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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


                                   (Mark One)
            [X] Annual Report Pursuant to Section 13 or 15(d) of the
                 Securities Exchange Act of 1934 For the fiscal
                           year ended March 27, 1999,

                                       or

     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

            For the transition period from __________ to __________

                         Commission File Number: 0-27482

                                XETEL CORPORATION
             (Exact Name of Registrant as Specified in its Charter)


          DELAWARE                                             74-2310781
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                           Identification Number)

                              2105 GRACY FARMS LANE
                               AUSTIN, TEXAS 78758
          (Address of principal executive offices, including zip code)

                                 (512) 435-1000
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, $0.0001 Par Value Per Share

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other 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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ].

At June 22, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $10,002,525 (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of the
Registrant's Common Stock). At June 22, 1999, there were 9,268,559 outstanding
shares of the Registrant's Common Stock.


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                       DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by reference to
the Proxy Statement for the Registrant's 1999 annual meeting of stockholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K.

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PART I

ITEM 1.         BUSINESS

THE COMPANY

In addition to the historical information contained herein, the discussion in
this Form 10-K contains certain forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, such as statements
concerning: growth and expansion, future operating results, developments in the
Company's markets and strategic focus, and new production processes and
capabilities. The cautionary statements made in this Form 10-K should be read as
being applicable to all related forward-looking statements whenever they appear
in this Form 10-K. Actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
under the section "Risk Factors".

XeTel Corporation ("XeTel" or the "Company") provides comprehensive and
customized manufacturing solutions to original equipment manufacturers ("OEMs")
primarily in the computer, networking and telecommunications industries. The
Company holds ISO 9002 and BABT certifications. The Company's design and
prototype services support customers in the product development phase and assist
in their efforts to reduce time to market and time to volume as well as
production costs. In its assembly operations, the Company employs advanced
surface mount technologies and manufacturing processes and has developed
production capabilities using advanced packaging technologies such as chip-scale
packages ("CSP"). The Company incorporates its design and prototype services and
assembly capabilities, together with materials management, advanced testing,
systems integration and order fulfillment services, to provide turnkey solutions
for its customers. The Company believes that as a result of providing design and
prototype services, it is well positioned to provide other value added
manufacturing services for products through production volumes. The Company
believes that its turnkey operations provide its customers with access to
advanced manufacturing capabilities, quick turnaround, greater production
flexibility and shorter delivery cycles. The Company's principal OEM customers
include Allied Signal, Cielo Communications, Crossroads Systems, General
Instrument, Intel, Micro Motion, a subsidiary of Emerson Electric, Motorola
(various divisions), Real 3D, a subsidiary of Lockheed Martin, SBE, Sony
Electronics, TouchStar Technologies, a subsidiary of the Williams Companies,
Visual Networks and Xplore Technologies. The Company is headquartered in Austin,
Texas with manufacturing services operations in Austin and Dallas, Texas and San
Ramon, California.

The Company was incorporated in Texas in 1984 and reincorporated in Delaware in
1995. The Company maintains its principal executive offices at 2105 Gracy Farms
Lane, Austin, Texas 78758, and its telephone number is (512) 435-1000.

RISK FACTORS

The following summary of risk factors relevant to an investment in shares of the
Company's common stock is derived, in part, from the section captioned "Risk
Factors" in the prospectus of the Company dated February 13, 1996 (the
"Prospectus"), as filed with the Securities and Exchange Commission (the
"Commission") pursuant to the initial registration of shares of common stock of
the Company under the Securities Act of 1933, as amended (the "Securities Act").
This discussion does not purport to be complete and is subject to, and qualified
by, the discussion of risk factors set forth in the Prospectus. A copy of the
Prospectus and additional reports, proxy statements and other information filed
with the Commission may be read or copied at the following public reference
rooms of the Commission: 450 Fifth Street, NW., Room 1024, Washington DC 20549;
7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies can be requested by writing
to the Commission and paying a duplicating fee at prescribed rates. Please call
the Commission's toll-free number, 1-800-SEC-0330, for further information on
the operation of the public reference rooms. Commission filings, including the
Prospectus, are also available on the Commission's internet website,
http://www.sec.gov.

FLUCTUATIONS IN OPERATING RESULTS. XeTel's operating results are affected by a
number of factors, including timing of orders from and shipments to major
customers, availability of materials and components, the volume of orders
relative to the Company's capacity, timing of expenditures in anticipation of
future sales, the gain or

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loss of significant customers, variations in the mix between consignment and
component purchase arrangements with customers, variations in the demand for
products in the industries served by the Company and general economic
conditions. Operating results can also be significantly influenced by the
development and introduction of new products or technologies by the Company's
customers, or such customer's competitors, which may materially and adversely
affect the demand for the Company's services. The Company's customers generally
require short delivery cycles, and a substantial portion of the Company's
backlog is typically scheduled for delivery within 120 days. In the absence of
substantial backlog, quarterly sales and operating results depend on the volume
and timing of bookings received during the quarter which can be difficult to
forecast. Backlog fluctuations affect the Company's ability to plan production
and inventory levels, which could lead to fluctuations in operating results.
Variations in the size and delivery schedules of purchase orders received by the
Company, changes in customers' delivery requirements, or the rescheduling or
cancellation of orders and commitments, may result in substantial fluctuations
in backlog from period to period. Accordingly, the Company believes that backlog
may not be a meaningful indicator of future operating results.

A significant portion of the Company's expenses is relatively fixed in nature
and planned expenditures are based in part on anticipated orders. The inability
to adjust expenditures quickly enough to compensate for a decline in net sales
may magnify the adverse impact of such decline in the Company's results of
operations. Due to the factors noted above and elsewhere in this Form 10-K and
other filings by XeTel with the Securities and Exchange Commission, the
Company's future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods. Any shortfall in revenue and earnings from the levels anticipated by
securities analysts could have an immediate and significant effect on the
trading price of the Company's common stock in any given period. Also, the
Company participates in a highly dynamic industry, which often results in
volatility of the Company's common stock price.

CONCENTRATION OF CUSTOMERS. The Company's customer base is highly concentrated.
The Company's three largest customers accounted for approximately 32%, 8% and
7%, respectively, of net sales for its fiscal year ended March 27, 1999 ("fiscal
1999"). For the fiscal year ended March 28, 1998 ("fiscal 1998"), the Company's
three largest customers accounted for approximately 20%, 16% and 9%, of its net
sales. The Company anticipates that a significant portion of its sales will
continue to be concentrated in a relatively small number of customers for the
foreseeable future. In addition, the Company's objective is to develop new and
expand existing relationships with leading and emerging OEM's in the electronics
industry. Such emerging growth and technology companies tend to have limited
operating histories, and also may have changes in management and limited
capitalization. As a result, the Company may experience difficulties in
maintaining long-term relationships with these customers and in receiving
payment for services rendered to them. To the extent that any significant
customers of the Company terminate their relationship with the Company, or the
Company is unable, for any reason, to receive payment for its services, the
Company's business, financial condition and results of operations likely would
be materially and adversely affected.

UNAVAILABILITY OF COMPONENTS AND MATERIALS. Components and material used by
XeTel in producing surface mount assemblies and turnkey solutions are purchased
by XeTel from approved suppliers of its customers. Any failure on the part of
these suppliers to deliver required components to the Company or any failure of
such components to meet performance requirements could impair the Company's
ability to meet scheduled shipment dates and could delay sales of systems by the
Company's customers and thereby adversely affect the Company's business,
financial condition and results of operations. The Company has in the past
experienced shortages of certain types of electronic components, and may
experience shortages of certain electronic components that are customer supplied
or are in short supply generally within the electronics industry. Component
shortages or price fluctuations, to the extent not absorbed by customers under
its agreements with the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations. Certain
components used in a number of the Company's customer programs are obtained from
a single source.

VARIABILITY OF CUSTOMER REQUIREMENTS; ABSENCE OF LONG-TERM PURCHASE ORDERS.
The level and timing of purchase orders placed by the Company's customers are
affected by a number of factors, including variation in demand for the
customer's products, customer attempts to manage inventory and changes in the
customer's manufacturing strategies. Many of such factors are outside of the
control of the Company. The Company typically does not obtain long-term purchase
orders or commitments, but instead works with its customers to develop
nonbinding forecasts of the future volume of orders. Based on such nonbinding
forecasts, the Company makes commitments regarding the level of business that it
will seek and accept, the timing of production schedules and the


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levels and utilization of personnel and other resources. Generally, customers
may cancel, reduce or delay purchase orders and commitments without penalty,
except for payment for services rendered, materials purchased or procured and,
in certain circumstances, charges associated with such cancellation, reduction
or delay. Significant or numerous cancellations, reductions or delays in orders
by customers, or inability by customers to pay for services provided by the
Company or to pay for components and materials purchased by the Company on such
customer's behalf, have adversely affected the Company's business, financial
condition and results of operations in the past and could have a material
adverse effect on the Company's business, financial condition and results of
operations in the future.

MANAGEMENT OF GROWTH AND EXPANSION. The Company's design, prototype, assembly
and turnkey solutions business and multi-site locations have grown rapidly in
recent years. This growth has increased the Company's fixed costs and required
it to hire additional personnel. Furthermore, the Company plans to establish
additional regional manufacturing services centers, which will increase the
Company's fixed costs, and will require additional personnel. A continuing
period of rapid growth, including geographic expansions and acquisitions, could
place a significant strain on the Company's management, operations and other
resources. The Company's ability to manage its growth will require it to manage
its existing resources more efficiently, to continue to invest in its
operations, including its financial and management information systems and
internal process controls, and to retain, motivate and manage its employees. If
the Company's management is unable to manage growth effectively, the quality of
the Company's services and its ability to retain key personnel could be
materially and adversely affected, which would have a material adverse effect on
the Company's business, financial condition and results of operations.

YEAR 2000 COMPLIANCE. The Company began a Year 2000 data assessment project in
fiscal 1998 to address all necessary code changes, testing and implementation
for all of its systems. Many of the Company's business and operating systems are
currently Year 2000 compliant, and therefore, the Company is undertaking
additional efforts to identify and modify those systems which may not be Year
2000 compliant. Anticipated spending for the Year 2000 date conversion project
will be expensed as incurred or new software will be capitalized and amortized
over the software's useful life and is not expected to have a significant impact
on the Company's results of operations. Project completion is planned during
calendar 1999 as described below. The costs of the project and the date on which
the Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which are derived utilizing numerous assumptions of
future events, including the continuous availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. In addition, there can be no assurance that the systems of other
companies on which the Company's systems rely will be converted on a timely
basis or that such failure by another company to convert would not have an
adverse effect on the Company's systems.

INDUSTRY OVERVIEW

The electronics manufacturing services market emerged over 20 years ago as a
result of the need by OEMs to utilize additional manufacturing sources for
excess production capacity when in-house capacity was insufficient to meet
product demand. Small, local manufacturers were often used by OEMs for temporary
and unpredictable capacity overruns and for specialty work, when required. As a
result of the capital intensive requirements of the manufacturing process and
the demand for more complex and sophisticated technologies, outsourcing by OEMs
has continued to gain acceptance. Today, many OEMs consider the electronics
manufacturing services industry an integral part of their business and
manufacturing strategy and have established long-term relationships with
electronics manufacturers. As a result, the electronics manufacturing services
industry has experienced significant growth. The Institute for Interconnecting
and Packaging Electronic Circuits ("IPC") estimates electronics manufacturing
services in North America totaled $22.5 billion in 1998, 83% of which was
attributable to the approximately 37 companies in the industry that achieved net
sales in 1998 of over $100 million. According to IPC, sales for companies in the
electronics manufacturing services industry have grown at an average rate of 20%
per year since 1984, and will continue to grow through 2001, at an average rate
of 25% per year.

The Company believes that there are four principal factors supporting the trend
by OEMs in the electronics industry to establish continuing relationships with
independent manufacturers for design, engineering and volume production of
sophisticated electronics products. First, the demand for more complex
electronics products has increased significantly due to the continued
development of more advanced telecommunications, networking and computer systems
and other



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devices for rapidly growing markets. The manufacture of these products requires
increasingly advanced engineering and manufacturing expertise and substantial
capital investment. By using independent manufacturers, OEMs can reduce their
overall capital equipment requirements while maintaining access to advanced
manufacturing facilities. Second, due to intense competitive pressures and
shorter life cycles for products in the electronics industry, OEMs are required
to reduce the time needed to both introduce new products to market and
manufacture such products in volume. OEMs can reduce product time to market and
time to volume by using the specialization and flexibility afforded by an
independent manufacturer's design, prototype and manufacturing expertise. Third,
as OEMs experience greater levels of competition, many OEMs seek to focus their
resources on their core competencies in technology and product development and
marketing. By offering comprehensive electronics assembly and turnkey
manufacturing services, independent manufacturers enable OEMs to concentrate
their efforts on such activities. Finally, OEMs in the electronics industry are
faced with increased difficulties in reducing overhead while planning, procuring
and managing their inventories efficiently due to frequent design changes, short
product life cycles, large investments in electronics components, component
price fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce product costs by using an independent
manufacturer's volume procurement, materials management and manufacturing
capabilities.

In response to the intense competition in the electronics manufacturing services
industry, an increasing number of independent manufacturers have expanded the
range of their value added services to serve as a single source provider of a
comprehensive set of services, or turnkey solutions, for their customers. For
example, by developing design and prototype expertise, an independent
manufacturer can assist an OEM customer in the critical preproduction planning
phase of product development, and follow on with traditional volume production
services. The expansion in the types of value added services offered by
independent electronics manufacturers has enabled OEMs to streamline their
production processes by utilizing fewer independent service providers to meet
their production needs. As a result, the establishment of mutually beneficial
strategic relationships between OEMs and independent manufacturers are
increasingly becoming an important competitive factor for both OEMs and
independent manufacturers within their respective industries.

In addition, rapid advances in technology have further supported the trend by
OEMs to utilize independent electronics manufacturers. OEMs in the advanced
electronics industries continue to devote considerable resources to the
development of new technologies to incorporate into their products. Due to their
reduced size and higher performance standards, these products require
state-of-the-art assembly, manufacturing and process technologies to achieve
targeted levels of performance. OEMs are increasingly utilizing independent
electronics manufacturers that have demonstrated capabilities in these
developing technologies.

XETEL STRATEGY

The Company's objective is to establish and expand long-term relationships with
OEMs of advanced electronics products primarily in the telecommunications,
networking and computer industries by providing a wide range of sophisticated
design and manufacturing services. In order to attain this goal and assist
customers in continually improving time to market and time to volume production,
the Company's strategy includes the following elements:

IMPLEMENT ADVANCED MANUFACTURING PROCESS TECHNOLOGIES. To meet anticipated
long-term market demands, the Company has invested and intends to continue to
invest in advanced manufacturing process technologies. The Company expects that
it will continue to work closely with its customers to identify and implement
the next-stage process technologies needed for the design and manufacture of
complex new products. The Company will continue to expand its capabilities in
leading surface mount technologies such as fine pitch surface mount and intends
to further develop its capabilities in CSP. Moreover, the Company plans to
devote additional resources to the development of capabilities in chip-on-board
("COB") process technologies.

DEVELOP DESIGN, PROTOTYPE AND MANUFACTURING SERVICES CENTERS IN TARGETED
GEOGRAPHIC AREAS. XeTel has expanded the range of its value added services to
include design, prototype and preproduction services, volume production,
testing, system integration, and order fulfillment. During fiscal 1997,
additional full-service manufacturing centers were acquired in Dallas, Texas and
San Ramon, California. By offering these services, the Company believes that it
is well positioned with its customers to provide value added manufacturing of
their products through production volumes. The Company plans to establish
similar design, prototype and manufacturing service centers in other geographic
areas which have a high current customer concentration, or in certain




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other targeted geographic markets. This expansion may be implemented by
acquisitions of existing companies or the commencement of new operations in
these areas. No assurance can be given that any acquisition by the Company will
not materially and adversely affect the Company's business, financial condition
and results of operations or that any such acquisition will enhance the
Company's business.

EXPAND STATE-OF-THE-ART MANUFACTURING CAPACITY. During fiscal 1998, the Company
relocated its Austin manufacturing and administrative operations to new
facilities totaling 145,000 square feet. To support higher demand levels, the
Company increased its investments in advanced test, surface mount and other
equipment during fiscal 1998. The Company expects to continue to expand its
manufacturing facilities with state-of-the-art equipment and retain additional
personnel to increase its production capacity and enhance its customer service.

CONTINUE TO IMPROVE PRODUCTION AND BUSINESS PROCESSES. The Company continually
seeks to improve production quality and reduce cycle time. The Company combines
materials management and continuous flow manufacturing with sophisticated
computer-aided design and manufacturing capabilities to shorten the time from
receipt of customers' electronic design data to manufacturing. The Company will
continue to coordinate its design, prototype, manufacturing and support
operations to provide customers with quick turnaround, greater production
flexibility and shorter delivery cycles. In addition, the Company seeks to
refine its computer integrated manufacturing processes, including management
resources planning ("MRP II"), materials procurement and order fulfillment. All
of the quality management systems at the Company's three sites are ISO 9002
certified.

EXPAND SERVICES TO TARGETED CUSTOMERS. The Company targets customers with whom
it can establish long-term, primary or sole source relationships and endeavors
to provide such customers with turnkey solutions for existing and new products.
The Company intends to expand the range of services that it provides by
developing expertise in areas complementary to the Company's existing
capabilities and identifying additional market opportunities where its
capabilities can improve customer time to market, time to volume, product yields
and utilization.

MANUFACTURING CAPABILITIES AND SERVICES

XeTel seeks to establish strategic relationships with its customers primarily in
the telecommunications, networking and computer industries by providing advanced
manufacturing process technologies and high quality, responsive and flexible
manufacturing services. Such technologies and services include the following:

DESIGN AND PROTOTYPE SERVICES. As XeTel's customers experience greater
competition and shorter product life cycles in their respective industries,
XeTel has responded by expanding its design, prototype and preproduction
services. The Company's engineers work closely with customers to design products
that will meet customers' specifications for functionality and reliability,
while providing optimal manufacturability under planned production requirements.
By applying its computer-aided design and manufacturing capabilities and quick
turnaround techniques in manufacturing and surface mount assembly to the design
and prototype of a customer's product, the Company's engineering team assists
the customer in improving the manufacturability and performance reliability of
the product and thereby reducing production time and costs. Following completion
of the design and engineering of a product, the Company can, as requested by the
customer, manufacture prototypes or preproduction versions of the product. The
Company believes that as a result of its involvement in the design and prototype
of a customer's product, it is well positioned to provide value added
manufacturing of the product through production volumes.

SURFACE MOUNT ASSEMBLY SERVICES. XeTel has made a substantial investment in
specialized equipment, which includes 17 SMT machines, GenRad and Realm testers
and nitrogen atmosphere reflow soldering machines. In addition, the Company
employs advanced manufacturing processes, including sophisticated surface mount
technologies ("SMT"). SMT has generally replaced pin-through-hole technology as
the preferred method for printed circuit board assemblies. Using SMT, the leads
on integrated circuits and other electronic components are soldered to the
surface of the printed circuit board rather than inserted into holes, thereby
accommodating a substantially greater component density than can be achieved
with pin-through-hole technology. This permits a reduction in the size of the
printed circuit board which, in turn, enhances the performance of the product
and can reduce the costs of materials. Advanced surface mount technologies,
which include double-sided component attachment and fine pitch SMT component
placement, have further increased the component density and reduced the printed
circuit board size. Double-sided component attachment consists of SMT components
placed on both sides of the printed circuit board, and fine pitch





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SMT involves placing components with tightly spaced leads, typically less than
30 mil lead-to-lead spacing. Currently, the most common fine pitch surface mount
device is a quad flat pack ("QFP"), which is a device with tightly spaced leads
around the periphery. Substantially all of the printed circuit boards assembled
by the Company utilize SMT, and an increasing percentage employ fine pitch SMT
and double-sided SMT attachment. In addition, XeTel continues to devote
resources to develop new process technologies to support customer requirements.

XeTel has integrated BGA and CSP placement capabilities into its manufacturing
processes. A BGA or a CSP component has leads arrayed on the underside of the
component, which supports higher speed devices and results in better assembly
yields than fine pitch surface mount placement. XeTel is currently directing
additional resources into the development of COB technology and has produced
engineering samples utilizing this technology. Two methods of COB technology
exist: direct chip attachment ("DCA") and wirebonding. Specifically, DCA
(commonly known as "flip-chip") involves placing the chip (or integrated
circuit) with the leads facing down so that the electrical interconnects are in
direct contact with the printed circuit board. In comparison, wirebonding
involves sequentially bonding wires from the chip leads to the printed circuit
board.

TURNKEY SOLUTIONS. To meet the diverse requirements and specifications of its
customers, the Company has broadened the range of its electronics manufacturing
services to provide turnkey solutions. The Company's turnkey solutions generally
consist of product design and prototype, component procurement, utilization of
the components to manufacture printed circuit board assemblies, testing, systems
integration services, order fulfillment and distribution to the OEM or directly
to its customers. The Company's testing services include test development,
board-level in-circuit testing and functional and environmental stress screening
of both board-level and system-level products.

ADVANCED MANUFACTURING PROCESSES. XeTel has applied statistical process control
("SPC") and design of experiment ("DOE") techniques in order to control its
critical process parameters. Additionally, the Company's total quality
management ("TQM") approach supports continuous improvement in key processes
such as cycle time reduction. To improve production efficiencies, a variety of
computer-aided manufacturing methods have been implemented. For example, the
Company has implemented an innovative automated system to reduce the set-up time
and improve the quality of loading components on its SMT placement machines, and
has also internally developed a data collection system which utilizes
touchscreen technology to gather data to maintain process controls and provide
quality feedback. The quality management systems at the Company's three
facilities are ISO 9002 certified.

MATERIALS MANAGEMENT. XeTel's materials management organization focuses on
supply and inventory management. The Company's services include planning,
purchasing and warehousing of electronic components. XeTel's materials
management system combines traditional approaches such as MRP II with responsive
procurement strategies, including just-in-time inventory management techniques
and dock-to-stock shipments from qualified suppliers. XeTel actively manages its
materials pipeline and supplier base to enable the Company's customers to adjust
production requirements within established frameworks. The Company maintains
more than one supply source wherever possible, however, components for certain
major OEM contracts are only obtainable from a single source. The Company's
computer integrated information systems facilitate the tracking of components
and materials from forecast to delivery, thus enabling the Company to
efficiently procure components and materials, determine inventory levels by
customer and monitor the flow of parts through each major step of the production
process. The Company provides its customers with flexible inventory
arrangements, including in certain circumstances the acceptance of components on
a consignment basis, or the purchase of components in advance of lengthy
manufacturing programs. An interruption or loss of any such component supply
could have a material adverse effect on the Company's business, financial
condition and results of operations.

PROGRAM MANAGEMENT. Customer responsiveness is a key priority at XeTel. To
provide better service to its customers, the Company has implemented a customer
team approach. Each customer team typically consists of a program manager, an
assigned customer engineer and a materials planner, resulting in a cohesive
group with expertise in the production process. Customer teams interact with
customers on a regular basis and work with XeTel's engineering, materials
management and manufacturing personnel to enhance responsiveness to customers.




<PAGE>   9



CUSTOMERS AND MARKETING

XeTel has over 15 years of experience in the electronics manufacturing services
industry. The Company serves a diversified customer base consisting of
approximately 150 customers spread over a variety of growing industries,
including the computer, networking and telecommunications industries.

Although XeTel serves a large and varied group of customers, a substantial
portion of the Company's sales are derived from a small number of customers.
Three of the Company's customers, Motorola SD, Intel, and Real 3-D, accounted
for 32%, 8% and 7% of the Company's net sales for fiscal 1999, respectively.
Three customers, Motorola SD, General Instrument and SBE, accounted for 20%, 16%
and 9% of net sales for fiscal 1998, respectively. In addition, the Company's
fifteen largest customers (including Motorola SD, Intel, and Real 3-D)
collectively accounted for approximately 81% of the Company's net sales during
fiscal 1999. The loss of, or a significant curtailment of purchases by, one or
more of these customers, or any other significant customer of the Company, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company's customers typically enter into a manufacturing services agreement
("MSA") with XeTel to provide the general terms and conditions applicable to
purchase orders delivered to the Company. A MSA is not an authorization for the
Company to provide services or ship product, but provides the contractual
framework for the future relationship between the parties. Although the terms of
MSAs will vary from customer to customer depending on the particular
requirements of each customer, the Company's standard MSA provides that (i) the
Company will provide price quotations for services to the customer, (ii) if the
customer determines to proceed with ordering services based on such price
quotations, the customer then will provide a purchase order to the Company and
(iii) the Company may then accept such purchase order, at which time the Company
is authorized to ship product or provide services in accordance with the terms
of the purchase order. Upon execution of a MSA, the customer will typically
provide the Company with a binding purchase order for required deliveries for a
minimum of 90 days, and will further provide a nonbinding forecast of its
requirements for an additional 180 to 270 day period, updated monthly. In the
event of the modification or cancellation of a purchase order, the customer is
generally liable for services rendered, materials purchased or procured and, in
certain circumstances, charges associated with such modification or
cancellation. MSAs typically are terminable by either party upon 120 days prior
written notice to the other for convenience or within 30 days prior written
notice to the other for cause. Significant cancellations, reductions or delays
in orders by customers, or inability by customers to pay for services provided
by the Company or to pay for components and materials purchased by the Company
on such customer's behalf, have in the past adversely affected the Company's
business, financial condition and results of operations and could have a
material adverse effect on the Company's business, financial condition and
results of operations in the future.

The Company markets its services through its sales and marketing organization
and its customer support and service organization. The Company also utilizes
independent sales representative organizations located in the major electronics
market areas in the United States to develop new customer introductions and
generate new orders from existing customers.

COMPETITION

XeTel competes in the electronics manufacturing services industry which is
highly fragmented and is characterized by intense competition. The Company
competes against numerous domestic independent electronics manufacturers,
including ACT Manufacturing, Atlantic Design, AVEX Electronics, Benchmark
Electronics, DII Group, Flextronics, IEC Electronics, Jabil Circuit, SCI
Systems, Solectron and numerous regional manufacturers. Certain of these
competitors have substantially greater manufacturing, financial and marketing
resources than the Company. In addition, the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power with
component suppliers or who have lower cost structures. Current and prospective
customers continually evaluate the merits of manufacturing products internally
and will from time to time offer manufacturing services to third parties in
order to utilize excess capacity.During downturns in the electronics industry,
OEMs may become more price sensitive.

The Company believes that the principal competitive factors in the electronics
manufacturing services industry are quality, service, technology, manufacturing
capability, price, reliability, timeliness and regional access. There can be no
assurance that competition from existing or potential competitors will not have
a material adverse effect on the




<PAGE>   10

Company's business, financial condition or results of operations. The
introduction of lower priced competition or significant price reductions by the
Company's competitors could result in price reductions that would adversely
affect the Company's business, financial condition and results of operations, as
could the introduction of new technologies which would render the Company's
manufacturing process technology less competitive or obsolete.

BACKLOG

The Company's backlog as of March 27, 1999 was approximately $101.6 million
compared to approximately $112.3 million as of March 28, 1998. Backlog consists
of purchase orders received by the Company and commitments under scheduled
releases, both of which generally specify delivery dates within twelve months.
Variations in the size and delivery schedules of purchase orders received by the
Company, as well as changes in customers' delivery requirements or the
rescheduling or cancellation of orders and commitments, has resulted in the past
and may in the future result in substantial fluctuation in backlog from period
to period. Accordingly, the Company believes that backlog may not be a
meaningful indicator of future financial results. See "Variability of Customer
Requirements" and "Fluctuations in Operating Results."

EMPLOYEES

As of March 27, 1999, the Company had approximately 520 full-time employees
supplemented from time to time by part-time employees. The employees are not
represented by a union and the Company believes its employee relations to be
satisfactory.

The Company's success depends to an extent upon the continued services of
several key employees. The loss of certain key personnel could have a material
adverse effect on the Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers and skilled employees.
Failure to do so could adversely affect the Company's operations.

ENVIRONMENTAL MATTERS

In the past, electronics manufacturing services companies have used
chlorofluorocarbon ("CFC") cleaners which are believed to contribute to
depletion of the ozone layer in the atmosphere. In 1993, the Company eliminated
the use of CFC-based chemicals in its manufacturing operations.

The Company is required to comply with all federal, state, county and municipal
regulations regarding protection of the environment. The Company believes that
its facilities currently comply with all applicable regulations regarding
environmental protection. The cost to the Company of such compliance to date has
not materially affected the Company's business, financial condition or results
of operations. However, there can be no assurance that violations will not occur
in the future as a result of human error, equipment failure or other causes. The
Company cannot predict the nature, scope or effect of environmental legislation
or regulatory requirements that could be imposed or how existing or future laws
or regulations will be administered or interpreted. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies of
regulatory agencies, could require substantial expenditures by the Company and
could adversely affect the Company's business, financial condition and results
of operations.

ACQUISITIONS

In July 1996, the Company acquired Maxtron Corporation located in Dallas, Texas.
Maxtron was a contract manufacturer focusing on high complexity, custom
assemblies. In December 1996, the Company acquired the manufacturing operations
of SBE, Inc. located in San Ramon, California. Under the asset purchase
agreement related to the SBE, Inc. transaction, the Company acquired all
manufacturing activities, including production. The companies have entered into
a long term purchasing agreement under which SBE, Inc. will purchase contract
manufacturing services from the Company. The Company believes these acquisitions
will further establish and expand long-term relationships with OEM's of advanced
electronic products in targeted geographic areas. However, no assurance can be
given that such expansion will have a positive effect on the Company's operating
results.


<PAGE>   11

YEAR 2000 COMPLIANCE

Many currently installed systems and software products are coded to accept only
two digit entries in the date code field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result computer systems and/or software used by many companies will
need to be upgraded to comply with such "Year 2000" requirements.

An assessment of internal changes required for Year 2000 compliance has been
performed and the Company has determined that it will be necessary to upgrade
its network operating systems, test equipment, electronic mail systems, custom
reports and PC BIOS so that its computer systems will be Year 2000 compliant.
These modifications and replacements are being and will continue to be made in
conjunction with the Company's overall information systems initiatives. In
addition, the Company is continuing its discussions with third-party vendors to
ensure that any of their products that are incorporated into the Company's
products or currently in use by the Company can adequately deal with the change
in century. Areas being addressed include major third-party suppliers of
components of the Company's products as well as full reviews of the Company's
manufacturing equipment, telephone and voice mail systems, security systems and
other office support systems. The Company has also initiated formal
communications with significant suppliers and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. No significant information technology initiatives
have been deferred by the Company as a result of its Year 2000 project.

Since 1998, the Company has made Year 2000 compliance a priority in purchasing
and installation decisions. The Company's information systems department has
adopted a Year 2000 compliance program to assess and address any Year 2000
issues which remain related to the Company's information technology systems and
equipment. The following is a table showing the Company's status of the Year
2000 program based on management's assessment:

                       YEAR 2000 COMPLIANCE PROGRAM STATUS
                              AS OF MARCH 27, 1999

<TABLE>
<CAPTION>
Phase                                                Percent Complete                   Estimated Completion Date
-----                                                ----------------                   -------------------------
<S>                                                  <C>                                <C>
Assessment of internal changes required                    100%                                  Complete

Major supplier readiness risk assessment                   80%                                September 1999

Upgrades of commercial and internal
applications/products                                      85%                                September 1999
</TABLE>



As of March 27, 1999, the Company has spent approximately $60,000 of the
currently estimated $80,000 total cost of the program. Costs incurred and
expected to be incurred consist primarily of the cost of Company personnel
involved in updating applications and operating systems and the costs of
software updates and patches (many of which are provided free of charge from the
vendors). Such expenses are being funded through operating cash flows. The
Company has utilized the Company's internal technical personnel, and intends to
continue to use such personnel, to address Year 2000 issues, rather than
contract with third-party consultants.

Based on available information, the Company does not believe any material
exposure to a significant business interruption exists as a result of Year 2000
compliance issues, or that the cost of remedial actions will have a material
adverse effect on its business, financial condition or results of operations.
Accordingly, and as the program is on schedule to be completed during the summer
of 1999, the Company has not formulated a "worst case" scenario or adopted any
formal contingency plan in the event its Year 2000 project is not completed in a
timely manner.

With respect to products manufactured by the Company based on third-party
designs, there can be no assurance that such products contain all necessary date
code changes necessary to ensure Year 2000 compliance. Although the Company has
not experienced any Year 2000-related product liability claims or lawsuits to
date, production of products that are not Year 2000 compliant may entail the
risk of such claims and lawsuits. The Company's defense against any future
lawsuits, regardless of their merit, could result in substantial expense to the
Company as well as the diversion of management time and attention. In addition,
Year 2000 product liability claims, regardless of the merit or eventual outcome
of such claims, could affect the Company's business reputation and its ability
to retain existing customers or



<PAGE>   12

attract new customers which, in turn, could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to develop new products and purchase services such as
those offered by the Company.

Significant uncertainty still exists as to the global implications of the Year
2000 issue. Costs of defending and resolving Year 2000-related disputes,
reductions in product development programs by customers or the failure of the
Company to adequately resolve internal Year 2000 compliance issues could result
in a material adverse effect on the Company's business, operating results and
financial condition.


ITEM 2.         PROPERTIES

XeTel leases 145,000 square feet of space in Austin, Texas for its executive
offices and manufacturing operations. Additional leased manufacturing plants are
located in Dallas, Texas (25,000 square feet) and San Ramon, California (25,000
square feet).

A disruption of the Company's manufacturing operations resulting from sustained
process abnormalities, human error, theft, government intervention or a natural
disaster such as fire, earthquake, or flood could cause the Company to curtail
or suspend its manufacturing operations and consequently have a material adverse
effect on the Company.

The Company believes that its existing facilities are adequate for its current
level of business. The Company anticipates that additional space will be needed
to meet increased demand associated with targeted geographic markets currently
not served by the Company.


ITEM 3.         LEGAL PROCEEDINGS

To the Company's knowledge, there are no pending legal proceedings to which it
is a party or to which any of its property is subject that are material to the
Company or its business.


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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal 1999.





<PAGE>   13




PART II

ITEM 5.         MARKET FOR THE REGISTRANT'S COMMON EQUITY
                AND RELATED STOCKHOLDERS

COMMON STOCK INFORMATION

The following table sets forth the quarterly high and low per share sales prices
of the Company's common stock by quarter for fiscal 1999 and fiscal 1998 as
reported by the Nasdaq National Market. The Company's common stock is quoted on
the Nasdaq National Market under the symbol "XTEL".

<TABLE>
<CAPTION>

                   1999                  1998
            ------------------     -----------------
QUARTER      HIGH       LOW         HIGH       LOW
            ------     -------     ------     ------
<S>         <C>        <C>         <C>        <C>
First       $6 3/8     $3 3/4      $6 3/8     $4 3/8
Second       5 1/8      2 5/8       6 1/8      5
Third        3          2           5 1/2      3 3/4
Fourth       3          1 15/16     4 1/4      3 1/2
</TABLE>


XeTel has not paid any dividends since its inception and does not intend to pay
any dividends in the foreseeable future. As of June 22, 1999, the approximate
number of shareholders of record was approximately 1,930 based upon information
obtained from the Company's transfer agent.


ITEM 6.         SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
financial statements, including the notes to financial statements. The
information set forth below is not necessarily indicative of results of future
operations. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."






<PAGE>   14





FIVE YEAR SELECTED FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                    Fiscal Year Ended
                                       ---------------------------------------------------------------------------
                                         March 27,       March 28,       March 29,       March 30,       April 1,
STATEMENT OF OPERATIONS DATA:              1999             1998           1997            1996             1995
                                       ------------    ------------    ------------   ------------    ------------
<S>                                    <C>             <C>             <C>            <C>             <C>
Net sales                              $    135,713    $    112,685    $     90,453   $    117,846    $     64,507

Cost of sales                               130,249         105,171          83,442        102,605          58,689
                                       ------------    ------------    ------------   ------------    ------------

Gross profit                                  5,464           7,514           7,011         15,241           5,818
Selling, general and administrative
expenses                                      6,539           6,469           6,573          5,875           4,146
Asset impairment and other charges            6,855              --              --             --              --
                                       ------------    ------------    ------------   ------------    ------------

(Loss) income from operations                (7,930)          1,045             438          9,366           1,672
Other (expense) income, net                    (712)            (30)            268           (605)           (411)
                                       ------------    ------------    ------------   ------------    ------------

(Loss) income before income taxes            (8,642)          1,015             706          8,761           1,261
(Benefit) provision for income taxes         (3,104)            386             257          3,106             319
                                       ------------    ------------    ------------   ------------    ------------


Net (loss) income                      $     (5,538)   $        629    $        449   $      5,655    $        942
                                       ============    ============    ============   ============    ============

Basic (loss) earnings per share        $      (0.61)   $       0.07    $       0.05   $       0.85    $       0.37
                                       ============    ============    ============   ============    ============
Basic weighted average shares
outstanding                                   9,096           8,863           8,709          6,673           2,531
                                       ============    ============    ============   ============    ============

Diluted (loss) earnings per share      $      (0.61)   $       0.07    $       0.05   $       0.76    $       0.14
                                       ============    ============    ============   ============    ============
Diluted weighted average shares
outstanding                                   9,096           9,532           9,575          7,411           6,646
                                       ============    ============    ============   ============    ============


BALANCE SHEET DATA:

Working capital                        $     15,670    $     20,953    $     20,384   $     20,560    $      1,007

Total assets                                 52,601          58,806          39,802         45,156          22,950

Notes payable and current portion of
long-term debt                               10,600           5,800              --             --           7,016

Long-term debt, less current portion          2,167           2,667              42             --              --

Stockholders' equity                   $     22,754    $     27,744    $     26,661   $     24,922    $      4,403
                                       ============    ============    ============   ============    ============
</TABLE>





<PAGE>   15




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

The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of the risk
factors set forth above and elsewhere.

OVERVIEW

XeTel was founded in 1984. In 1986, Rohm U.S.A., Inc. ("Rohm") a subsidiary of
Rohm Co., Ltd., Japan, a diversified electronics company, acquired a controlling
interest in the Company. Since its inception, the Company has manufactured
surface mount assemblies and performed other manufacturing services for OEMs in
the electronics industry. In a number of cases, such services were rendered
during periods in which customers were experiencing fluctuations in demand for
their products. During such periods, the Company's net sales and operating
results were subject to significant fluctuations that often were tied to the
market demand for its customers' products, competitive factors and the
customers' need to utilize independent manufacturers to maintain sufficient
product supply to meet such demand. Such fluctuations are expected to continue
to affect the demand for the Company's services.

Annual and/or quarterly gross margins and operating results are also affected by
the level of capacity utilization of manufacturing facilities, indirect labor
and selling, general and administrative expenses. Accordingly, gross margins and
operating income margins have generally improved during periods of high volume
and high capacity utilization. XeTel generally has idle capacity and reduced
operating margins during periods of lower volume.

In an effort to achieve greater stability and higher gross margins, the Company
made the strategic decision in 1993 to reduce its dependence on the computer
industry and expand its service offerings in order to establish long-term
relationships with targeted customers in diversified markets. With the addition
of new management personnel in 1993, including a new President in September
1993, the Company focused certain of its resources to establish capabilities in
product design and prototype, improve materials management processes,
restructure the Company's management organization, establish dedicated customer
teams, and to expand and diversify its customer base. The Company has reduced
its role as a source of additional capacity for OEMs during periods of
fluctuating product demand and has positioned itself to provide a more
comprehensive set of services within the electronics manufacturing services
industry.

The development and growth of the Company's business has generally followed the
trend by OEMs in the electronics industry to outsource certain of their
manufacturing requirements. Recognizing the benefits offered by using
independent manufacturers, OEMs in the electronics industry have increasingly
relied on independent manufacturers not only as a source of additional
manufacturing capacity during periods of fluctuating demand, but as the primary
source for their manufacturing and assembly needs. In addition, the Company has
developed competencies in additional areas where it can add value to its
customers' requirements, such as design, prototype, systems integration and
order fulfillment and has sought to use such competencies to forge long-term
relationships as a single source provider of turnkey solutions for its
customers. During fiscal 1997, XeTel acquired two full-service manufacturing
services centers in Dallas, Texas and San Ramon, California to further establish
and expand its long-term relationships with OEM's of advanced electronic
products.





<PAGE>   16




RESULTS OF OPERATIONS

The following table sets forth the percentage of net sales of certain items in
the Statement of Operations. The financial information and the discussion below
should be read in conjunction with the financial statements and notes thereto.

<TABLE>
<CAPTION>

                                                            Fiscal Year Ended
                                                  -----------------------------------
                                                  March 27,    March 28,    March 29,
                                                     1999        1998          1997
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
Net sales                                             100.0%       100.0%       100.0%
Cost of sales                                          96.0         93.3         92.2
                                                  ---------    ---------    ---------
Gross profit                                            4.0          6.7          7.8
Selling, general and administrative expenses            4.8          5.7          7.3
Asset impairment and other charges                      5.1           --           --
                                                  ---------    ---------    ---------
(Loss) income from operations                          (5.8)         1.0          0.5

Other (expense) income, net                            (0.5)        (0.1)         0.3
                                                  ---------    ---------    ---------
(Loss) income before income taxes                      (6.4)         0.9          0.8
(Benefit) provision for income taxes                   (2.3)         0.3          0.3
                                                  ---------    ---------    ---------
Net (loss) income                                      (4.1)%        0.6%         0.5%
                                                  =========    =========    =========
</TABLE>


FISCAL 1999 COMPARED TO FISCAL 1998

Net sales for fiscal 1999 increased 20.4% to $135.7 million from $112.7 million
for fiscal 1998. The increase in net sales resulted primarily from increased
shipments to the Company's major computer, networking and telecommunications
customers. The Company's sales to its three largest customers for fiscal 1999
represented 32%, 8% and 7% respectively, of total net sales. Sales to the
Company's three largest customers for fiscal 1998 represented 20%, 16% and 9%
respectively, of total net sales.

Gross profit for fiscal 1999 decreased to $5.5 million from $7.5 million in
fiscal 1998. Gross profit is defined as net sales less cost of sales. Cost of
sales consists of direct labor, direct material and manufacturing overhead
(which includes manufacturing and process engineering expenses). Gross margin
(gross profit as a percentage of net sales) decreased to 4.0% for fiscal 1999
from 6.7% for fiscal 1998. The decrease in the Company's gross margin was
primarily due to the insourcing by one of the Company's major computer
customers, changes in product mix towards higher material content programs and
higher infrastructure costs associated with strategic investments in equipment,
facilities and operations. Management has taken actions to respond to the
decrease in gross margins including establishing aggressive new targets in cost
management and manufacturing efficiency.

Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, and sales
commissions paid to direct sales personnel and independent sales representative
organizations. SG&A expenses remained relatively stable at $6.5 million in
fiscal 1999 and fiscal 1998. SG&A expenses represented 4.8% of net sales for
fiscal 1999 as compared to 5.7% for fiscal 1998. The decrease in SG&A expenses
as a percentage of sales reflected the higher sales levels and the
implementation of cost controls.

Asset impairment and other charges consisted of a $6.9 million special charge to
write-down certain non-performing assets and write-off impaired assets. In
response to an uncured default of payments by, and assessment of, a certain
customer, the Company wrote-down all receivables and inventory, totaling $6.0
million, associated with this customer's program. The Company will pursue
available alternatives to mitigate the loss as well as legal rights and remedies
under its various agreements. In addition, during the year, the Company recorded
an impairment charge of $897,000 for the write-down of certain property and
equipment and the write-off of goodwill.




<PAGE>   17

Other (expense) income, net for fiscal 1999 reflects expense of $712,000
compared to $30,000 for fiscal 1998. The change in other (expense) income, net
was due to increased interest expense incurred on the Company's term note and
revolving line of credit in fiscal 1999.

The income tax benefit of $3,104,000 reflects an effective tax rate of 35.9% in
fiscal 1999 and a provision for income taxes of $386,000 reflects an effective
tax rate of 38.0% for fiscal 1998. The lower effective tax rate for fiscal 1999
was primarily due to the benefit attributed to the deferred tax asset.

FISCAL 1998 COMPARED TO FISCAL 1997

Net sales for fiscal 1998 increased 24.6% to $112.7 million from $90.5 million
for fiscal 1997. The increase in net sales resulted primarily from increased
shipments to the Company's major computer, telecommunications, and networking
customers. The Company's sales to its three largest customers for fiscal 1998
represented 20%, 16% and 9% respectively, of total net sales. Sales to the
Company's three largest customers for fiscal 1997 represented 14%, 9% and 8%
respectively, of total net sales.

Gross profit for fiscal 1998 increased to $7.5 million from $7.0 million in
fiscal 1997. Gross margin decreased to 6.7% for fiscal 1998 from 7.8% for fiscal
1997. The decrease in the Company's gross margin was mainly due to higher costs
associated with strategic investments made to expand and upgrade equipment and
facilities. SG&A expenses for fiscal 1998 remained relatively flat at $6.5
million as compared to fiscal 1997. SG&A expenses represented 5.7% of net sales
for fiscal 1998 as compared to 7.3% for fiscal 1997. The decrease in SG&A
expenses as a percentage of sales reflected the effect of cost controls during
fiscal 1998.

Other (expense) income, net for fiscal 1998 reflected expense of $30,000
compared to income of $268,000 for fiscal 1997. The change in other (expense)
income, net was due to increased interest expense incurred on the Company's term
note and revolving line of credit in fiscal 1998.

The provision for income taxes of $386,000 and $257,000 reflected an effective
tax rate of 38.0% and 36.4% for fiscal 1998 and fiscal 1997, respectively. The
higher effective tax rate for fiscal 1998 was primarily due to increased
goodwill amortization expense during fiscal 1998 that was deductible for
financial reporting purposes but was not deductible for tax purposes.






<PAGE>   18
QUARTERLY RESULTS

The following table sets forth certain quarterly financial data for the periods
indicated (in thousands, except per share data).

<TABLE>
<CAPTION>

                                                                    Three Months Ended
                                               -------------------------------------------------------------
                                                March 27,       Dec. 26,         Sept. 26,         June 27,
Fiscal 1999                                       1999            1998             1998              1998
                                               ----------      ----------       ----------       -----------
<S>                                            <C>             <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
   Net sales                                   $   24,604      $   30,590       $   36,211       $    44,308
   Gross (loss) profit                               (275)          1,282            1,387             3,070
   (Loss) income from operations                   (8,724)           (324)            (165)            1,283
   Net (loss) income                               (5,671)           (311)            (240)              684
                                               ----------      ----------       ----------       -----------
   Basic (loss) earnings per share             $    (0.62)     $    (0.03)      $    (0.03)      $      0.08
                                               ==========      ==========       ==========       ===========
   Basic weighted average shares                    9,198           9,118            9,062             9,008
                                               ==========      ==========       ==========       ===========

   Diluted (loss) earnings per share           $    (0.62)     $    (0.03)      $    (0.03)      $      0.07
                                               ==========      ==========       ==========       ===========
   Diluted weighted average shares
   outstanding                                      9,198           9,118            9,062             9,695
                                               ==========      ==========       ==========       ===========

                                                                    Three Months Ended
                                               -------------------------------------------------------------
                                                March 28,       Dec. 27,         Sept. 27,        June 28,
Fiscal 1998                                       1998            1997             1997             1997
                                               ----------      ----------       ----------       -----------
STATEMENT OF OPERATIONS DATA:
   Net sales                                   $   37,724      $   27,772       $   22,722       $    24,467
   Gross profit                                     2,568             930            1,720             2,296
   Income (loss) from operations                      890            (606)              90               672
   Net income (loss)                                  502            (388)              61               455
                                               ----------      ----------       ----------       -----------
   Basic earnings (loss) per share             $     0.06      $    (0.04)      $     0.01       $      0.05
                                               ==========      ==========       ==========       ===========
   Basic weighted average shares                    8,927           8,840            8,821             8,811
                                               ==========      ==========       ==========       ===========
   Diluted earnings (loss) per share           $     0.05      $    (0.04)      $     0.01       $      0.05
                                               ==========      ==========       ==========       ===========
   Diluted weighted average shares
   outstanding                                      9,356           8,840            9,662             9,638
                                               ==========      ==========       ==========       ===========
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

Working capital was $15.7 million at the end of fiscal 1999, compared to $21.0
million at the end of fiscal 1998. In addition to the Company's working capital
as of March 27, 1999, which included cash and cash equivalents of $7.3 million,
the Company also had $11 million available from unused credit facilities.

Net cash used in operating activities was $3.6 million during fiscal 1999 and
$2.7 million in fiscal 1998 on higher year-over-year sales levels and net cash
provided by operating activities was $4.9 million in fiscal 1997 on lower
year-over-year sales levels.


<PAGE>   19
Capital expenditures during fiscal 1999, 1998 and 1997 were $1.6 million, $6.3
million and $1.4 million, respectively. Management anticipates capital
expenditures in fiscal 2000 will approximate the level of capital expenditures
made in fiscal 1999. During fiscal 1998, the Company relocated its Austin
manufacturing and administrative operations to a new facility and incurred
larger capital expenditures to upgrade its equipment and capabilities. The
Company's expenditures on research and development in fiscal 1999, 1998 and 1997
were $189,000, $183,000 and $180,000, respectively.

The Company has negotiated $36 million in credit lines and equipment financing
facilities, as follows: (i) a revolving line of credit for $17 million from a
commercial bank, (ii) a $3.3 million term loan facility, and (iii) an equipment
financing facility for $16 million from a financial services company ($4 million
unused at March 27, 1999). There was $ 10.1 million and $5.3 outstanding under
the commercial bank line of credit and $2.7 million and $3.3 outstanding under
the term note at March 27, 1999 and March 28, 1998, respectively.

The bank revolving credit facility bears interest at LIBOR plus 1.25% to 1.75%
depending upon certain financial ratios and/or prime (such rate determined based
upon the amounts and period of loans), matures August 31, 1999 and is secured by
certain assets of the Company. The bank facility requires the payment of a
monthly commitment fee equal to one-eighth of one percent (1/8%) on the unused
balance, and borrowings are limited based upon certain collateral availability
requirements. The term loan facility bears interest at 9.2% with a maturity of
August 31, 2000. The equipment financing facility provides for the leasing of
equipment over a five-year period commencing on the date of acceptance of such
equipment.

The financing facilities contain certain restrictions, which among others,
require maintenance of a minimum level of tangible net worth and other operating
and financial ratios. At March 27, 1999, the Company did not satisfy certain
financial covenants imposed under its financing facilities. The Company received
covenants and waivers with respect to these financial covenants as of March 27,
1999 and for the fourth quarter then ended. The Company has plans to restructure
its commercial bank line to an asset based loan agreement.

The Company believes that its working capital, together with cash generated from
operations and financing facilities, will be sufficient to satisfy anticipated
sales growth and investment in manufacturing facilities and equipment through
its fiscal year 2000.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company invests its cash in money market funds or instruments which meet
high credit quality standards specified by the Company's investment policy. The
Company does not use financial instruments for trading or other speculative
purposes. The Company's financing facilities are subject to interest rate
fluctuations.



<PAGE>   20
ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The information required by Item 8 of Form 10-K is presented here in the
following order:

<TABLE>

<S>                                                                        <C>
REPORT OF INDEPENDENT ACCOUNTANTS                                            21


BALANCE SHEET AS OF MARCH 27, 1999 AND MARCH 28, 1998                        22


STATEMENT OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 27, 1999,
MARCH 28, 1998, AND MARCH 29, 1997                                           23


STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS
ENDED MARCH 27, 1999, MARCH 28, 1998 AND MARCH 29, 1997                      24


STATEMENT OF CASH FLOWS FOR THE FISCAL YEARS ENDED MARCH 27, 1999,
MARCH 28, 1998 AND MARCH 29, 1997                                            25


NOTES TO FINANCIAL STATEMENTS                                                26

</TABLE>


<PAGE>   21
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of XeTel Corporation

In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of XeTel
Corporation (the "Company") at March 27, 1999 and March 28, 1998, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended March 27, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP
-----------------------------------
    PRICEWATERHOUSECOOPERS LLP

Austin, Texas
April 28, 1999



<PAGE>   22
                                XETEL CORPORATION
                                  BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                                    March 27,        March 28,
                                                                      1999             1998
                                                                  ------------     ------------
<S>                                                               <C>              <C>
ASSETS

Current assets:
     Cash and cash equivalents                                       $  7,330        $  7,239
     Trade accounts receivable, net                                    14,940          22,887
     Inventories                                                       19,065          18,061
     Prepaid expenses and other                                         1,833             927
                                                                     --------        --------
         Total current assets                                          43,168          49,114

Property and equipment, net                                             7,233           8,955
Deferred tax asset                                                      2,200               -

Goodwill                                                                    -             737
                                                                     --------        --------
         TOTAL ASSETS                                                $ 52,601        $ 58,806
                                                                     --------        --------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Trade accounts payable                                          $ 12,816        $ 19,396
     Notes payable and current portion of long-term debt               10,600           5,800
     Accrued expenses and other liabilities                             4,081           2,965
                                                                     --------        --------
         Total current liabilities                                     27,497          28,161

Deferred income taxes                                                     183             234
Long-term debt                                                          2,167           2,667
Commitments (Note 9)

Stockholders' equity:
  Common stock, $0.0001 par value, 25,000,000 shares
  authorized, 9,212,700 and 8,998,896 shares issued
  and 9,206,702 and 8,936,400 shares outstanding, respectively         21,818          21,142
     Retained earnings                                                  1,087           6,625
     Deferred compensation                                               (151)            (23)
                                                                     --------        --------
         Total stockholders' equity                                    22,754          27,744
                                                                     --------        --------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $ 52,601        $ 58,806
                                                                     ========        ========

</TABLE>

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


<PAGE>   23
                                XETEL CORPORATION
                             STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                              Fiscal Year Ended
                                                                ----------------------------------------------
                                                                   March 27,        March 28,       March 29,
                                                                     1999             1998            1997
                                                                -------------     ------------    ------------
<S>                                                             <C>               <C>             <C>
Net sales                                                        $   135,713      $  $112,685     $    90,453
Cost of sales                                                        130,249          105,171          83,442
                                                                 -----------      -----------     -----------
Gross profit                                                           5,464            7,514           7,011
Selling, general and administrative expenses                           6,539            6,469           6,573
Asset impairment and other charges                                     6,855                -               -
                                                                 -----------      -----------     -----------
(Loss) income from operations                                         (7,930)           1,045             438
Other (expense) income, net                                             (712)             (30)            268
                                                                 -----------      -----------     -----------
(Loss) income before income taxes                                     (8,642)           1,015             706
(Benefit) provision for income taxes                                  (3,104)             386             257
                                                                 -----------      -----------     -----------
Net (loss) income                                                $    (5,538)     $       629     $       449
                                                                 ===========      ===========     ===========

Basic (loss) earnings per share                                  $     (0.61)     $      0.07     $      0.05
                                                                 ===========      ===========     ===========

Basic weighted average shares outstanding                              9,096            8,863           8,709
                                                                 ===========      ===========     ===========

Diluted (loss) earnings per share                                $     (0.61)     $      0.07     $      0.05
                                                                 ===========      ===========     ===========

Diluted weighted average shares outstanding                            9,096            9,532           9,575
                                                                 ===========      ===========     ===========
</TABLE>


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

<PAGE>   24
                                XETEL CORPORATION
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                      Common Stock        Deferred                  Total
                                  --------------------     Compen-    Retained  Stockholders'
                                   Shares      Amount      sation     Earnings     Equity
                                  --------    --------    --------    --------    --------
<S>                               <C>         <C>         <C>         <C>         <C>
Balance, March 30, 1996              8,523    $ 19,430    $    (55)   $  5,547    $ 24,922
   Stock options exercised              68          77          --          --          77
   Tax benefit on disqualifying
     dispositions                       --          46          --          --          46
   Amortization of deferred
     compensation                       --          --          16          --          16
   Acquisition- XeTel Dallas           207       1,448        (294)         --       1,154
   Net income                           --          --          --         449         449
   Other                                (2)         (3)         --          --          (3)
                                  --------    --------    --------    --------    --------
Balance, March 29, 1997              8,796      20,998        (333)      5,996      26,661

   Stock options exercised             115         149          --          --         149
   Employee stock purchase plan         67         254          --          --         254
   Transfer of restricted stock        (42)       (294)        294          --          --
   Tax benefit on disqualifying
     dispositions                       --          35          --          --          35
   Amortization of deferred
     compensation                       --          --          16          --          16
    Net income                          --          --          --         629         629
                                  --------    --------    --------    --------    --------
Balance, March 28, 1998              8,936      21,142         (23)      6,625      27,744

   Stock options exercised             108         144          --          --         144
   Employee stock purchase plan        106         286          --          --         286
   Issuance of restricted stock         57         246        (246)         --          --
   Amortization of deferred
     compensation                       --          --         118          --         118
    Net loss                            --          --          --      (5,538)     (5,538)
                                  --------    --------    --------    --------    --------
Balance, March 27, 1999              9,207    $ 21,818    $   (151)   $  1,087    $ 22,754
                                  ========    ========    ========    ========    ========

</TABLE>




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


<PAGE>   25









                                XETEL CORPORATION
                             STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                   Fiscal Year Ended
                                                           ----------------------------------
                                                           March 27,    March 28,   March 29,
                                                              1999         1998        1997
                                                           ---------    ---------   ---------
<S>                                                        <C>          <C>         <C>
Cash flows from operating activities:
   Net (loss) income                                        $(5,538)     $   629     $   449
   Adjustments to reconcile net (loss) income to net cash
   (used in) provided by operating activities:
        Deferred income taxes                                (2,859)         121           5
        Asset impairment and other charges                    6,855           --          --
        Depreciation and amortization                         2,769        2,736       2,080
        Provision for deferred compensation                     118           --          --
        (Gain) Loss on disposal of equipment                   (132)          51          16
   Change in operating assets and liabilities:
        Trade accounts receivable                             4,719       (9,001)      5,949
        Inventories                                          (3,545)      (7,562)      4,524
        Prepaid expenses and other                             (362)         788        (509)
        Trade accounts payable                               (6,580)       9,456      (4,745)
        Accrued expenses and other liabilities                  994           35      (2,845)
                                                            -------      -------     -------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES              (3,561)      (2,747)      4,924
                                                            -------      -------     -------
Cash flows from investing activities:
   Proceeds from sale of equipment                              516          426          --
   Purchases of property and equipment                       (1,594)      (6,334)     (1,416)
   Acquisition, net of cash acquired - XeTel Dallas              --           --         (18)
   Acquisition, net of cash acquired - XeTel West                --           --      (1,631)
                                                            -------      -------     -------
CASH USED IN INVESTING ACTIVITIES                            (1,078)      (5,908)     (3,065)
                                                            -------      -------     -------
Cash flows from financing activities:
  Net borrowings under debt agreements                        4,300        8,424         (92)
  Proceeds from stock options exercised                         144          149          77
  Cash proceeds from stock issued under employee
       stock purchase plan                                      286          254          --
  Tax benefit on disqualifying dispositions                      --           35          46
                                                            -------      -------     -------
CASH PROVIDED BY FINANCING ACTIVITIES                         4,730        8,862          31
                                                            -------      -------     -------

Increase in cash and cash equivalents                            91          207       1,890
Cash and cash equivalents, beginning of period                7,239        7,032       5,142
                                                            -------      -------     -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                    $ 7,330      $ 7,239     $ 7,032
                                                            =======      =======     =======
</TABLE>


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



<PAGE>   26



                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE  1     BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

XeTel provides comprehensive and customized manufacturing solutions to original
equipment manufacturers primarily in the computer, networking and
telecommunications industries. XeTel incorporates advanced design and prototype
services and complex electronics manufacturing assembly capabilities together
with materials management, advanced testing, systems integration services and
order fulfillment to provide turnkey solutions for its customers.

CASH EQUIVALENTS

All highly liquid investments purchased with original maturities of three months
or less are classified as cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation and amortization on
property and equipment is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.

REVENUE RECOGNITION

Sales are recognized on the date of shipment to customers. Sales returns are not
material.

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes are
provided for temporary differences between the basis of assets and liabilities
for financial reporting and tax purposes.

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares for the
year. Diluted EPS is similar to Basic EPS except that the weighted average of
common shares outstanding is increased to include the number of common share
equivalents, when inclusion is dilutive. Common share equivalents are comprised
of stock options. The number of common share equivalents outstanding relating to
stock options is computed using the treasury stock method.





<PAGE>   27


                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, trade accounts receivable and payable, and notes payable and
long-term debt, approximate fair values. SFAS No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", requires disclosure
of any significant off-balance-sheet and credit risk concentrations. The
Company's exposure to concentrations of credit risk relate primarily to trade
receivables. The Company controls credit risk by performing credit evaluations
and requires letters of credit, bank guarantees and advanced payments, if deemed
necessary.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current
year presentation.

USE OF ESTIMATES

Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
the reported revenues and expenses for the period. Actual results could differ
from those estimates.

STOCK BASED COMPENSATION

The Company adopted SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation" for the fiscal year ended March 28, 1998. SFAS No. 123 introduces
a fair-value based method of accounting for stock-based compensation. It
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to apply the accounting rules contained in APB Opinion No. 25, "Accounting
for Stock Issued to Employees". As such, SFAS No. 123 did not have any effect on
the Company's financial position or results of operations. Companies that
continue to use APB Opinion No. 25 are required to present in the notes to the
financial statements the pro forma effects on reported net (loss) income and
(loss) earnings per share as if compensation expense had been recognized based
on the fair value of options granted (see Note 12).

FISCAL YEAR

The Company's fiscal year is the 52 or 53 weeks ending on the Saturday nearest
to March 31. Reference to fiscal years ended 1999, 1998 and 1997 are for the 52
weeks ended March 27, 1999, March 28, 1998 and March 29, 1997, respectively.

COMPREHENSIVE INCOME

The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
fiscal year ended March 27, 1999. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net (loss) income or
stockholders' equity. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.


<PAGE>   28






                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


SEGMENTS

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in the fiscal year ended March 27, 1999. The adoption
of SFAS No. 131 did not affect the Company's results of operations or financial
position. The Company operates in one industry segment: electronics
manufacturing services, which encompasses design, prototype, manufacturing and
other turnkey manufacturing solutions to original equipment manufacturers. The
manufacturing services are sold to customers in the telecommunications,
networking and computer industries, which are geographically dispersed
throughout the United States. The Company's manufacturing facilities are located
in the United States.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No.133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of this new accounting pronouncement is not expected to have a
material impact on the financial statements.


NOTE  2     ASSET IMPAIRMENT AND OTHER CHARGES

The components of the Asset impairment and other charges included in the
Statement of Operations and Statement of Cash Flows are as follows (in
thousands):

<TABLE>
<CAPTION>

Fiscal Year Ended:                                             1999
----------------------                                      -----------
<S>                                                         <C>
Provision for doubtful accounts                             $     3,228
Provision for excess and obsolete inventory                       2,541
Impairment of long-lived assets                                     897
Other                                                               189
                                                            -----------
                                                            $     6,855
                                                            -----------
</TABLE>


The Company recorded a tax benefit of $2.8 million in connection with this
charge.

During fiscal 1999, the Company recorded a charge of $6.0 million to write-down
all receivables and inventory and other costs in response to an uncured default
of payments by, and an assessment of, a certain customer. This charge included a
provision for doubtful accounts, a provision for excess and obsolete inventory
and other associated costs. Additionally, Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires long-lived assets, including
goodwill, be reviewed for impairment and be written-down to their fair value
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. As a result of management's assessment, the Company recorded
an impairment charge of $897,000 for the write-down of certain property and
equipment and the write-off of goodwill.





<PAGE>   29





                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE  3     TRADE ACCOUNTS RECEIVABLE, NET

Trade accounts receivable, net consist of the following (in thousands):

<TABLE>
<CAPTION>

                                         March 27,   March 28,
                                           1999        1998
                                         --------    --------
<S>                                      <C>         <C>
Accounts receivable                      $ 18,408    $ 23,127
Less:  allowance for doubtful accounts     (3,468)       (240)
                                         --------    --------
                                         $ 14,940    $ 22,887
                                         ========    ========
</TABLE>


NOTE  4     INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>

                                         March 27,   March 28,
                                          1999        1998
                                         -------     -------
<S>                                      <C>         <C>
Raw materials                            $15,262     $13,944
Work in progress                           3,584       3,731
Finished goods                               219         386
                                         -------     -------
                                         $19,065     $18,061
                                         =======     =======
</TABLE>


As of March 27, 1999 and March 28, 1998, the Company had allowances for obsolete
raw materials (principally printed circuit board components) of $3,031,000 and
$490,000, respectively. As discussed in Note 2, asset impairment and other
charges include a $2,541,000 provision to the allowance for excess and obsolete
inventory for fiscal 1999. Cost of sales for fiscal 1998 and 1997 include
provisions to the allowance for obsolete materials of $344,000 and $168,000,
respectively.







<PAGE>   30





                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE  5     PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following (in thousands):

<TABLE>
<CAPTION>

                                                   March 27,   March 28,
                                                     1999        1998
                                                   --------    --------
<S>                                                <C>         <C>
Machinery and equipment                            $ 12,086    $ 13,204
Leasehold improvements                                3,884       3,506
Furniture and fixtures                                  890         838
                                                   --------    --------
                                                     16,860      17,548
Less:  accumulated depreciation and amortization     (9,627)     (8,593)
                                                   --------    --------
                                                   $  7,233    $  8,955
                                                   ========    ========
</TABLE>


NOTE  6     NOTES PAYABLE AND LONG-TERM DEBT

The Company has (i) a revolving line of credit for $17 million from a commercial
bank, (ii) a term loan facility for $3.3 million from a commercial bank, and
(iii) an equipment financing facility from a financial services company. There
was $10.1 million and $5.3 million outstanding under the commercial bank line of
credit and $2.7 million and $3.3 million outstanding under the term note at
March 27, 1999 and March 28, 1998, respectively. The term loan facility bears
interest at 9.2%, is secured by certain assets, and matures on August 31, 2000.

The $17 million line of credit bears interest at LIBOR plus 1.25% or 1.75%,
depending on certain financial ratios, and/or prime (such rate determined based
upon the amounts and period of loans), matures on August 31, 1999 and is secured
by certain assets of the Company. The facility requires payment of a commitment
fee equal to one-eighth of 1% (1/8%) on the unused balance, and borrowings are
limited based upon certain collateral availability requirements. The equipment
financing facility provides for the leasing of equipment over a five-year period
commencing on the date of acceptance of such equipment. All equipment leased to
date under this facility has qualified for operating lease treatment.

The financing facilities contain certain restrictions, which include maintenance
of a minimum level of tangible net worth and other operating and financial
ratios. At March 27, 1999, the Company did not satisfy the working capital and
cash flow ratios required by the financing facilities. The Company received
consents and waivers with respect to these financial covenants as of March 27,
1999 and for the quarter then ended.

Interest paid totaled $841,000, $209,000 and $18,000 for fiscal 1999, 1998 and
1997, respectively.




<PAGE>   31



                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE  7     INCOME TAXES

The (benefit) provision for income taxes consists of the following (in
thousands):

<TABLE>
<CAPTION>

                                                                               Fiscal Year Ended
                                                                       ------------------------------------
                                                                       March 27,    March 28,    March 29,
                                                                          1999         1998         1997
                                                                       ----------   ----------   ----------
<S>                                                                    <C>          <C>          <C>
Federal
   Current                                                             $     (245)  $      228   $      255
   Deferred                                                                (2,485)         125          (37)
State
   Current                                                                     --           37            7
   Deferred                                                                  (374)          (4)          32
                                                                       ==========   ==========   ==========
                                                                       $   (3,104)  $      386   $      257
                                                                       ==========   ==========   ==========
</TABLE>


The differences in income taxes provided and the amounts determined by applying
the federal statutory tax rate to (loss) income before income taxes result from
the following:

<TABLE>
<CAPTION>

                                                                          Fiscal Year Ended
                                                            -----------------------------------------------
                                                             March 27,        March 28,         March 29,
                                                               1999              1998             1997
                                                            ------------     -------------     ------------
<S>                                                         <C>              <C>               <C>
Tax at statutory rate                                              (34.0)%            34.0%            34.0%
Add (deduct) the effect of state income tax                         (2.9)              2.6              3.8
Other, net                                                           1.0               1.4             (1.4)
                                                            ------------     -------------     ------------
                                                                   (35.9)%            38.0%            36.4%
                                                            ============     =============     ============
</TABLE>

The components of deferred income tax assets, included in prepaid expenses and
other current assets, and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                     March 27,   March 28,
                                                                                       1999         1998
                                                                                    ----------   ----------
<S>                                                                                 <C>          <C>
Deferred tax assets:
   Reserves                                                                         $    2,557   $      200
   Net operating loss carry-forwards                                                       397           --
   Franchise tax                                                                             5           39
   Accrued vacation                                                                        132           70

   Other                                                                                   200          174
                                                                                    ----------   ----------
Gross current deferred tax asset                                                         3,291          483

Deferred tax liabilities:
   Depreciation                                                                           (183)        (229)

   Other                                                                                    --           (5)
                                                                                    ----------   ----------
Gross long-term deferred tax liability                                                    (183)        (234)
                                                                                    ----------   ----------
Net deferred tax asset                                                              $    3,108   $      249
                                                                                    ==========   ==========
</TABLE>




<PAGE>   32

                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


Realization of the total deferred tax assets representing tax loss and credit
carry-forwards is dependent on the Company's ability to generate future taxable
income. Management believes that it is more likely that not future taxable
income will be sufficient to utilize the tax carry-forwards prior to their
expiration to fully recover the asset. However, there can be no assurance that
the Company will meet these expectations. As a result, the amount of the
deferred tax assets considered realizable could be reduced. Such an occurrence
could adversely affect the Company's results of operations and financial
condition.

Income taxes totaling $355,000, $170,000 and $3,157,000 were paid in fiscal
1999, 1998 and 1997, respectively. As of March 27, 1999, the Company had net
operating loss carry-forwards of approximately $2.7 million expiring primarily
in 2019. In addition, the Company had recoverable income taxes on the balance
sheet of approximately $245,000 at March 27, 1999 that is included in prepaid
expenses and other current assets.


NOTE  8     CAPITAL STOCK

The Board of Directors has the authority to issue the preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the Company's stockholders. The issuance of
the preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of common stock.


NOTE  9     LEASE COMMITMENTS

XeTel leases its operating facility and certain office equipment under
noncancellable operating leases. Rental expense under all operating leases was
approximately $4,377,000, $3,024,000 and $1,233,000 during fiscal 1999, 1998 and
1997, respectively. Future noncancellable minimum rental payments under all
operating leases with initial terms of greater than one year are $4,169,000 in
2000, $3,937,000 in 2001, $3,066,000 in 2002, $2,111,000 in 2003, $1,227,000 in
2004 and an aggregate of $5,128,000 thereafter.


NOTE 10     SALES TO MAJOR CUSTOMERS

XeTel's sales are concentrated in the electronics industry; however, the
customers operate in diverse markets and geographic areas. The following table
summarizes the percentage of gross revenues generated by sales to customers that
account for more than 10% of sales in fiscal 1999, 1998 and 1997:

<TABLE>
<CAPTION>

               March 27,     March 28,     March 29,
                 1999          1998          1997
               --------      --------      --------
<S>            <C>           <C>           <C>
Customer A           32%           20%           14%
Customer B           --            16            --
</TABLE>


NOTE 11     RELATED PARTY TRANSACTIONS

The Company has transactions with certain divisions of Rohm Corporation, a
wholly-owned subsidiary of Rohm U.S.A., Inc. ("Rohm") a subsidiary of Rohm Co.,
Ltd., Japan, during the normal course of business. Purchases from such divisions
were $162,000, $191,000 and $526,000 for fiscal 1999, 1998 and 1997,
respectively. Accounts payable to such divisions were $28,000 and $14,000 as of
March 27, 1999 and March 28, 1998, respectively. Accounts receivable from such
divisions were not significant.



<PAGE>   33

                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE 12     EMPLOYEE BENEFIT PLANS

STOCK OPTION PLAN

The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plan, which is described below. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair market value at the date of grant for awards under that plan
consistently with the method provided for by SFAS No. 123, the Company's net
(loss) income and the diluted (loss) earnings per share would have reflected the
following pro forma amounts for fiscal 1999 and fiscal 1998 (in thousands,
except per share data):

<TABLE>
<CAPTION>

                                                                  Fiscal Year Ended
                                                                -----------------------
                                                                March 27,     March 28,
                                                                   1999          1998
                                                                ---------     ---------
<S>                                                             <C>           <C>
Net (loss) income                As reported                    $  (5,538)    $     629
                                 Pro forma                      $  (5,868)    $     361

Diluted (loss) earnings per
share                            As reported                    $   (0.61)    $    0.07
                                 Pro forma                      $   (0.65)    $    0.04
</TABLE>


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:

<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
                                                                -----------------------
                                                                March 27,     March 28,
                                                                   1999          1998
                                                                ---------     ---------
<S>                                                             <C>           <C>
Dividend yield                                                         --            --
Expected volatility                                                  63.5%        47.47%
Risk-free rate of return                                             5.11%         5.67%
Expected life                                                     5 years       5 years
</TABLE>



<PAGE>   34




                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


XeTel's 1997 Stock Option Plan (the "Option Plan") provides for the grant of
common stock options to key employees. The exercise price of each option is the
fair market value of a share of common stock on the date of grant. The term of
each option can be no more than 10 years from the date of grant and expires 90
days after the termination of employment. Each option vests equally over a
period of four years from the date of grant. As of March 27, 1999, the Company
has reserved 2,340,850 shares of common stock for the Option Plan. A summary of
activity under the Option Plan is as follows:

<TABLE>
<CAPTION>

                                                Number        Weighted
                                              of Shares        Average
                                                Under         Exercise
                                               Option         Price ($)
                                             ----------      ----------

<S>                                          <C>             <C>
Options outstanding as of March 30, 1996      1,172,000            1.34
    Granted                                     418,500            5.06
    Exercised                                   (67,525)           1.28
    Canceled                                    (37,875)           2.68
                                             ----------      ----------
Options outstanding as of March 29, 1997      1,485,100            2.36

    Granted                                     415,500            4.94
    Exercised                                  (115,775)           1.29
    Canceled                                   (179,625)           5.20
                                             ----------      ----------
Options outstanding as of March 28, 1998      1,605,200            2.82

    Granted                                     331,000            3.36
    Exercised                                  (108,375)           1.33
    Canceled                                   (147,250)           4.62
                                             ----------      ----------
Options outstanding as of March 27, 1999      1,680,575            2.86
                                             ==========      ==========

Options exercisable at:
    March 29, 1997                              758,975            1.38
    March 28, 1998                              930,450            1.79
    March 27, 1999                            1,031,325            2.20
</TABLE>

<TABLE>
<CAPTION>

Weighted average, grant                       Number of          Weighted
date fair value of options                      Shares            Average
granted during:                              Under Option      Fair Value ($)
                                             ------------      --------------
<S>                                          <C>               <C>
    Fiscal 1997                                 418,500            2.28
    Fiscal 1998                                 415,500            2.42
    Fiscal 1999                                 331,000            1.95
</TABLE>





<PAGE>   35





                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                       March 27, 1999
                   -------------------------------------------------------------------------------------------
                                   Options Outstanding                             Options Exercisable
                   ---------------------------------------------------     -----------------------------------
                                                           Weighted
                                        Weighted           Average
                     Number of           Average          Remaining          Number of            Weighted
                      Options            Exercise        Contractual          Options              Average
Exercise Price      Outstanding           Price           Life (yrs)         Exercisable       Exercise Price
--------------     --------------     -------------    ---------------     --------------     ----------------
<S>                <C>                <C>              <C>                 <C>                <C>
$1.22 - 1.22            199,750          $    1.22               6.18            147,250          $    1.22
 1.23 - 1.23            393,750               1.23               4.69            393,750               1.23
 1.33 - 3.50            522,950               2.49               6.80            243,825               1.61
 3.81 - 4.88            165,000               4.54               7.87             77,500               4.58
 5.00 - 6.00            399,125               5.09               7.93            169,000               5.10
                      ---------          ---------          ---------          ---------          ---------
$1.22 - 6.00          1,680,575          $    2.86               6.61          1,031,325          $    2.20
                      =========          =========          =========          =========          =========

</TABLE>


EMPLOYEE STOCK PURCHASE PLAN

Under the Company's Employee Stock Purchase Plan ("Purchase Plan"), employees
meeting specific employment qualifications are eligible to participate and can
purchase shares semi-annually through payroll deductions at the lower of 85% of
the fair market value of the stock at the commencement or end of the offering
period. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions for up to 10% of qualified compensation to a maximum
of 1,500 shares per enrollment period. During fiscal 1999 and fiscal 1998,
105,427 and 67,481 shares were issued under the plan, respectively. Proceeds
from stock issued under the Purchase Plan were $286,000 and $254,000 for fiscal
1999 and fiscal 1998, respectively. The weighted average estimated fair value of
purchase rights granted under the employee stock purchase plan was $1.19 per
share for fiscal 1999. As of March 27, 1999, 827,092 shares were reserved for
future issuance under the plan.

401 (k) PLAN

The Company sponsors a defined contribution retirement plan (the "401(k) Plan")
pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) Plan was
amended effective July 1, 1995 whereby substantially all employees are eligible
to participate if they are at least 21 years of age, and such participants may
contribute up to 12% of their compensation. Also in connection with this
amendment, the Company elected to make matching contributions to participants
after the participants have completed one year of service. The matching
contribution is 25% of participant contributions, which is applied to a maximum
of 5% of each participant's compensation. The Company may also make profit
sharing and other contributions to the 401(k) Plan for the benefit of the
participants. Company contributions vest ratably over a five-year period.
Company contributions charged to operations were $126,000, $137,000 and $85,000
for fiscal 1999, 1998 and 1997, respectively.

RESTRICTED STOCK AWARDS

Restricted stock awards are currently granted at the discretion of the Board of
Directors under the Stock Option Plan in connection with the hiring or retention
of key executives and are subject to certain conditions. Restrictions are lifted
two years after the grant date, provided the executive continues to be employed
by the Company. For the year ended March 27, 1999, the Company awarded 56,500
shares of common stock, which had a fair value at the date of grant of $246,552.
Compensation under the plan is charged to operations over the restriction period
and amounted to $102,000 in fiscal 1999.




<PAGE>   36

                                XETEL CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE 13     ACQUISITIONS

In July of 1996, the Company acquired Maxtron Corporation located in Dallas,
Texas for $500,000 in cash and $1,154,000 in common stock. In December 1996, the
Company acquired the manufacturing operations of SBE, Inc. ("SBE"), located in
San Ramon, California for approximately $1.6 million in cash. These transactions
were accounted for under the purchase method of accounting with the results of
operations from the acquired manufacturing operations included in the Company's
results of operations from the acquisition date forward.





<PAGE>   37




ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The directors and executive officers of the Company and their ages are as
follows:

<TABLE>

<S>                                            <C>      <C>
Ronald W. Guire                                50       Chairman of the Board of Directors (Class III)
Angelo A. DeCaro, Jr.                          47       President, Chief Executive Officer and Director (Class III)
Julian C. Hart                                 59       Senior Vice President, Chief Technical Officer, and Secretary
William A. Peten                               51       Senior Vice President, Corporate Materials and Systems
Richard S. Chilinski                           47       Vice President, Chief Financial Officer and Assistant Secretary
Stephen D. Sauter                              39       Vice President, Sales and Marketing
Norman E. O'Shea                               50       Vice President, General Manager XeTel West
Daniel J. Williams                             50       Vice President, General Manager XeTel Austin
David Bibeau                                   45       General Manager XeTel Dallas
Al R. Schuele                                  53       Director (Class II)
Sam L. Densmore                                58       Director (Class I)
Kozo Sato                                      59       Director (Class II)

</TABLE>

Mr. Guire has served as Chairman of the Board of Directors since April 1998.
Prior to April 1998, Mr. Guire served as a Director of the Company from 1986 to
April 1998 and as Secretary from 1991 to September 1996. Mr. Guire has served
with EXAR Corporation ("EXAR"), a semiconductor designer and manufacturer, since
1984 including as Executive Vice President since June 1995, as Senior Vice
President from 1989 to 1995 and as a director, Secretary of the Board of
Directors and Chief Financial Officer since 1985. Mr. Guire was formerly a
partner in the public accounting firm of Graubart & Co. from 1979 to 1985.

Mr. DeCaro has served as a Director and President of the Company since 1993, and
in August 1995 was elected its Chief Executive Officer. Mr. DeCaro was employed
by IBM from 1974 to 1993, and served as Director of Operations-Printed Wiring
Board and Services at IBM's circuit board facility in Austin, Texas from 1992 to
1993 and Plant Manager of the same facility from 1989 to 1992.

Mr. Hart, a founder of the Company, has served as Senior Vice President of the
Company since 1984, its Chief Technical Officer since November 1995 and
Secretary since September 1996. Mr. Hart served as a Director of the Company
from 1984 until May 1997. From 1964 to 1984, he was employed by Texas
Instruments ("TI") in various development engineering positions, including in
the development of TI's Advanced Scientific Computer. Mr. Hart is a registered
Professional Engineer and a member of The International Society for Hybrid
Microelectronics.

Mr. Peten has served as Senior Vice President - Corporate Materials and Systems
since April 1998. Prior to April 1998, Mr. Peten served as Vice President -
Material Acquisition and Control from 1993 to April 1998. Prior to joining
XeTel, Mr. Peten was employed by IBM for approximately 23 years where he held
numerous management assignments including Materials Manager for the IBM Printed
Circuit Panel Plant in Austin from 1989 to 1993.

Mr. Chilinski has served as Vice President and Chief Financial Officer of the
Company since January 1995 and its Assistant Secretary since November 1995. He
previously served as Chief Financial Officer/Controller of IBM PC Company
Austin, a manufacturer of personal computers, from 1993 to 1994, and Vice
President-Finance and Administration and Assistant Secretary of TN Technologies,
a subsidiary of Baker Hughes Technology Products Division, engaged in the
manufacture of process control technology, from 1988 to 1993. He is a Certified
Public Accountant.



<PAGE>   38


Mr. Sauter has served as Vice President- Sales and Marketing since August 1997.
Prior to joining XeTel, Mr. Sauter was employed by Jabil Circuit, Inc. Mr.
Sauter was employed by Jabil Circuit for over 12 years and last held the
position of Sales and Marketing Manager for North America. Prior to Jabil, Mr.
Sauter worked for Texas Instruments in their Equipment Group as a Manufacturing
Engineer.

Mr. O'Shea has served as Vice President - General Manger XeTel West since
December 1996. Mr. O'Shea joined the Company as part of the acquisition of the
manufacturing operations of SBE. Prior to joining XeTel, Mr. O'Shea served as
Vice President of Manufacturing of SBE. From 1987 to 1993, Mr. O'Shea was
employed at NeXT Computer where he served as Process Engineering Manager from
1987 to 1991 and Materials Manager from 1991 to 1993. From 1979 to 1987, he was
employed by Motorola where he held various management positions.

Mr. Williams has served as Vice President - General Manager XeTel Austin since
January 1999. Previous to this position, he served as General Manager XeTel
Austin High Volume Manufacturing from 1998 to 1999. Prior to joining XeTel, he
was employed as Director of Operations at Arrowsmith Technologies in 1997 and
Columbia Scientific from 1995 to 1997. He was also employed by Fisher Rosemount
Systems for approximately 18 years where he held numerous management positions
including Manufacturing, Materials and Operations Manager from 1989 to 1995.

Mr. Bibeau joined XeTel as General Manager of XeTel Dallas in February, 1999.
Prior to joining XeTel, he served as Director of Operations for Current
Technology, a division of Danaher Corporation. From 1986 to 1997, Mr. Bibeau
held several senior management positions in manufacturing and engineering with
General Signal Corporation.

Mr. Schuele joined XeTel as a Director of the Company in August 1998. Since
August 1998, Mr. Schuele has served as President and COO of Unitrode
Corporation. Unitrode Corporation designs, manufactures and sells analog/linear
and mixed-signal integrated circuits, electronic modules and non-volatile
products. Prior to working with Unitrode, he was the President and CEO of
Benchmarq Microelectronics, Inc. Mr. Schuele has also held a variety of senior
management positions with Crystal Semiconductor, Mostek Corporation, Motorola
Semiconductor and Texas Instruments.

Mr. Densmore has served as a Director of the Company since May 1997. Mr.
Densmore has served with RF Monolithics, Inc., a radio frequency component and
module designer and manufacturer, since 1993 including as its President and
Chief Executive Officer since 1996, Director since 1994 and Executive Vice
President, Chief Operating Officer, Chief Financial Officer and Secretary from
1993 to 1996. In 1991, Mr. Densmore founded the IBC Group, a private consulting
company, and served as its President from 1991 to 1993. From 1984 to 1990, Mr.
Densmore was employed at Recognition International, Inc., a document image
processing company. During that period, Mr. Densmore served as Senior Vice
President, Treasurer and Chief Financial Officer from 1989 to 1990 and Vice
President of Corporate Development from 1984 to 1989. Mr. Densmore is a
Certified Public Accountant.

Mr. Sato has served as a Director of the Company since 1986 and as Chairman of
the Board of Directors from 1986 to April 1998. Mr. Sato previously served as
the Company's Chief Executive Officer from 1986 to August 1995. Mr. Sato served
as a director of Rohm Americas, Inc., a wholly owned subsidiary of Rohm Co.,
Ltd., Japan, a diversified electronics company, from February 1997 to February
1999. From 1984 to October 1997, Mr. Sato served as the Chief Executive Officer
and President of Rohm U.S.A., Inc., a wholly owned subsidiary of Rohm Co., Ltd.,
Japan.

There is no family relationship among any of the foregoing individuals.


ITEM 11.        EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference to
the information contained in the section captioned "Executive Officer
Compensation" of the Registrant's definitive Proxy Statement (Notice of Annual
Meeting of Stockholders) for the fiscal year ended March 27, 1999 to be held
August 17, 1999 which the Company will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.





<PAGE>   39
ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT

Information regarding this item is incorporated herein by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement (Annual Meeting of
Stockholders) for the fiscal year ended March 27, 1999.


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has engaged in a number of transactions with Rohm, its largest
stockholder. The Company believes that these transactions were on terms no less
favorable to the Company than would have been obtained from unaffiliated third
parties. All significant transactions in the past and future, if any, between
the Company and its officers, directors, principal stockholders and affiliates
(including Rohm) will be approved by a majority of the Company's independent
directors and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.

At March 28, 1998, the Company had a $3 million revolving line of credit with
Rohm bearing interest at LIBOR plus 1.25%, was payable on demand and was secured
by certain equipment. The revolving line of credit with Rohm expired on March
31, 1998. There were no outstanding balances under the Rohm line of credit at
March 28, 1998 or at any time during fiscal 1999.

No interest was paid to Rohm under the credit facility described above for
fiscal years 1999, 1998 and 1997. In addition to the arrangements described
above, the Company has entered into transactions in the ordinary course of
business with certain divisions of Rohm Corporation, a wholly owned subsidiary
of Rohm. Component purchases from such divisions were $162,000, $191,000 and
$526,000 for fiscal years 1999, 1998 and 1997, respectively.


<PAGE>   40
PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                REPORTS ON FORM 8-K

(a)     1.     Financial Statements.

               The financial statements listed in ITEM 8: FINANCIAL STATEMENTS
               AND SUPPLEMENTARY DATA, above are filed as part of this Annual
               Report on Form 10-K.

        2.     Financial Statement Schedules.

               All schedules are omitted because they are not applicable or the
               required information is shown in the financial statements or
               notes thereto.

        3.     Exhibits.

               The exhibits listed in the accompanying Index to Exhibits are
               filed as part of this Annual Report on Form 10-K.

(b)     Reports on Form 8-K

               On January 5, 1999, the Company filed a Form 8-K announcing the
               adoption of a stockholder rights plan as of December 31, 1998.
               The description and terms of the Rights are set forth in a Rights
               Agreement dated as of December 31, 1998 between the Company and
               American Stock Transfer & Trust Company, as Rights Agent, and
               filed as an exhibit to the Company's Registration Statement on
               Form 8-A filed with the SEC on January 5, 1999.


SIGNATURES

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


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints, Angelo A. DeCaro, Jr. and
Richard S. Chilinski, and each or either of them, his true and lawful
attorney-in-fact and agent, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report ( Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.


                                                               XETEL CORPORATION
                                                                    (Registrant)

                            Date: June 22, 19    By:  /s/ Angelo A. DeCaro, Jr.
                                                 ------------------------------
                                                          Angelo A. DeCaro, Jr.
                             President and Chief Executive Officer and Director




<PAGE>   41
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

               Name                                    Title                                       Date
<S>                                 <C>                                                       <C>
/s/ Angelo A. DeCaro, Jr.
-----------------------------------
Angelo A. DeCaro, Jr.               President and Chief Executive Officer and                 June 22, 1999
                                    Director (principal executive officer)

/s/ Richard S. Chilinski
-----------------------------------
Richard S. Chilinski                Vice President, Chief Financial Officer and               June 22, 1999
                                    Assistant Secretary (principal financial
                                    and accounting officer)

/s/ Ronald W. Guire
-----------------------------------
Ronald W. Guire                     Chairman of the Board of Directors                        June 22, 1999

/s/ Kozo Sato
-----------------------------------
Kozo Sato                           Director                                                  June 22, 1999

/s/ Al R. Schuele
-----------------------------------
Al R. Schuele                       Director                                                  June 22, 1999

/s/ Sam L. Densmore
-----------------------------------
Sam L. Densmore                     Director                                                  June 22, 1999

</TABLE>


<PAGE>   42
INDEX TO EXHIBITS

<TABLE>
<CAPTION>

EXHIBIT
NUMBER          DESCRIPTION
<S>             <C>
        3.2(1)  Second Restated Certificate of Incorporation.
        3.3(1)  Restated Bylaws of the Registrant, as amended.
        3.4(1)  Registration Rights, dated June 18, 1986 among the Registrant Rohm Corporation, Julian C. Hart, David W.
                Gault and Emory C. Garth.
         .1(1)  Reference is made to Exhibits 3.1, 3.2 and 3.3.
        4.2(1)  Specimen Common Stock certificate.
       10.2(1)  Form of Indemnification Agreement between the Registrant and
                each of its directors and certain executive officers.
      10.20(1)  Manufacturing Services Agreement February 22, 1989 between
                Motorola, Inc., MOS Memory Products Division and the Registrant,
                and letter from Motorola, Inc., Fast Static RAM Module Division
                related thereto.
      10.21(1)  Mobile Communication Standard Terms and Conditions dated August 5, 1994 for Westinghouse Electric.
      10.22(2)   Master Lease Agreement between the Registrant and General Electric Capital Corporation.
      10.23(2)  $3,000,000 Promissory Note between the Registrant and Rohm U.S.A.
      10.24(3)   $7,000,000 Promissory Note between the Registrant and Texas Commerce Bank National Association.
      10.25(3)  Lease Agreement between Braker Phase III, Ltd. as Landlord, and the Registrant, as Tenant.
      10.26(4)  Lease Agreement between Delta HP Limited, as Landlord, and the Registrant, as Tenant.
      10.27(4)   First Amendment to Credit Agreement between the Registrant and Texas Commerce Bank National Association.
      10.28(4)  Letter of Commitment between the Registrant and General Electric Capital Corporation.
      10.29(4)  Amended $3,000,000 Promissory Note between the Registrant and Rohm U.S.A.
      10.30(5)  Registrant's 1997 Stock Incentive Plan
      10.31(5)  Registrant's Employee Stock Purchase Plan
      10.32(6)  Lease Agreement between Braker Phase III, Ltd. as Landlord, and the Registrant, as Tenant.
      10.33(7)  Amended $10,000,000 Promissory Note between the Registrant and Chase Bank of Texas.
      10.34(7)  Second Amendment to Credit Agreement between the Registrant and Chase Bank of Texas.
      10.35(7)  Amended Letter of Commitment between the Registrant and General Electric Capital Corporation.
      10.36(8)  Amended $17,000,000 Promissory Note
      10.37(8)  Third Amendment to Credit Agreement
      10.38(9)  First Amendment to Credit Agreement between the Registrant and Chase Bank of Texas.
      10.39(9)  Amendment No. 1 to 1997 Stock Incentive Plan.
     10.40(10)  Stockholders Rights Agreement dated December 31, 1998
          11.1  Computation of Earnings per Share.
          23.1  Consent of PricewaterhouseCoopers, LLP.
          24.1  Power of Attorney, pursuant to which amendments to this Form
                10-K may be filed, is included on the signature page contained
                in Part IV of this Form 10-K.
          27.1  Financial Data Schedule
</TABLE>

(1)      Incorporated by reference to the like-numbered exhibits previously
         filed with Registrant's Registration Statement on Form S-1, No.
         33-99632 filed with the Securities and Exchange Commission on February
         14, 1996.

(2)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's 1996 Form 10-K.

(3)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's September 1996 Form 10-Q.

(4)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's 1997 Form 10-K.

(5)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's 1997 Form 14-A.



<PAGE>   43
(6)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's December 1997 Form 10-Q.

(7)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's 1998 Form 10-K.

(8)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's June 1998 Form 10-Q.

(9)      Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's September 1998 Form 10-Q.

(10)     Incorporated by reference to the like-numbered exhibits previously
         filed with the Registrant's January 1999 Registration Statement on Form
         8-A.