATIONAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             JUNE 30, 2003 AND 2002
                                   (UNAUDITED)

States dollars. This is an increase over the total of credit lines that CXR
France has with its other banks. The IFN Finance facility will replace the
several smaller credit lines. The IFN Finance facility is secured by accounts
receivable and carries an annual interest rate of 1.6 percentage points above
the French "T4M" rate. The French T4M rate was 2.2103% as of June 30, 2003.
Funds that become available under the new IFN Finance credit line as new
accounts receivables develop are being used to retire the existing CXR France
debt.

(6) NEW ACCOUNTING PRONOUNCEMENTS

         New accounting pronouncements are discussed under the heading "Impacts
of New Accounting Pronouncements" beginning on page 14 of this report.

(7) INCOME TAXES

         The effective tax rate for the three-month period ended June 30, 2003
differed from the United States federal statutory rate due to the fact that the
majority of taxes accrued were at U.K. tax rates on U.K. source income. Also,
certain domestic net operating losses were incurred without a tax benefit having
been recorded. The effective tax rate for the six-month period ended June 30,
2003 was also affected by these factors, although the resultant effective tax
rate was similar to the United States federal statutory rate.

(8) PREFERRED STOCK CONVERSIONS

         During the three months ended June 30, 2003, holders of Series A
Preferred Stock converted 25 shares of Series A Preferred Stock into 1,263,250
shares of common stock, and holders of Series B Preferred Stock converted
58,728.65 shares of Series B Preferred Stock into 587,286 shares of common
stock. Each share of Series A Preferred Stock was convertible into 50,530 shares
of common stock, and each share of Series B Preferred Stock was convertible into
10 shares of common stock.

(9)  GOODWILL

         The balance of goodwill on the Company's balance sheet fluctuates from
period to period due to the application of foreign currency translation to
United States dollars in calculating the balance of goodwill of our foreign
subsidiaries.

                                      F-11



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

         The following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes to financial
statements included elsewhere in this report. This report and our condensed
consolidated financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:

         o    the projected growth or contraction in the electronic components
              and communications equipment markets in which we operate;

         o    our business strategy for expanding, maintaining or contracting
              our presence in these markets;

         o    anticipated trends in our financial condition and results of
              operations; and

         o    our ability to distinguish ourselves from our current and future
              competitors.

         We do not undertake to update, revise or correct any forward-looking
statements.

         The information contained in this document is not a complete
description of our business or the risks associated with an investment in our
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures we made in this
report, and in our other materials filed with the Securities and Exchange
Commission that discuss our business in greater detail and that disclose various
risks, uncertainties and other factors that may affect our business, results of
operations or financial condition. In particular, you should review our annual
report on Form 10-K for the year ended December 31, 2002, and the "Risk Factors"
we included in that report.

         Any of the factors described above could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.

OVERVIEW

         Through our three wholly-owned operating subsidiaries, XET Corporation,
CXR Telcom and CXR France, and through the divisions and subsidiaries of those
subsidiaries, we design, develop, manufacture, assemble, and market products and
services in the following two material business segments:

         o    Electronic Components

              --   digital and rotary switches
              --   electronic power supplies
              --   subsystem assemblies

                                      F-12



<PAGE>

         o    Communications Equipment

              --   transmission and network access products
              --   communications test instruments

         Our sales are primarily in North America, Europe and Asia. Revenues are
recorded when products are shipped if shipped FOB shipping point or when
received by the customer if shipped FOB destination.

         Sales to customers in the electronic components segment, primarily to
defense and aerospace customers, defense contractors and industrial customers,
were 59.1%, 46.1% and 44.1% of our total net sales for the years 2002, 2001 and
2000, respectively, and 62.8% of our total net sales during the six months ended
June 30, 2003. Sales of communications equipment and related services, primarily
to telecommunications equipment customers, were 40.9%, 53.9% and 55.8% of our
total net sales during 2002, 2001 and 2000, respectively, and 37.2% of our total
net sales during the six months ended June 30, 2003.

         We experienced a 37.2% decline in our communications equipment segment
sales during 2002. We believe this decline primarily was due to a general
business downturn experienced by many of our telecommunications customers, the
disruption caused by the French political elections in 2002 and our decision to
discontinue the resale in Europe of test equipment not manufactured by us. As a
result of the general business downturn, we experienced significant reductions
in sales and gross profit as well as changes in our product mix. Consequently,
we have shifted our overall focus toward growing our electronic components
business. However, we also plan to continue working to improve the growth and
performance of our communications equipment business, particularly customer
premises transmission and network access products.

         During the six months ended June 30, 2003, our electronic components
segment improved its sales and profits as compared to the six months ended June
30, 2002. Our communications equipment segment improved its sales and reduced
its loss in the six months ended June 30, 2003. The improvement was related to
CXR France, which serves mainly our telecommunications customer premises
equipment in Europe and the United States. CXR France's 31.9% increase in sales
was almost completely offset by a 38.3% decline in sales at CXR Telcom in
Fremont, California. CXR Telcom mainly sells to telecommunications carrier
companies in the United States. In the first half of 2003, we reduced costs at
CXR Telcom by laying off a substantial portion of its work force and began to
increase our sources of test equipment components from Asian manufacturers that
produce the components for lower prices than we previously paid to our former
suppliers.

         We have reduced costs in our communications equipment segment and
lowered the breakeven point both in our United States and French operations
through various cost-cutting methods, such as using Asian contract
manufacturers, reducing facility rent expense and downsizing our administrative
office in Paris, France. We anticipate these cost-cutting efforts will improve
our bottom line performance in this segment if we are able to achieve at least
the same sales levels we achieved in 2002. However, we cannot predict the
duration or severity of the telecommunications market downturn or the extent to
which the downturn will continue to negatively affect our ability to sell our
products and services to customers in the telecommunications industry. A further
reduction in sales would reduce our accounts receivable balances, which in turn
would adversely affect our financial position by reducing cash availability
under our lines of credit.

                                        3



<PAGE>

         As mentioned above, we have taken various actions, including staffing
reductions as recently as February 2003, to reduce cash outlays of our
communications equipment segment. However, if the downturn is long-lasting and
more severe, we may need to continue to downsize or to restructure, sell or
discontinue all or part of our communications equipment operations, which would
negatively impact our business, prospects, financial condition, results of
operations and cash flows.

CRITICAL ACCOUNTING POLICIES

         Our significant accounting policies are described in the notes to the
consolidated financial statements that are included in our annual report on Form
10-K for the year ended December 31, 2002. We believe our most critical
accounting policies include inventory valuation, foreign currency translation
and goodwill impairment.

     INVENTORY VALUATION

         We value our inventory at the lower of the actual cost to purchase or
manufacture the inventory or the current estimated market value of the
inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. Demand for our products can fluctuate significantly. A significant
increase in the demand for our products could result in a short-term increase in
the quantity of inventory purchases, while a significant decrease in demand
could result in an increase in the amount of excess inventory quantities on
hand.

         In addition, the communications equipment industry is characterized by
rapid technological change, frequent new product development, and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Also, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize
additional operating income at the time of sale. Therefore, although we make
every effort to ensure the accuracy of our forecasts of future product demand,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and our reported
operating results.

     FOREIGN CURRENCY TRANSLATION

         We have foreign subsidiaries that together accounted for 62.1% of our
net revenues, 72.3% of our assets and 74.7% of our total liabilities as of and
for the year ended December 31, 2002, and 72.6% of our net revenues, 76.4% of
our assets and 74.8% of our total liabilities as of and for the six months ended
June 30, 2003.

         In preparing our consolidated financial statements, we are required to
translate the financial statements of our foreign subsidiaries from the
currencies in which they keep their accounting records into United States
dollars. This process results in exchange gains and losses which, under relevant
accounting guidance, are either included within our statement of operations or
as a separate part of our net equity under the caption "cumulative translation
adjustment."

                                       4



<PAGE>

         Under relevant accounting guidance, the treatment of these translation
gains or losses depends upon our management's determination of the functional
currency of each subsidiary. This determination involves consideration of
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be
considered the functional currency. However, management must also consider any
dependency of the subsidiary upon the parent and the nature of the subsidiary's
operations.

         If management deems any subsidiary's functional currency to be its
local currency, then any gain or loss associated with the translation of that
subsidiary's financial statements is included in a cumulative translation
adjustment. However, if management deems the functional currency to be United
States dollars, then any gain or loss associated with the translation of the
subsidiary's financial statements would be included within our statement of
operations.

         If we dispose of any of our subsidiaries, any cumulative translation
gains or losses would be realized into our statement of operations. If we
determine that there has been a change in the functional currency of a
subsidiary to United States dollars, then any translation gains or losses
arising after the date of the change would be included within our statement of
operations.

         Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries to be each
subsidiary's local currency. Accordingly we had cumulative translation losses of
$597,000 and $345,000 that were included as part of accumulated other
comprehensive loss within our balance sheets at December 31, 2002 and June 30,
2003, respectively. During the year ended December 31, 2002 and the six months
ended June 30, 2003, we included translation adjustments of gains of
approximately $446,000 and $252,000, respectively.

         If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our loss for the year ended December 31, 2002 and our net profit for
the six months ended June 30, 2003. The magnitude of these gains or losses
depends upon movements in the exchange rates of the foreign currencies in which
we transact business as compared to the value of the United States dollar. These
currencies include the euro, the British pound and the Japanese yen. Any future
translation gains or losses could be significantly higher than those we recorded
for the year ended December 31, 2002 and the six months ended June 30, 2003.

     IMPAIRMENT OF GOODWILL

         We periodically evaluate acquired businesses for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses.

         In assessing potential impairment of goodwill, we consider these
factors as well as forecasted financial performance of the acquired businesses.
If forecasts are not met, we may have to record additional impairment charges
not previously recognized. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of those respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets that were not previously
recorded. On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142, and
were required to analyze our goodwill for impairment issues by June 30, 2002,
and then at least annually after that date. During the year ended December 31,

                                       5



<PAGE>

2002 and the six months ended June 30, 2003, we did not record any impairment
losses related to goodwill and other intangible assets.

RESULTS OF OPERATIONS

   THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

         The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:

                                                             Three months ended
                                                                  June 30,
                                                             ------------------
                                                              2003        2002
                                                             ------      ------
         Net sales .....................................     100.0%      100.0%
         Cost of sales .................................      58.6        59.0
                                                             ------      ------
         Gross profit ..................................      41.4        41.0
         Selling, general and administrative
           expenses ....................................      28.1        30.3
         Engineering and product development
           expenses ....................................       3.6         4.2
                                                             ------      ------
         Operating income ..............................       9.7         6.5
         Interest expense ..............................      (1.7)       (1.5)
         Other income (expense) ........................      (0.7)        0.2
                                                             ------      ------
         Income before income tax expense ..............       7.3         5.2
         Income tax expense ............................       2.0         1.0
                                                             ------      ------
         Net income ....................................       5.3%        4.2%
                                                             ======      ======

         NET SALES. Net sales for the three months ended June 30, 2003 increased
by $716,000 (11.7%) to $6,834,000 as compared to $6,118,000 for the three months
ended June 30, 2002.

         Net sales of our electronic components for the three months ended June
30, 2003 increased by $741,000 (20.4%) to $4,378,000 as compared to $3,637,000
for the three months ended June 30, 2002. Net sales of power supplies by XCEL
Corporation, Ltd., our U.K. subsidiary that manufactures power supplies and
wound components, for the three months ended June 30, 2003 increased by $929,000
(51.2%) to $2,743,000 as compared to $1,814,000 for the three months ended June
30, 2002 due to an increase in the number of products shipped under long-term
programs. We anticipate that during the remainder of 2003 we will experience
similar increases in sales of power supplies as compared to 2002. Sales of
digital switches manufactured by our Digitran Division for the three months
ended June 30, 2003 increased by $469,000 (47.2%) to $1,463,000 as compared to
$994,000 for the three months ended June 30, 2002. The increase in sales of
digital switches was a result of increased orders, which we believe was
primarily due to increases in sales of spare parts and increased demand due to
the war in Iraq. Sales of electronic subsystem assemblies were negligible in the
current period as compared to $662,000 in the quarter ended June 30, 2002
because of the completion of a contract.

         Net sales of our communications equipment products and services for the
three months ended June 30, 2003 remained relatively unchanged at $2,456,000 as
compared to $2,481,000 for the comparable prior year period. However, CXR France
increased sales by $311,000 (22.3%) to $1,705,000 in the current period as
compared to $1,394,000 in the prior year period. The increase was the result of
a substantial improvement in sales by CXR France of transmission and network
access equipment, which improvement exceeded a decline in sales of test
equipment by CXR Telcom. CXR France produces all of our transmission products

                                       6



<PAGE>

and network access equipment. Net sales of transmission products and network
access equipment produced by CXR France for the three months ended June 30, 2003
increased slightly by $50,000 (3.5%) to $1,491,000 as compared to $1,441,000 for
the three months ended June 30, 2002 primarily because the prior year sales were
negatively affected by the political elections in France, which we believe
caused a slow down in purchasing activity in the first half of 2002.

         Test equipment net sales for the three months ended June 30, 2003
decreased by $352,000 (36.3%) to $617,000 as compared to $969,000 for the three
months ended June 30, 2002. The sales decrease resulted from a reduction in
orders from telecommunication customers in the United States, which we believe
was primarily due to the weak telecom market.

         Net sales of our CXR HALCYON 704 series field test equipment decreased
by $243,000 (30.3%) to $559,000 as compared to $802,000 for the three months
ended June 30, 2002. The CXR HALCYON product line experienced a decrease in
sales primarily due to the continued slowdown in the capital expenditures of
telecommunications service providers. The service providers released their
capital budgets later in the year and at reduced levels. We are responding to
this industry downturn by reducing costs and developing a strategy to seek new
business development in other industries that are not suffering from the
telecommunications downturn, such as utilities, construction and government. We
have begun to receive orders from certain non-telecom customers, such as
utilities and government agencies, as a result of our efforts to expand our
markets.

         We believe that many of the United States telecom customers that CXR
Telcom serves built networks to handle an anticipated demand for voice and data
traffic that has not yet occurred. Consequently, many of these customers reduced
their purchasing budgets for 2002 and 2003. This has had a negative impact on
CXR Telcom's sales. We have seen recent improvement in orders at CXR Telcom but
do not know if such improvement will be a continuing trend or only a temporary
change.

         GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 41.4% for the three months ended June 30, 2003 as compared to 41.0% for the
comparable period in 2002. In dollar terms, total gross profit increased by
$319,000 (12.7%) to $2,829,000 as compared to $2,510,000 for the three months
ended June 30, 2002.

         Gross profit for our electronic components segment increased in dollar
terms by $232,000 (15.5%) to $1,726,000 for the three months ended June 30, 2003
as compared to $1,494,000 for the three months ended June 30, 2002, and
decreased as a percentage of related net sales to 39.4% for the three months
ended June 30, 2003 from 41.1% for the three months ended June 30, 2002. This
decrease was primarily due to a higher portion of power supply sales in relation
to the total electronic component sales. Power supplies generally carry a lower
gross margin than digital switches. However, sales of power supplies by XCEL
Power Systems resulted in an improved gross margin at XCEL Power Systems of
29.5% in the current period as compared to 24.8% in the prior year period.
Digital switches had a slightly lower gross margin of 56.8% in the current
period due to product mix as compared to the 61.5% gross margin in the second
quarter of 2002.

         Gross profit for our communications equipment segment increased in
dollar terms by $85,000 (8.4%) to $1,102,000 for the three months ended June 30,
2003 as compared to $1,017,000 for the comparable period in 2002, and increased
as a percentage of net sales to 44.8% for the three months ended June 30, 2003
from 40.1% for the three months ended June 30, 2002. The increase in gross
profit as a percentage of net sales primarily was due to the increase in sales
volume at CXR France and cost reductions, which helped reduce costs on a per

                                       7



<PAGE>

unit basis. This increase in gross margin more than offset the reduced gross
margin of CXR Telcom that declined to 44.6% from 54.6% in the prior year period
due primarily to lower sales.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 30, 2003 increased
slightly by $63,000 (3.4%) to $1,918,000 as compared to $1,855,000 for the three
months ended June 30, 2002. However, selling, general and administrative
expenses decreased as a percentage of total net sales, to 28.1% of net sales
during the three months ended June 30, 2003 from 30.3% of net sales during the
comparable period in 2002. The slight increase in these expenses was due
primarily to a $108,000 increase in electronic component segment administrative
and selling expenses due to additional staffing. These increases were partially
offset by a $157,000 decrease in such expenses at our communication equipment
units primarily due to staffing reductions. We will continue to seek cost
reductions, but most of the major cost reductions have been implemented for the
current business levels.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment and XET Corporation's
Digitran Division. These expenses remained relatively constant at $246,000 for
the three months ended June 30, 2003 as compared to $259,000 for the three
months ended June 30, 2002.

         OTHER INCOME AND EXPENSE. Interest expense increased by $23,000 (24.5%)
to $117,000 for the three months ended June 30, 2003 from $94,000 for the three
months ended June 30, 2002. Other expense was $47,000 for the three months ended
June 30, 2003 as compared to other income of $19,000 for the three months ended
June 30, 2002 primarily due to miscellaneous charges and credits.

         INCOME TAX EXPENSE. Income tax expense for the three months ended June
30, 2003 was $142,000 as compared to $66,000 for the comparable prior year
period. The majority of the increase related to the recording by XCEL Power
Systems of a provision for U.K. income tax that was required because XCEL Power
Systems is expected to produce greater taxable income for 2003 than in 2002 and
has consumed its net operating loss carryforwards.

         NET INCOME. Net income increased by $104,000 (40.8%) to $359,000 for
the three months ended June 30, 2003 as compared to $255,000 for the comparable
prior year period. The largest contributions to this positive change were the
increases in net sales of CXR France and XCEL Power Systems, which improved
their operating profits by $338,000 and $308,000, respectively. The benefits of
these improvements were partially offset by reductions in operating earnings of
XET Corporation's Digitran Division, which experienced a $251,000 decline in
operating earnings.

                                       8



<PAGE>

     SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

         The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:

                                                              Six Months Ended
                                                                   June 30,
                                                             ------------------
                                                              2003        2002
                                                             ------      ------
         Net sales .....................................     100.0%      100.0%
         Cost of sales .................................      60.2        63.1
                                                             ------      ------
         Gross profit ..................................      39.8        36.9
         Selling, general and administrative
           expenses ....................................      28.9        34.0
         Engineering and product development
           expenses ....................................       3.8         4.5
                                                             ------      ------
         Operating income (loss) .......................       7.1        (1.6)
         Interest expense ..............................      (1.7)       (1.7)
         Other income (loss) ...........................      (0.5)        0.2
                                                             ------      ------
         Income (loss) before income tax expense .......       4.9        (3.1)
         Income tax expense ............................       1.7         1.0
                                                             ------      ------
         Net income (loss) .............................       3.2%       (4.1)%
                                                             ======      ======

         NET SALES. Net sales for the six months ended June 30, 2003 increased
by $1,564,000 (14.3%) to $12,502,000 as compared to $10,938,000 for the six
months ended June 30, 2002.

         Net sales of our electronic components for the six months ended June
30, 2003 increased by $1,347,000 (20.7%) to $7,849,000 as compared to $6,502,000
for the six months ended June 30, 2002. Net sales of power supplies by XCEL
Corporation, Ltd. for the six months ended June 30, 2003 increased by $1,565,000
(47.6%) to $4,852,000 as compared to $3,287,000 for the six months ended June
30, 2002 due to an increase in the number of products shipped under long-term
programs. We anticipate that during the remainder of 2003 we will continue to
experience increases in sales of power supplies as compared to 2002. Sales of
digital switches manufactured by our Digitran Division for the six months ended
June 30, 2003 increased by $360,000 (15.4%) to $2,697,000 as compared to
$2,337,000 for the six months ended June 30, 2002. The increase in sales of
digital switches was primarily a result of increases in orders for spare parts
that we believe was mainly due to the war in Iraq. Sales of electronic subsystem
assemblies were $110,000 in the current period as compared to $662,000 in the
first half of 2002 due to the completion of a contract in 2002.

         Net sales of our communications equipment products and services for the
six months ended June 30, 2003 increased by $217,000 (4.9%) to $4,653,000 as
compared to $4,436,000 for the six months ended June 30, 2002. The increase was
the result of a substantial improvement in sales by CXR France of transmission,
network access equipment, and services which improvement exceeded a decline in
sales of test equipment by CXR France and CXR Telcom. We decided to terminate
the resale of test equipment by CXR France in 2002 and now have only residual
sales of these products. Transmission and network access equipment sales for the
six months ended June 30, 2003 increased by $684,000 (26.2%) to $3,299,000 as
compared to $2,615,000 for the prior year period. Test equipment net sales for
the six months ended June 30, 2003 decreased by $696,000 (43.4%) to $908,000 as
compared to $1,604,000 for the six months ended June 30, 2002. The sales
decrease resulted from a reduction in orders from telecommunication customers in
the United States, which we believe was primarily due to the weak telecom market
and CXR France's discontinuation of test equipment resales.

         CXR France produces all of our transmission products and network access
equipment. Total net sales by CXR France, including both test equipment and
transmission and networking equipment, increased by $871,000 (31.9%) to
$3,599,000 as compared to $2,728,000 for the six months ended June 30, 2002
primarily because we terminated the resale of test equipment in Europe and the
prior year sales were negatively affected by the political elections in France,
which we believe caused a slow down in purchasing activity in the first half of
2002.

         Net sales of our CXR HALCYON 704 series field test equipment decreased
by $338,000 (32.6%) to $700,000 as compared to $1,038,000 for the six months
ended June 30, 2002 primarily due to the poor telecom market. The CXR HALCYON
product line experienced a decrease in sales mainly due to the continued
slowdown in the capital expenditures of telecommunications service providers.

                                       9



<PAGE>

The service providers released their capital budgets later in the year and at
reduced levels. We have responded to this industry downturn by reducing costs
and developing a strategy to seek new business development in other industries
that are not suffering from the telecommunications downturn, such as utilities,
construction and government.

         We believe that many of the United States telecom customers that CXR
Telcom serves built networks to handle an anticipated demand for voice and data
traffic that has not yet occurred. Consequently, many of these customers reduced
their purchasing budgets for 2002 and 2003. This has had a negative impact on
CXR Telcom's sales. We have seen recent improvement in orders at CXR Telcom but
do not know if such improvement will be a continuing trend or only a temporary
change.

         GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 39.8% for the six months ended June 30, 2003 as compared to 36.9% for the
comparable period in 2002. In dollar terms, total gross profit increased by
$931,000 (23.1%) to $4,970,000 as compared to $4,039,000 for the six months
ended June 30, 2002.

         Gross profit for our electronic components segment increased in dollar
terms by $564,000 (22.3%) to $3,096,000 for the six months ended June 30, 2003
as compared to $2,532,000 for the six months ended June 30, 2002, and increased
as a percentage of related net sales to 39.4% for the six months ended June 30,
2003 from 38.9% for the six months ended June 30, 2002. This increase primarily
was the result of increases in the profit margins of both digital switches and
power supplies due to changes in product mix for XET Corporation's Digitran
Division switch production operations and increased production due to higher
sales volumes lowering per unit costs and product mix for XCEL Power Systems'
U.K. power supply production operations.

         Gross profit for our communications equipment segment increased in
dollar terms by $366,000 (24.3%) to $1,873,000 for the six months ended June 30,
2003 as compared to $1,507,000 for the comparable period in 2002, and increased
as a percentage of net sales to 40.3% for the six months ended June 30, 2003
from 34.0% for the six months ended June 30, 2002. The increase in gross profit
as a percentage of net sales primarily was due to the increase in sales volume
at CXR France and cost reduction, which helped reduce costs on a per unit basis.
Cost reductions at CXR Telcom were not sufficient to offset the effect of CXR
Telcom's decline in sales, and CXR Telcom ended the first half of 2003 with a
gross profit of 29.6% as compared to 36.9% in the first half of 2002. Based on
recent orders, we expect CXR Telcom to improve its gross profit in the second
half of 2003.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 2003 decreased by
$104,000 (2.8%) to $3,616,000 as compared to $3,720,000 for the six months ended
June 30, 2002. Selling, general and administrative expenses also decreased as a
percentage of total net sales, to 28.9% of net sales during the six months ended
June 30, 2003 from 34.0% of net sales during the comparable period in 2002.
Selling expenses were reduced by $134,000 in our communications equipment
segment, and administrative costs were reduced by $253,000 in our communications
equipment segment primarily due to staff reductions at CXR Telcom and CXR
France. These reductions were partially offset by a $121,000 increase in
administrative expenses in our electronic components segment, which was
partially due to an increase in the reserve for doubtful accounts and
miscellaneous other items. We will continue to maintain our vigilance in
controlling costs. However, we have made most of the major cost reductions
possible for our level of business and do not anticipate additional large cost
reductions.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development

                                       10



<PAGE>

activities of our communications equipment segment and XET Corporation's
Digitran Division. These expenses decreased by $30,000 (6.0%) to $467,000 for
the six months ended June 30, 2003 as compared to $497,000 for the six months
ended June 30, 2002 due primarily to cost reductions in the communication
equipment segment.

         OTHER INCOME AND EXPENSE. Interest expense increased by $29,000 (15.8%)
to $213,000 for the six months ended June 30, 2003 from $184,000 for the six
months ended June 30, 2002 generally due to higher average debt balances at XCEL
Power Systems. Other expense was $61,000 for the six months ended June 30, 2003
as compared to other income of $23,000 for the six months ended June 30, 2002
primarily due to miscellaneous discounts and fees.

         INCOME TAX EXPENSE. Income tax expense for the six months ended June
30, 2002 was $210,000 as compared to $105,000 for the comparable prior year
period. The majority of the increase related to the recording by XCEL Power
Systems of a provision for U.K. income tax that was required because XCEL Power
Systems is expected to produce greater taxable income for 2003 than in 2002 and
has consumed its net operating loss carryforwards.

         NET INCOME (LOSS). The net income for the six months ended June 30,
2003 was $403,000 as compared to the net loss of $444,000 for the six months
ended June 30, 2002, an improvement of $847,000. The largest contribution to
this positive change was the increase in net sales of CXR France in our
communications equipment segment, which improved its operating income by
$771,000. We continue to closely monitor costs throughout our operations and
have reduced costs through staffing reductions in our communications equipment
operations in the United States and France and through various other
cost-cutting methods, such as using contract manufacturers, reducing facility
rent expense and phasing out our administrative office in Paris, France. These
actions have substantially reduced the sales volume required to create
profitability at both CXR Telcom and CXR France.

LIQUIDITY AND CAPITAL RESOURCES

         During the six months ended June 30, 2003 and the year ended December
31, 2002, we funded our operations primarily through revenue generated from our
operations and through our lines of credit with Wells Fargo Business Credit,
Inc. and various foreign banks. As of June 30, 2003, we had working capital of
$4,650,000, which represented an increase of $689,000 (17.4%) over working
capital at December 31, 2002, an accumulated deficit of $18,644,000, an
accumulated other comprehensive loss of $345,000, cash and cash equivalents of
$513,000, and $5,290,000 of accounts receivable. As of December 31, 2002, we had
working capital of $3,961,000, an accumulated deficit of $19,042,000, an
accumulated other comprehensive loss of $597,000, cash and cash equivalents of
$254,000, and $5,356,000 of accounts receivable.

         Cash provided by our operating activities totaled $612,000 for the six
months ended June 30, 2003, an improvement of $1,150,000 as compared to cash
used in our operating activities of $538,000 for the six months ended June 30,
2002. This $1,150,000 increase in cash provided by operations during the six
months ended June 30, 2003 primarily resulted from generation of net income as
compared to our recording of a net loss in the prior year and the reduction of
inventory levels.

         Cash provided by our investing activities totaled $4,000 for the six
months ended June 30, 2003 as compared to $58,000 for the six months ended June
30, 2002. Included in the results for the six months ended June 30, 2002 are
$72,000 of fixed asset purchases.

                                       11



<PAGE>

         Cash used in our financing activities totaled $616,000 for the six
months ended June 30, 2003 as compared to $188 of cash provided by our financing
activities for the six months ended June 30, 2002, due to repayments of bank
debt.

         On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation,
together with MicroTel acting as guarantor, obtained a credit facility from
Wells Fargo Business Credit, Inc. In April 2002, the maturity date of the
facility was extended by two years to August 16, 2005. Since April 17, 2002, the
facility has provided for a revolving loan of up to $3,000,000 secured by
inventory and accounts receivable and a term loan in the amount of $687,000
secured by machinery and equipment. On June 30, 2003, the interest rate was the
prime rate (then 4%) plus 1%, subject to a minimum interest charge of $13,500
per month. The balance outstanding at June 30, 2003 was $796,000 on the
revolving loan and $76,000 on the term loan, and we had available to us $19,000
of additional borrowings under the revolving loan. The credit facility contains
restrictive financial covenants that are set by mutual agreement each year. At
June 30, 2003, we were in compliance with these covenants, which include a
minimum net income covenant and a minimum debt service ratio to be measured
quarterly. The credit facility also contains an annual net worth covenant.

         As of June 30, 2003, our foreign subsidiaries had credit facilities,
including lines of credit and term loans, with Venture Finance PLC, a subsidiary
of the global Dutch ABN AMRO Holdings N.V. financial institution, in England,
Banc National de Paris, Banque Hervet and IFN Finance, a subsidiary of ABN AMRO
Holdings, N.V., in France, and Johan Tokyo Credit Bank and Johnan Shinkin Bank
in Japan. At June 30, 2003, the balances outstanding under our U.K., France and
Japan credit facilities were $2,075,000, $873,000 and $75,000, respectively.

         XCEL Japan Ltd. , or XJL, obtained a term loan on November 29, 2002
from the Johnan Shinkin Bank. The loan is amortized over five years and carries
an annual interest rate of 3.25%. The balance of the loan as of June 30, 2003
was $75,000 using the exchange rate in effect at that date for conversion of
Japanese yen into United States dollars.

         Our U.K. subsidiary, XCEL Power Systems, Ltd., or XPS, obtained a
credit facility with Venture Finance PLC as of November 12, 2002, which facility
expires on November 15, 2005. Using the exchange rate in effect at June 30, 2003
for the conversion of British pounds into United States dollars, the facility is
for a maximum of $2,475,000 and includes a $578,000 unsecured cash flow loan, a
$132,000 term loan secured by fixed assets and the remainder is a loan secured
by accounts receivable and inventory. The interest rate is the base rate of
Venture Finance PLC (4% at June 30, 2003) plus 2%, and is subject to a minimum
rate of 4% per annum. There are no financial performance covenants applicable to
this credit facility.

         As of June 30, 2003, CXR France had credit facilities with several
lenders with balances totaling up to approximately $873,000 in the aggregate.
Each credit facility has a specified repayment term. However, each lender has
the right to demand payment in full at any time prior to the scheduled maturity
date of a particular credit facility. Because CXR France has experienced a
substantial reduction in revenue, some of its lenders have made reductions in
the total available credit. Banque Hervet reduced availability to $78,000 from
$159,000 effective December 31, 2002. On February 10, 2003, Societe Generale
notified CXR France that CXR France had to pay back its credit line balance by
April 30, 2003. Societe Generale agreed to an alternative pay back schedule for
the full balance owed as of March 31, 2003 so that $54,000 was due by May 31,
2003 and another $54,000 was due by June 30, 2003. The overdraft loan from
Societe Generale has been paid off in accordance with the bank's demand. There
is a $12,000 balance outstanding that will be paid off upon the collection of

                                       12



<PAGE>

certain receivables. Accordingly, we sought alternative financing sources in
France to replace all of the lenders to our French operations.

         On April 8, 2003, CXR France obtained a credit facility from IFN
Finance. The new credit line is for a maximum of $1,371,000, based on the
exchange rate in effect at June 30, 2003 for the conversion of euros into United
States dollars. This is an increase over the total of credit lines that CXR
France has with its other banks. The IFN Finance facility will replace the
several smaller credit lines. The IFN Finance facility is secured by accounts
receivable and carries an annual interest rate of 1.6 percentage points above
the French "T4M" rate. The French T4M rate was 2.2103% as of June 30, 2003.
Funds that become available under the new IFN Finance credit line as new
accounts receivables develop are being used to retire the existing CXR France
debt.

         Our backlog was $11,476,000 as of June 30, 2003 as compared to
$14,886,000 as of June 30, 2002. Our backlog as of June 30, 2003 was 96.1%
related to our electronic components business, which business tends to provide
us with long lead-times for our manufacturing processes due to the custom nature
of the products and 3.9% related to our communications equipment business, which
business tends to deliver standard products from stock as orders are received.
The amount of backlog orders represents revenue that we anticipate recognizing
in the future, as evidenced by purchase orders and other purchase commitments
received from customers, but on which work has not yet been initiated or with
respect to which work is currently in progress. However, there can be no
assurance that we will be successful in fulfilling such orders and commitments
in a timely manner or that we will ultimately recognize as revenue the amounts
reflected as backlog.

         During the six months ended June 30, 2003, 62.8% and 37.2% of our total
net sales were generated by our electronic components segment and communications
equipment segment, respectively. We experienced a 4.9% increase in our
communications equipment segment sales for the six months ended June 30, 2003 as
compared to the six months ended June 30, 2002. This increase was net of a 43.4%
decline in sales of test equipment. The test equipment decline was due to our
discontinuation of test equipment resales in Europe and the general
telecommunications downtown in the United States. We cannot predict the duration
or severity of the telecommunications market downturn or the extent to which the
downturn will continue to negatively affect our ability to sell our products and
services to customers in the telecommunications industry. A further reduction in
sales could reduce our total accounts receivable balances, which in turn would
have an adverse effect on our financial position by reducing the amount of cash
available under our lines of credit.

         We took various actions to reduce costs in 2002. These actions were
intended to reduce the cash outlays of our telecommunications equipment segment
to match its revenue rate. Also, in February 2003, we reduced the staffing level
by 50% at CXR Telcom, which we anticipate will reduce costs at an annualized
rate of approximately $360,000. This savings is in addition to the approximate
$325,000 annualized savings we have begun to realize from moving CXR Telcom into
a lower cost facility in November 2002. We also have contracted with Asian
manufacturers for production of test equipment components at lower prices than
we previously paid to our former suppliers and have received shipments of
quality components from these new suppliers. The following table outlines
payments due from us or our subsidiaries under our lines of credit and other
significant contractual obligations over the next five years, exclusive of
interest. The symbol "P" represents the prime rate, and the symbol "B"
represents the lender's base rate.

                                       13



<PAGE>

<TABLE>
<CAPTION>
                                                       PAYMENTS DUE BY PERIOD
                                                       ----------------------
       CONTRACTUAL                                        (IN THOUSANDS)
      OBLIGATIONS AT
      JUNE 30, 2003                 2003       2004     2005     2006    2007    THEREAFTER   TOTAL
                                 ----------  -------  --------  ------  -------  ----------  --------
  <S>                            <C>         <C>      <C>       <C>     <C>      <C>         <C>
  Line of Credit (Domestic)      $     795   $   --   $    --   $  --   $   --   $      --   $   795
     Average Interest Rate          P+1%
  Line of Credit (U.K.)          $   1,389   $   --   $    --   $  --   $   --   $      --   $ 1,389
     Average Interest Rate          B+2%
  Overdraft (France)             $     767   $   --   $    --   $  --   $   --   $      --   $   767
     Average Interest Rate       5.5% -7.2%
  Term Loan (Domestic)           $      19   $   38   $    18   $  --   $   --   $      --   $    75
     Average Interest Rate          P+1%
  Term Loan (U.K.)               $      23   $   46   $   617   $  --   $   --   $      --   $   686
     Average Interest Rate          B+2%
  Term Loan (France)             $      40   $   56   $    10   $  --   $   --   $      --   $   106
     Average Interest Rate       5.2% -5.6%
  Term Loan (Japan)              $       7   $   17   $    17   $  16   $   15   $      --   $    72
     Average Interest Rate         3.25%
  Capitalized Lease
    Obligations                  $     103   $  121   $    35   $   3   $   --   $      --   $   262
  Operating Leases               $     240   $  562   $   382   $   6   $   --   $      --   $ 1,190
                                 ----------  -------  --------  ------  -------  ----------  --------
                                 $   3,383   $  840   $ 1,079   $  25   $   15   $      --   $ 5,342
</TABLE>

         We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including the credit facilities we and our subsidiaries have, will be adequate
to meet our anticipated working capital and capital expenditure requirements for
at least the next twelve months. If, however, our capital requirements or cash
flow vary materially from our current projections or if unforeseen circumstances
occur, we may require additional financing. Deteriorating global economic
conditions may cause prolonged declines in investor confidence in and
accessibility to capital markets. Our failure to raise capital, if needed, could
restrict our growth, limit our development of new products or hinder our ability
to compete.

EFFECTS OF INFLATION

         The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either our company or our
operating subsidiaries.

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

         In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" and amends SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking Fund Requirements." Under SFAS No. 4, all gains and
losses from extinguishment of debt were required to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. With the elimination of SFAS No. 4, gains and losses from extinguishment

                                       14



<PAGE>

of debt are to be classified as extraordinary items only if they meet the
criteria for extraordinary items in Accounting Principles Bulletin ("APB")
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Applying the provisions of APB Opinion No.
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the
classification of an extraordinary item. SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The adoption
of the provisions of SFAS No. 145 during 2002 did not have any impact on our
financial position or results of operations.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The adoption of this
statement has not had a material effect on our financial statements.

         In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified after December 31, 2002 and requires the
additional disclosures for interim or annual periods ended after December 15,
2002. The initial recognition and measurement provisions of FIN 45 have not had
an impact on our results of operations or financial position.

         In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently evaluating the effect that the adoption of EITF Issue No. 00-21
but do not expect a material impact on our consolidated financial position or
results of operations.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123."
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 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. We have chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, compensation expense for stock options is measured

                                       15



<PAGE>

as the excess, if any, of the estimate of the market value of our stock at the
date of the grant over the amount an employee must pay to acquire the stock. We
adopted the annual disclosure provisions of SFAS No. 148 for our financial
reports for the year ended December 31, 2002 and also adopted the interim
disclosure provisions for our financial reports beginning with the quarter ended
March 31, 2003. Because this standard involves disclosures only, the adoption of
SFAS No. 148 did not impact our results of operations, financial position or
liquidity.

         In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51." FIN 46 requires that if an
entity has a controlling financial interest in a variable interest entity, the
assets, liabilities and results of activities of the variable interest entity
should be included in the consolidated financial statements of the entity. FIN
46 requires that its provisions are effective immediately for all arrangements
entered into after January 31, 2003. For arrangements entered into prior to
January 31, 2003, the FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The provisions of FIN 46 have not had have a material impact on our results of
operations or financial position.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 is effective for all financial
instruments created or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 is not expected to have a material effect on
our consolidated financial condition or results of operations.

EURO CONVERSION

         Our operating subsidiaries located in France and the U.K. had combined
net sales from operations approximating 69.1% and 58.7%, respectively, of our
total net sales for the six months ended June 30, 2003 and the year ended
December 31, 2002. Net sales from the French subsidiary participating in the
euro conversion were approximately 28.8% and 25.8%, respectively, of our net
sales for the six months ended June 30, 2003 and the year ended December 31,
2002. We continue to review the impact of the euro conversion on our operations.

         Our European operations took steps to ensure their capability of
entering into euro transactions. No material changes to information technology
and other systems are necessary to accommodate these multiple currency
transactions because such systems already were capable of using multiple
currencies.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.

                                       16



<PAGE>

         A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates. Our annual report on Form 10-K for the year ended December 31,
2002 contains information about our debt obligations that are sensitive to
changes in interest rates under "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk." There were no material changes in those market
risks during the six months ended June 30, 2003.

ITEM 4.  CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of June 30, 2003, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.

         During the quarter ended June 30, 2003, there were no changes in our
"internal controls over financial reporting" (as defined in Rule 13a-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

                                       17



<PAGE>

                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         We are not a party to any material pending legal proceedings.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

     RECENT SALES OF UNREGISTERED SECURITIES

         In May and June 2003, we issued an aggregate of 587,286 shares of
common stock to five investors upon conversion of 58,728.6 shares of our Series
B Preferred Stock.

         In May and June 2003, we issued an aggregate of 1,263,250 shares of
common stock to four investors upon conversion of 25 shares of our Series A
Preferred Stock.

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transaction did not
involve any public offering and the purchasers were accredited or sophisticated
with access to the kind of information registration would provide.

     DIVIDENDS

         To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificate of designations related to our
Series B Preferred Stock provides that shares of Series B Preferred Stock are
not entitled to receive cash dividends. We currently intend to retain future
earnings to fund the development and growth of our business and, therefore, do
not anticipate paying cash dividends on our common stock within the foreseeable
future. Any future payment of dividends on our common stock will be determined
by our board of directors and will depend on our financial condition, results of
operations, contractual obligations and other factors deemed relevant by our
board of directors.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

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

         None.

ITEM 5.  OTHER INFORMATION.

         None.

                                       18



<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)  Exhibits
              --------

         Number   Description
         ------   -----------

         10.1     Fifth Amendment to Credit and Security Agreement dated July 1,
                  2003 by and between CXR Telcom Corporation and XET
                  Corporation, as borrowers, and Wells Fargo Business Credit,
                  Inc., as lender

         10.2     Credit facility agreement dated April 8, 2003 between IFN
                  Finance and CXR, S.A.S.

         31.1     Certifications Required by Rule 13a-14(a) of the Securities
                  Exchange Act of 1934, as amended, as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

         32.1     Certification of Chief Executive Officer and Chief Financial
                  Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         (b)  Reports on Form 8-K
              -------------------

              None.

                                       19



<PAGE>

                                   SIGNATURES

         Pursuant to the requirements 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.

                                MICROTEL INTERNATIONAL, INC.

Dated: August 14, 2003          By: /s/ CARMINE T. OLIVA
                                    --------------------------------------------
                                    Carmine T. Oliva, Chairman of the Board,
                                    Chief Executive Officer (principal executive
                                    officer) and President

                                By: /s/ RANDOLPH D. FOOTE
                                    --------------------------------------------
                                    Randolph D. Foote, Chief Financial Officer
                                    (principal financial and accounting officer)

                                       20



<PAGE>

                  EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q

         Number   Description
         ------   -----------

         10.1     Fifth Amendment to Credit and Security Agreement dated July 1,
                  2003 by and between CXR Telcom Corporation and XET
                  Corporation, as borrowers, and Wells Fargo Business Credit,
                  Inc., as lender

         10.2     Credit facility agreement dated April 8, 2003 between IFN
                  Finance and CXR, S.A.S.

         31.1     Certifications Required by Rule 13a-14(a) of the Securities
                  Exchange Act of 1934, as amended, as Adopted Pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

         32.1     Certification of Chief Executive Officer and Chief Financial
                  Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                                       21