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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORT
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended DECEMBER 31, 2003.

                                       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: 1-10346

                           MICROTEL INTERNATIONAL INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                       77-0226211
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

9485 HAVEN AVENUE, SUITE 100, RANCHO CUCAMONGA, CA               91730
    (Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (909) 987-9220

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

           Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $0.0033 PAR VALUE
                                (Title of class)

         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 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. [X]

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

         The aggregate market value of the voting common equity held by
nonaffiliates of the registrant computed by reference to the closing sale price
of such stock, was approximately $9,371,000 at June 30, 2003. The registrant has
no non-voting common equity.

         The number of shares of the registrant's common stock, $0.0033 par
value, outstanding as of March 12, 2004 was 23,481,866.

         DOCUMENTS INCORPORATED BY REFERENCE:  NONE.


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                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----

                                     PART I

Item 1.    Business...........................................................2

Item 2.    Properties........................................................22

Item 3.    Legal Proceedings.................................................23

Item 4.    Submission of Matters to a Vote of Security Holders...............23

                                     PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities.................24

Item 6.    Selected Financial Data...........................................25

Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.........................................26

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk........45

Item 8.    Financial Statements and Supplementary Data.......................46

Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..........................................46

Item 9A.   Controls and Procedures...........................................47

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant................48

Item 11.   Executive Compensation............................................50

Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters...................................58

Item 13.   Certain Relationships and Related Transactions....................60

Item 14.   Principal Accounting Fees and Services............................60

                                    PART IV

Index to Financial Statements and Financial Statement Schedule..............F-1

Index to Exhibits............................................................61

Signatures...................................................................66

Exhibits Attached to This Report.............................................67


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                                     PART I

ITEM 1.   BUSINESS.

CORPORATE OVERVIEW

         We are a Delaware corporation that was formed July 14, 1989. We have
three wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware
corporation formed in 1984 and based in the United States ("CXR Telcom"), CXR
Anderson Jacobson, formerly CXR, SA, a company organized under the laws of
France in 1973 and based in France ("CXR-AJ") and XET Corporation, a company
organized under the laws of New Jersey in 1983. CXR Telcom and CXR-AJ
manufacture, assemble and distribute communications products and network access
and transmission products. XET Corporation designs, manufactures and markets
electronic components for defense, aerospace and industrial markets.

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

         o    Electronic Components

              --   digital and rotary switches

              --   electronic power supplies

              --   subsystem assemblies

         o    Communications Equipment

              --   network access and transmission products

              --   communications test instruments

         Our sales are primarily in North America, Europe and Asia. Revenues are
recorded when products are shipped if shipped FOB shipping point or when
received by the customer if shipped FOB destination. Financial information
regarding our sales by segment and geographic area is contained in Note 12 of
our audited consolidated financial statements that are included in Item 8 of
Part II of this report.

         Sales to customers in the electronic components segment, primarily to
defense and aerospace customers, defense contractors and industrial customers,
were 63.4%, 59.1% and 46.1% of our total net sales for the years 2003, 2002 and
2001, respectively. Sales of communications equipment and related services,
primarily to telecommunications equipment customers, were 36.6%, 40.9% and 53.9%
of our total net sales during 2003, 2002 and 2001, respectively.

         Our objective in our electronic components business is to become the
supplier of choice for harsh environment digital and rotary switches and custom
power supplies. Our objective in our network access and transmission products
and communications test instruments business is to become a leader in quality,
cost effective solutions to meet the requirements of communications equipment
customers. We believe that we can achieve these objectives through
customer-oriented product development, superior product solutions, and
excellence in local market service and support.

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INDUSTRY OVERVIEW

    ELECTRONIC COMPONENTS

         The electronic components industry comprises three basic segments,
which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, aerospace, defense, commercial, industrial and other
environments, each of which places constraints that define performance and
permitted use of differing grades of components.

         We are active only in the industry segments that are characterized by
low volume, high margin and long lead-times, namely the aerospace, defense and
industrial segments. To support the myriad customers that rely on digital and
rotary switches and electronic power supplies, we believe that our electronic
components must offer high levels of reliability and in many cases must be
tailored to the size, appearance, functionality and pricing needs of each
particular customer.

         The defense market, which is a predominant market for our electronic
components, makes use of sophisticated electronic assemblies in diverse
applications that involve both original equipment and retrofit of existing
equipment.

         The Digitran Division of our subsidiary XET Corporation, which was
acquired by XET Corporation from Becton Dickinson in 1985, has been
manufacturing digital switches since the division was formed in the 1960s. XCEL
Power Systems Ltd., or XPS, a second tier subsidiary of XET Corporation, has
been manufacturing electronic power supplies since 1989.

    COMMUNICATIONS EQUIPMENT

         Over the past decade, telecommunications and data communications
infrastructures have undergone major growth and have become a critical part of
the global business and economic infrastructure that has been driven by:

         o    a surge in demand for broadband access used to conduct e-commerce
              activities and transmit growing volumes of data, voice and video
              information;

         o    the adoption of Internet protocol, or IP, which is a protocol
              developed to enable the transmission of information as packets of
              data from a source to a recipient using dynamically changing
              routes, with the data being reassembled at the recipient's
              location into the original information format; and

         o    an apparent worldwide trend toward deregulation of the
              communications industry, which has enabled a large number of new
              communications service providers to enter the market.

         This rapid growth has been succeeded by a period of consolidation.
According to industry sources, consumer demand for broadband access continues to
grow at a moderate pace, but existing carrier infrastructures generally have the
backbone capacity to more than accommodate this moderate growth, which has
resulted in substantially reduced capital spending by telecommunications
carriers. Private and corporate communications providers have been less severely
affected, and growth is still evident in this sector. Data traffic volumes
continue to exceed voice traffic volumes, with both types of traffic moving
toward more efficient IP transmission methods.


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         Private and corporate communications providers and other businesses
that rely heavily on information technology continue to devote significant
resources to the purchase of network access and transmission equipment, such as
high-speed DSL and fiber optic modems, through which data and voice information
may be transmitted. DSL, or digital subscriber line, technology transmits data
up to 50 times faster than a conventional dial-up modem using existing copper
telephone wires. We believe that the demand for test equipment with which to
test, deploy, manage and optimize communications networks, equipment and
services remains depressed for public carrier markets.

         To support the rapidly changing needs of telecommunications companies
and information technology dependent businesses, we believe that network access
and transmission products and communications test instruments must offer high
levels of functional integration, automation and flexibility to operate across a
variety of network protocols, technologies and architectures. Because the
competition for subscribers for high-speed bandwidth access is intense, the
quality and reliability of network service has become critical to
telecommunications companies due to the expense, loss of customers and negative
publicity resulting from poor service. Quality and reliability of network
service are also important to information technology dependent businesses that
rely on broadband high-speed data links for a variety of purposes.

         Technicians who use service verification equipment in the field or in
central or branch offices assist businesses in verifying and repairing service
problems effectively and, thus, increase the quality and reliability of their
networks. We believe that as broadband services are deployed further and as
competition for telecommunications subscribers and e-commerce customers
proliferates, telecommunications companies and other information
technology-reliant businesses will increasingly depend on new and improved
integrated access transmission devices and advanced field and central or branch
office testing and monitoring solutions.

OUR SOLUTION

         We have developed a range of electronic components, such as digital and
rotary switches and custom electronic power supplies, used primarily by
aerospace, defense and industrial customers. We have developed and we
manufacture and market various network access and transmission devices used by
businesses and other users to efficiently transmit data, voice and video
information to destinations within and outside of their respective networks. We
have also developed and we manufacture and market a broad range of test
instruments used by operators of public and private telecommunications networks
for the installation, maintenance and optimization of advanced communications
networks.

         Our extensive knowledge and understanding of our customers' needs,
together with the broad capabilities of our network access and transmission
products, test instrumentation products and our sophisticated electronic
components, enable us to provide the following features and benefits to our
customers:

         DEVELOPMENT OF NEW SWITCH TECHNOLOGY. We have complemented our
long-established range of products with a new range of patent-pending
space-saving rotary switches we refer to as VLP(TM), or very low profile
switches, and ELP(TM), or extremely low profile switches. These products have
been specifically designed to target harsh environment and aerospace
applications where space is at a premium, providing a substantial advantage over
larger switches offered by our competitors.

         PROVISION OF MORE EFFICIENT AND COST-EFFECTIVE POWER SYSTEMS. We have
developed and we provide high and low voltage power systems that are highly
integrated within the application hardware, which minimizes cost, space and
complexity and maximizes overall system reliability and efficiency. We believe
that our ability to partner with major international defense contractors and to
provide power systems solutions based on both standard modules and custom
designs provides us with an important competitive advantage.


                                       4
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         BROAD RANGE OF NETWORK ACCESS AND TRANSMISSION PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of professional network
access and transmission products that are capable of connecting to a wide range
of remote monitoring devices and equipment. Many of these products are designed
to operate in extended temperatures and harsh environments and generally exceed
the surge protection standards of the industry and are adaptive to wide ranges
of AC or DC power inputs. The design of many of our data transmission products
enables them to either interface with or complement one another. The versatility
of this concept has enabled us to offer numerous different product combinations
to our customers. These variations include customized selection of data speeds,
data interfaces, power inputs, operating temperatures, data formats and power
consumption. In addition, our desktop and rack mount transmission product lines
allow us to serve both central site data communications needs and remote access
and transmission sites on both the enterprise-wide and single location level.

         HANDHELD DESIGN OF FIELD TEST EQUIPMENT. We design many of our test
equipment products to be used in the field. Most of our digital and analog
products weigh less than four pounds and offer handheld convenience. The
compact, lightweight design of these products enables field technicians to
access problems and verify line operation quickly.

         RAPID AND EFFICIENT DIGITAL SERVICES DEPLOYMENT. Our test equipment
products allow field and office technicians to test lines rapidly and
efficiently to ensure that they are properly connected to the central office and
that they can support a specific type and speed of service. In a single device,
our products can be used to pre-qualify facilities for services, identify the
source of problems and verify the proper operation of newly installed service
before handing service over to customers.

         COMPREHENSIVE CONNECTIVITY. Our network access and transmission
products and communications test instruments are the result of significant
product research and engineering and are designed to connect to a broad range of
operation configurations and to connect over a wide range of prevailing
transmission conditions. Our products incorporate a wide range of standard
international connectivity protocols as well as proprietary protocols.

         CUSTOMER-DRIVEN FEATURES. Most of our digital and rotary switches and
each of our power supplies are highly tailored to our customers' needs. We
manufacture digital and rotary switches for insertion into new equipment as well
as for retrofit into existing equipment. Our engineers continually interact with
our customers during the design process to ensure that our electronic components
are the best available solution for them. For example, based on conversations
with our customers, we delivered a compact multiple output power supply to allow
BAE Systems to produce a single-heads up display suitable for fitting on a large
range of commercial and military aircraft.

         CUSTOMER RELATIONS. Our electronic components business currently enjoys
a preferred supplier status with several key accounts, which means that we work
in close association with the customer to develop custom products specifically
addressing their needs. Our electronic components also are considered qualified
products with many key accounts, which means that our products are designed into
equipment specifications of some of our customers for the duration of their
production of their equipment.

         LONG-TERM RELATIONSHIPS. Market procurement methods encourage long-term
relationships between electronic components suppliers and customers, with
customers committing to a single source of supply because of the high cost
involved in qualifying a product or its alternative for use. For example, a
large proportion of XPS' products are qualified products that have been involved
in many hours of flight trials.

                                       5
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OUR STRATEGY

         Our objectives are to become the supplier of choice for harsh
environment switches and custom power supplies in the aerospace, defense and
industrial markets, in addition to becoming a leading provider of network access
and transmission products and communications test instruments for a broad range
of applications within the global communications industry. The following are the
key elements of our strategy to achieve these objectives:

         CONTINUE TO FOCUS ON OUR ELECTRONIC COMPONENTS BUSINESS. We plan to
continue to grow our electronic components business by marketing our electronic
components products in their established market niches and identifying
opportunities to broaden our customer base for our power supply products.

         CONTINUE TO FOCUS ON NETWORK ACCESS AND TRANSMISSION PRODUCTS. We plan
to continue our efforts in the communications equipment market and develop new
products and enhancements to meet or exceed evolving requirements.

         CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH GROWTH
MARKET OPPORTUNITIES. We plan to continue investing in markets and technologies
that we believe offer substantial growth prospects. We believe that the
expertise we have developed in creating our existing products will permit us to
enhance these products, develop new products and respond to emerging
technologies in a cost-effective and timely manner.

         SEEK COMPETITIVE WORLD-CLASS MANUFACTURING IN ASIA FOR SELECTED
PRODUCTS. Toward the end of 2002, we cut costs by using Asian manufacturing
sources for selected communications equipment products and subassemblies. We
intend to build on this strategy to increase our competitiveness in the
marketplace.

         LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase network access and transmission products and
test instrument products and services. We intend to aggressively market new and
enhanced products and services to our existing customers. We also believe that
our existing customer base represents an important source of references and
referrals for new customers in new markets.

         PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to increase
the functionality of our communications equipment products, enabling products to
be upgraded by the downloading of software or the addition of hardware to an
existing unit, allowing customers to protect their investment in test equipment
and generating follow-on sales opportunities as we develop new modules in the
future. We plan to continue to approach our existing digital switch customers to
determine whether they need rotary switches that we do not currently manufacture
for them.

         SEEK ALTERNATIVE MARKET OPPORTUNITIES. We plan to expand our focus and
efforts to identify and capture more new customers, such as private network
utilities and transit customers, for our test equipment.

         PURSUE STRATEGIC ACQUISITIONS. The network access and transmission
market is large and highly fragmented. We plan to extend our market position by
acquiring or investing in complementary businesses or technologies on a selected
basis. We also intend to expand our U.K.-based electronic power supplies
division's United States presence through acquisition of businesses that offer
complementary products or technology for manufacture in the United States.

         DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. We plan to continue to
develop our strategic relationships with network access and transmission and
test instrument manufacturers in order to enhance our product development
activities and leverage shared technologies and marketing efforts to build
recognition of our brands. In particular, in Europe, we intend to continue to
expand our relationships with offshore vendors as a reseller of their products
to enhance our position and reputation as a provider of a comprehensive line of
test equipment products.

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         PURSUE TECHNOLOGY TRANSFER AND LICENSING. We plan to continue our
established practice of purchasing or licensing core technologies where this
reduces time and cost to market, as we did with the base platform for our remote
access server products purchased from Hayes Corporation.

         DEVELOP CUSTOMER-FOCUSED SOLUTIONS. We design, develop, and manufacture
many products and provide services that are tailored to the specific needs of
our customers with an emphasis on ease of use. We intend to continue to adapt
our core communications technologies to deliver focused products that improve
our customers' ability to test and manage increasingly large and complex
networks and that are easily used by field technicians and central office
personnel.

         EXTEND OUR GLOBAL PRESENCE. Our customers' needs evolve through
industry expansion and consolidation as well as with the deployment of new
technologies and services. To support our customers more effectively, we intend
to augment our sales, marketing and customer support organizations.

PRODUCTS AND SERVICES

         Our products and services currently are divided into the following two
main business segments:

         o    Electronic Components

              --   digital and rotary switches

              --   electronic power supplies

              --   subsystem assemblies

         o    Communications Equipment

              --   network access and transmission products

              --   communications test instruments

         During the years ended December 31, 2003, 2002 and 2001, our total net
sales were $25,519,000, $22,664,000 and $27,423,000, respectively, and the
percentages of total net sales contributed by each product group within our two
main business segments were as follows:


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                                                       YEAR ENDED DECEMBER 31
                                                       ----------------------
    SEGMENT AND PRODUCT TYPE                         2003       2002       2001
    ------------------------                       -------    -------    -------
    Electronic Components
         Digital and Rotary Switches                 20.9%      20.9%      23.1%
         Electronic Power Supplies                   34.3%      31.3%      20.0%
         Subsystem Assemblies                         5.9%       5.0%       --
         Other Products and Services                  2.3%       1.9%       3.0%
                                                   -------    -------    -------
                                                     63.4%      59.1%      46.1%
                                                   -------    -------    -------

    Communications Equipment
         Network Access and Transmission Products    24.0%      23.8%      24.7%
         Test Instruments                             9.2%      12.7%      26.7%
         Other Products and Services                  3.4%       4.4%       2.5%
                                                   -------    -------    -------
                                                     36.6%      40.9%      53.9%
                                                   -------    -------    -------
     Totals                                         100.0%     100.0%     100.0%
                                                   =======    =======    =======

    BACKLOG

         Our business is not generally seasonal, with the exception that network
access and transmission products and communications test instruments purchases
by telecommunications customers tend to be lower than average during the first
quarter of each year because capital equipment budgets typically are not
approved until late in the first quarter. At December 31, 2003 and 2002, our
backlog of firm, unshipped orders was approximately $9.6 million and $12.7
million, respectively. Our December 31, 2003 backlog was related approximately
96.0% to our electronic components business, which tends to provide us with long
lead-times for our manufacturing processes due to the custom nature of the
products, and 4.0% to our communications equipment business, the majority of
which portion relates to our network access and transmission products. Of these
backlog orders, we anticipate fulfilling approximately 75% of our electronic
components orders and 100% of our communications equipment orders within the
current fiscal year. However, we cannot assure you that we will be successful in
fulfilling these orders in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

    WARRANTIES

         Generally, our electronic components carry a one-year limited parts and
labor warranty and our communications equipment products carry a two-year
limited parts and labor warranty. Typically our communications equipment
products may be returned within 30 days of purchase if a new order is received,
and the new order will be credited with 80% of the selling price of the returned
item. Products returned under warranty typically are tested and repaired or
replaced at our option. Historically, product returns have not had a material
impact on our operations or financial condition. However, we cannot assure you
that this will continue to be the case or that disputes over components or other
materials or workmanship will not arise in the future.


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                       OUR ELECTRONIC COMPONENTS BUSINESS

         Our electronic components segment includes digital and rotary switches
and electronic power supplies and subsystem assemblies. During the years ended
December 31, 2003, 2002 and 2001, this segment accounted for 63.4%, 59.1% and
46.1%, respectively, of our total net sales.

    DIGITAL AND ROTARY SWITCHES

         XET Corporation's Digitran Division, based in Rancho Cucamonga,
California, manufactures, assembles and sells digital and rotary switch products
serving aerospace, defense and industrial applications. Digital and rotary
switches are manually operated electromechanical devices used for routing
electronic signals. Thumbwheel, push button, lever-actuated and rotary modules,
together with assemblies comprised of multiple modules, are manufactured in many
different model families. The Digitran Division also offers a wide variety of
custom keypads and digital and rotary switches for unique applications.

         Our switches may be ordered with different combinations of a variety of
features and options, including:

         o    8, 10, 11, 12, 16 or a special number of dial positions;
         o    special markings and dial characters;
         o    fully sealed, dust sealed or panel (gasket) sealed switch chambers
              to increase resistance to the elements in hostile environments,
              such as dust, sand, oils, salt spray, high humidity and
              temperature and explosive atmospheres;
         o    available with radio frequency interference shielding;
         o    rear mount (flush) or front mount switches that are sold with the
              needed installation hardware, or snap in mount switches that do
              not require installation hardware;
         o    provision for mounting components on output terminals on special
              personal computer boards;
         o    wire wrap terminals, pin terminals or special terminations;
         o    night vision compatibility;
         o    rotary; and
         o    VLP(TM) and ELP(TM)rotary.

    ELECTRONIC POWER SUPPLIES

         XPS, based in Ashford, Kent, England, produces a range of high and low
voltage, high specification, high reliability custom power conversion products
designed for hostile environments and supplied to an international customer
base, predominantly in the military and civil aerospace, military vehicle and
telecommunications markets.

         Power conversion units supplied by XPS range from 10VA to 1.5 KVA power
ratings, low voltage (1V) to high voltage (20KV+), and convert alternating
current, or AC, to direct current, or DC, convert DC to AC and convert DC to AC.
Units can be manufactured to satisfy input requirements determined by military,
civil aerospace, telecommunications or industrial businesses, and sophisticated
built-in test equipment, or BITE, and control circuitry often is included.
Operating environments for our units are diverse and range from fighter aircraft
to roadside cabinets.

     SUBSYSTEM ASSEMBLIES

         Subsystem assemblies incorporate various input and display devices and
are manufactured for integration with various aerospace, defense, industrial and
transportation industry systems.


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                      OUR COMMUNICATIONS EQUIPMENT BUSINESS

         Our communications equipment business comprises network access and
transmission products and communications test equipment. During the years ended
December 31, 2003, 2002 and 2001, the sale of communications equipment products
and related services accounted for 36.6%, 40.9% and 53.9% of our total net sales
revenues, respectively. These products, many of which are described below, are
configured in a variety of models designed to perform analog and digital
measurements or to transmit data at speeds varying from low-speed voice grade
transmission to high-speed broadband access.

         Some of the acronyms and terms used most frequently in the product
discussions on the following pages include:

         o    Time division multiplexing, or TDM, which is a technique for
              consolidating multiple data sources into a single data stream by
              allocating time slots to each data source
         o    Traditional telephone services, such as modems and plain old
              telephone service, or POTS
         o    Competitive local exchange carriers, or CLECs
         o    Bit error rate test, or BERT
         o    Dial tone multi-frequency, or DTMF
         o    Transmission impairment measurement, or TIMS
         o    Central office and private business exchange, or CO/PBX, services,
              where the central office houses the local exchange equipment that
              routes calls to and from customers and to Internet service
              providers and long-distance carriers
         o    Synchronous - in digital telephone transmission, synchronous means
              that the bits from one call are carried within one transmission
              frame
         o    Digital data services, or DDS, including the USA and worldwide
              standards described below:
           I. USA standards, including:
              --   ISDN, which is an enhanced digital network that offers more
                   bandwidth and faster speed than the traditional telephone
                   network
              --   Caller identification or caller-ID services
              --   Digital subscriber line technology, or DSL, technology which
                   transmits data up to 50 times faster than a conventional
                   dial-up modem using existing copper telephone wires
              --   Multi-rate symmetric DSL, or MSDSL, which allows the
                   transmission of data over longer distances than single-rate
                   technologies by adjusting automatically or manually the
                   transmission speed
              --   T-1, which is a standard for digital transmission in North
                   America used by large businesses for broadband access
              --   FT-1, or fractional T-1, which uses only a selected number of
                   channels from a T-1
              --   T-3, which is the transmission rate of 44 megabits, or
                   millions of bits, per second, or 44 Mbps, with 672 channels
              --   Digital signal level 0, or DS0, which is 64 kilobits, or
                   thousands of bits, per second, or 64 kbps, with one channel
                   of a T-1, E-1, E-3 or T-3
              --   Digital signal level 1, or DS1, which is the T-1 transmission
                   rate of 1.54 Mbps, with 24 channels
              --   Digital signal level 3, or DS3, which is the T-3 transmission
                   rate of 44 Mbps, with 672 channels
              --   Router, which is an intelligent device used to connect local
                   and remote networks
              --   Terminal adapter, which is situated between telephones or
                   other devices and an ISDN line and allows multiple voice/data
                   to share an ISDN line
              --   Transmission control protocol/Internet protocol, or TCP/IP


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              --   STS/SONET, which is an acronym for synchronous transport
                   signal/synchronous optical networks or fiber optic networks
              --   SDH is an acronym for synchronous digital hierarchy
              --   STM1 (SDH) is a standard technology for synchronous data
                   transmission on optical media and is the international
                   equivalent of synchronous optical network; SDH uses the
                   following synchronous transport modules, or STMs, and rates:
                   STM1- 155 Mbps, STM-4 - 622 Mbps, STM-16 - 2.5 gigabits per
                   second (Gpbs), and STM-64 - 10 Gbps
              --   G703/G704 is a standard for transmitting voice over digital
                   carriers such as T-1 and E-1; G703 provides the
                   specifications for pulse code modulation at data rates from
                   64 Kbps to 2.048 Mbps and is typically used for
                   interconnecting data communications equipment such as
                   bridges, routers and multiplexers
              --   V11/V35/X21 are types of serial interfaces; serial interfaces
                   work best for short (perhaps less than 20 meters), low-speed
                   applications
              --   X.25 is a protocol that allows computers on different public
                   networks or a TCP/IP network to communicate through an
                   intermediary computer at the network layer level
           II. International standards, including:
              --   E-1, which is the European standard for international digital
                   transmission used by large businesses for broadband access,
                   with 2.108 Mbps, with 30 channels
              --   FE-1, or fractional E-1, which uses only a selected number of
                   channels from an E-1
              --   E-3, which is the European standard for T-3, with 34.368 Mbps
                   and 480 channels

    NETWORK ACCESS AND TRANSMISSION PRODUCTS

         CXR-AJ develops, markets and sells a broad range of network access and
transmission products that are manufactured in France by CXR-AJ and sold under
the name "CXR Anderson Jacobson." These products include high-quality network
access devices such as fiber optic, DSL and voice frequency, or VF, modems, ISDN
terminal adapters, ISDN concentrators, multiplexers, terminal servers, interface
converters and remote access servers, which combine to provide users with a
complete solution for voice and data transmission.

         Modems
         ------

         Our modem product range includes professional grade traditional VF
modems covering the performance spectrum, a range of fiber optic modems and a
range of DSL modems. Our modems are sold as standalone devices for remote sites
or as rack-mountable versions for central sites. Our customers use our
high-quality professional grade modems worldwide for networking and for central
office telecommunications applications such as voicemail and billing systems and
secure communications. Our modems are feature rich and we believe generally
offer more capabilities and better performance than competing products,
especially when operating over poor quality lines. This characteristic alone has
made our modems the modems of choice for voicemail applications throughout the
United States. Our modems are also available in more rugged versions for
industrial applications such as telemetry and remote monitoring in harsh
environments.

         ISDN Terminal Adapters
         ----------------------

         Together with modems, we offer a line of ISDN terminal adapters, which
are the popular digital equivalent of analog modems used primarily in Europe.
These terminal adapters are used in a broad range of applications, including
point-of-sale and videoconferencing, and are available in standalone as well as
rack-mountable versions.


                                       11
<PAGE>

         Terminal Servers
         ----------------

         Terminal servers include a range of products that enable the connection
of asynchronous applications to the Ethernet Network. These products were
designed to meet the requirements of our customers to interface equipment to the
corporate local area network, commonly called the LAN, and therefore to the
outside world, via our range of network access products.

         Drop and Insert Multiplexers
         ----------------------------

         Our broad range of drop and insert multiplexers covers E-1, T-1, FE-1,
E-3, T-3 and STM1 (SDH) over both copper wires and fiber optic networks. The
units enable users to manage the consolidation of their information from a
variety of voice or data sources (G703, G704, X21, V11 and V35) through an
easy-to-use menu-driven and Microsoft Windows-based user interface.

         Modular Routers
         ---------------

         Our commercial/industrial router product range is modular, which
provides users the flexibility to configure or have configured a unit that meets
their specific requirements. Our routers provide access to the Internet or
remote sites via ISDN, leased line, X.25, frame relay and DSL connections. The
router creates or maintains a table of available routes and their conditions and
uses this information, along with distance and cost algorithms, to determine the
best route for a given packet of data.

         Interface Converters
         --------------------

         Our range of interface converters provides users the ability to
interface data from LAN, V11 or V35 to E-1, T-1, E-3, T-3 and STM1. A channel
service unit/data service unit, or CSU/DSU, converts a digital data frame from a
LAN into a frame appropriate to a wide area network, or WAN.

         ISDN Concentrators
         ------------------

         We also manufacture and offer a line of ISDN intelligent concentrators
called CB2000. These products, which were designed primarily for the European
market, allow for better use of ISDN resources.

         TDMoIP Voice and Data transmission
         ----------------------------------

         Our IP-Jet TDMoIP products facilitate the use of TDM services and
equipment over the Packet Switched Network bringing simplicity with lower cost
without the costly need to replace existing TDM hardware for both carrier and
enterprise users. TDM over IP, or TDMoIP, takes advantage of the internet
protocol, or IP, infrastructure and changing economics of data services delivery
to deliver high revenue leased line services such as E1 and T1. TDMoIP is also
ideal for the enterprise looking to reduce network expenses without compromising
features of their existing PBX and TDM equipment allowing all TDM traffic to be
carried transparently over ethernet and IP networks irrespective of protocols or
signaling. Typical TDMoIP applications include: transmission of E1/T1, voice,
video and TDM data and IP, centralized voice services over ethernet or IP,
secure data transmission E1/T1, and transmission of HDLC over IP.


                                       12
<PAGE>

         The following are descriptions of a few of our more prominent network
access and transmission products:

     PRODUCT NAME                  KEY USES, FEATURES AND FUNCTIONS

POWER MODEMS               A family of products that allow asynchronous and
                           synchronous transmission over dial-up or leased
                           lines; asynchronous transmission is a very high-speed
                           transfer mode that allows telephone companies to mix
                           formerly incompatible signals, such as voice, video
                           and data.
                           -- in dial-up applications, a unique line
                              qualification mechanism assesses the quality of
                              the line and automatically redials before entering
                              the transmission mode when a poor line is
                              detected, which avoids having to transmit in a
                              degraded mode and leads to money savings in long
                              transmission sessions
                           -- available in standalone units or as rack mountable
                              cards to be inserted into our Smart Rack
                           -- industrial versions designed for harsh
                              environments are available with features such as
                              extra line protection, metallic enclosures,
                              extended temperature ranges and high humidity
                              protection

MD 2000 RANGE              A multi-rate MSDSL modem that has the ability to
                           manually or automatically adjust line transmission
                           speed to provide the optimum performance for a
                           particular pair of copper wires.
                           -- operates over a single twisted pair of copper
                              wires, which allows telecommunications companies
                              to take advantage of the large installed base of
                              copper twisted pairs that has been deployed around
                              the world over many years and upon private copper
                              wire infrastructures that exist for networking
                              purposes in locations such as universities,
                              hospitals, military bases, power plants and
                              industrial complexes
                           -- allows data transmission over a single copper pair
                              at E-1 speed over a distance of up to 8.0 miles
                           -- available as both a standalone unit and as a
                              rack-mountable card

CB 2000 RANGE              The primary function of this unit is to split one or
                           two primary rate interface links, or PRIs, into
                           multiple basic rate interfaces, or BRIs.
                           -- this allows substantial cost savings by allowing
                              more effective use of available ISDN resources
                              without the limitations of conventional voice PBX
                           -- this allows for migration from BRI to PRI when the
                              number of ports needs to be increased while
                              preserving the user's investment in existing
                              BRI-based terminal equipment
                           -- this unit can be used in a wide variety of
                              situations where multiple BRI and PRI access is
                              required, such as:
                              -  videoconferencing, where the unit can be used
                                 to aggregate bandwidth of multiple BRI lines to
                                 provide the necessary bandwidth, and to connect
                                 the videoconferencing system to the ISDN
                                 network through a PRI access while still
                                 providing connectivity to other ISDN devices,
                                 or to connect two or more videoconferencing
                                 systems together within the same building or
                                 campus without going through the ISDN public
                                 network
                              -  ISDN network simulation, which can be used in
                                 places such as showrooms, exhibition and
                                 technical training centers to eliminate the
                                 need to have access to, and pay for access to,
                                 the ISDN public network for telephone or data
                                 calls
                              -  remote access servers, which usually use
                                 multiple BRIs, often need a method for
                                 migration from multiple BRIs to a single PRI as
                                 traffic and the number of users expands

                                       13
<PAGE>
     PRODUCT NAME                  KEY USES, FEATURES AND FUNCTIONS

ISDN TERMINAL ADAPTERS     These devices are the ISDN equivalent of a modem.
                           -- these devices connect non-ISDN devices to the ISDN
                              via a network termination unit, or NT1, which
                              converts the "U" interface from the telephone
                              company into a 4-wire S/T interface
                           -- allow users to access the data rates of the
                              digital network -- available as both a standalone
                              unit and as a rack-mountable card

TERMINAL SERVERS           This range of products is used to provide the
                           connection of asynchronous applications to the TCP/IP
                           Ethernet network. These can include point-of-sale
                           terminals, industrial machines, point-to-point RS232
                           connections and the visual display units/keyboards.

DROP AND INSERT            These products provide users the ability to manage
MULTIPLEXERS               the consolidation of data and/or voice information
                           over a variety of TDM networks such as E-1, T-1, E-3,
                           T-3 and STM (SDH).
                           -- easily configured via management software
                           -- remotely manageable over IP or dedicated time slot

ROUTERS                    A router provides connection between the primary rate
                           ISDN and local area networks.
                           -- dynamically route incoming and outgoing data
                              packets to the appropriate destination
                           -- available as both a standalone unit and as a
                              rack-mountable card to supplement the functions of
                              our Smart Rack system

         Smart Rack
         ----------

         Our modem cards and our ISDN terminal adapter cards generally are
available in standalone versions or in versions that can be mounted in our Smart
Rack, our universal card cage that provides remote management through a
menu-driven user interface. Each part of the framework, or chassis, of the Smart
Rack has slots to house up to 16 cards (or up to 4 cards in a smaller
installation) plus one optional management card. Each slot can be used to insert
any member of our transmission products family, such as analog modems, ISDN
terminal adapters, ISDN digital modems and high-speed MSDSL modems. The optional
Simple Network Management Protocol/Internet Protocol, or SNMP/IP, management
card that can be inserted into each chassis can be used to configure any card in
the chassis and can provide additional features, including alarm reporting,
tracking of configurations, running of diagnostic routines and generation of
statistics. Up to eight chassis can be linked together to form a fully-managed
node with 128 slots. Our Smart Rack arrangement allows each chassis to be used
to its full capacity while reducing floor space needed to house complex systems.

    COMMUNICATIONS TEST INSTRUMENTS

         Our primary field test instruments, built by our CXR Telcom subsidiary
in Fremont, California, are our CXR HALCYON 700 series of products, which we
believe provide performance and value in integrated installation, maintenance
and testing of communications services. These test instruments are modular,
rugged, lightweight, hand-held products used predominantly by telephone and
Internet companies to pre-qualify facilities for services, verify proper
operation of newly installed services and diagnose problems. Original equipment
manufacturers, or OEMs, also use service verification equipment to test
simulated networks during equipment development and to verify the successful
production of equipment.

                                       14
<PAGE>

         The unique modular nature of our CXR HALCYON 700 series test equipment
provides an easy configuration and upgrade path for testing of the specific
services offered by the various national and international service providers.
Key performance enhancements to this product family address the trend toward
conversion of analog service installations to high-speed digital access lines.
Some of these key features include:

         o    ability to conduct the 23-tone test, which is an automated single
              key-stroke test that performs the equivalent of over 12 individual
              test sequences;
         o    load-coil analysis, which identifies the presence of voice coils
              that prevent high-speed digital access; and
         o    voice analysis and testing of individual T-1 channels.

         We believe that these enhancements will allow further penetration of
CXR HALCYON 700 series test equipment into the telecommunications services
market. Some of the key test equipment products we offer are described below:

       PRODUCT NAME                        KEY USES, FEATURES AND FUNCTIONS

                                   BASE UNITS
                                   ----------

         HALCYON 704A-400  -- handheld transmission and signaling wideband test
         SERIES               set for ISDN, HDSL, DDS and ADSL facility testing
                           -- optimized for use in installation and maintenance
                              of analog voice and data services
                           -- provides users with single-button test execution,
                              which allows quick circuit diagnosis and repair
                              without extensive training

         HALCYON 756A      -- handheld integrated test set for installation and
                              maintenance of digital data circuits, including
                              DDS, Switched 56K, 2-wire Datapath, ISDN, T-1 and
                              FT-1

                           -- provides users with intuitive user interface
                              allowing quick circuit diagnosis and repair
                              without extensive training

         HALCYON 764A      -- handheld integrated test set for installation and
                              maintenance of T-1 facilities
                           -- can be used for T-1 and FT-1 access and testing
                           -- T-1 monitor testing occurs automatically upon
                              plugging in the test set and returns information;
                              test pattern; customer data detected and errors,
                              if any.
                           -- T-1 BERT testing can be accomplished in automatic
                              mode, which automatically frames and detects
                              pattern if present and displays an all clear
                              message or the type and count of errors, or in the
                              manual mode, which allows the technician to do a
                              simple set up where the technician dictates the
                              variety of test patterns and measurements used

                         TYPICAL OPTIONAL CONFIGURATIONS
                         -------------------------------

         HALCYON 704A-NTS1 -- 704A universal data test set with 1.5 MHz TIMS,
                              full signaling, caller ID and full 4-wire loop DDS
                              test functions, as well as DDS/DS0 test functions
                              and T-1, DS1, DS0 and FT-1 test package
                           -- T-1 test package includes reference receiver for
                              T-1 level, frequency and slip measurements

         HALCYON 704A-NTS2 -- universal data test set
                           -- handheld wideband test set for installation and
                              maintenance of analog voice and data and digital
                              data circuits including Switched 56K
                           -- expands upon the features of the 704A-400 to add
                              DDS BRI/ISDN and DS1/T-1/FT-1 test functions

                                       15
<PAGE>
       PRODUCT NAME                        KEY USES, FEATURES AND FUNCTIONS

         HALCYON 704A-PKG2 -- 704A universal data test set with 1.5 MHz TIMS,
                              full signaling, full 4-wire loop DDS test
                              functions, as well as DDS/DS0 test functions for
                              DS0-DP and OCU-DP DS0 and sub-rate testing

         HALCYON 756A-PG   -- handheld integrated test set designed for the
                              testing and performance monitoring of digital data
                              communication links for "protective relaying
                              backbone communications" for power utility
                              companies
                           -- provides users with a test set which closely
                              emulates the live operating conditions of the data
                              links while providing an intuitive user interface
                              allowing quick circuit diagnosis and repair
                              without extensive training

                          CENTRAL OFFICE TEST EQUIPMENT
                          -----------------------------


         T-COM 440B T-ACE  This is a high-performance integrated digital
                           communications test instrument.
                           -- used to monitor and assure service reliability of
                              high-density digital test nodes and switch centers
                           -- provides comprehensive digital test measurements
                              ranging from STS/SONET, DS3, through T-1, FT-1,
                              DSO and DDS services

         MICROCEL 2001A    These portable units, used in conduction with laptop
                           computers, are multi-layer asynchronous transfer
                           mode, or ATM, testers, analyzers and simulators.
                           -- basic unit has a 4-port capability that can be
                              independently configured and provides full support
                              of testing, generation and monitoring of ATM
                              traffic
                           -- these units address the requirement for a small,
                              portable unit that can provide monitoring and
                              statistical and user analyses at all three ATM
                              layers, as well as simulate or generate traffic
                              patterns defined by the user

CUSTOMERS

    ELECTRONIC COMPONENTS

         We sell our components primarily to OEMs in the electronics industry,
including manufacturers of aerospace and defense systems, industrial instruments
and test equipment. During 2003, our top five electronic components customers in
terms of revenues were the BAE Systems companies, MBDA (U.K.) Ltd., Thales
Defense Ltd., Essential Components, Inc. and Raytheon Systems. Sales to the BAE
Systems companies represented approximately 12.5% percent of our total net sales
revenues during 2003. No other customer represented 10% or more of our total
revenues net sales during 2003. Currently we are experiencing an increase in our
electronic components business which we believe to be due primarily to the war
on terrorism and a general expansion of defense-related business in Europe, the
United States and Asia.

    COMMUNICATIONS EQUIPMENT

         We market our network access and transmission products and
communications test instruments primarily to public, private and corporate
telecommunications service providers and end users. Typically, communications
service providers use a variety of network equipment and software to originate,
transport and terminate communications sessions. Communications service
providers rely on our products and services as elements of the communications
infrastructure and to configure, test and manage network elements and the
traffic that runs across them. Also, our products help to ensure smooth
operation of the network and increase the reliability of services to customers.

                                       16
<PAGE>

         The major communications service providers to whom we market our
telecommunications test instruments and network access and transmission products
and services include inter-exchange carriers, incumbent local exchange carriers,
competitive local exchange carriers, Internet service providers, integrated
communications providers, cable service providers, international post, telephone
and telegraph companies, banks, brokerage firms, government agencies and other
service providers. During 2003, our top five communications test instruments and
network access and transmission products customers in terms of our net sales
were Verizon, Siemens, SBC, Coris and Carte, SA. None of our communications
equipment customers represented 10% or more of our revenues during 2003.

         Because we currently derive a significant portion of our revenues from
sales to Regional Bell Operating Companies, or RBOCs, and other
telecommunications service providers, we have experienced and will continue to
experience for the foreseeable future an impact on our quarterly operating
results due to the budgeting cycles of the RBOCs. RBOCs generally obtain
approval for their annual budgets during the first quarter of each calendar
year. If an RBOC's annual budget is not approved early in the calendar year or
is insufficient to cover its desired purchases for the entire calendar year, we
are unable to sell products to the RBOC during the period of the delay or
shortfall.

         Due to a general downturn in business activity in the public carrier
telecommunications capital equipment market during 2002 and 2003, all RBOCs
reduced their capital expenditures, which negatively impacted our 2002 and 2003
sales of test instruments. Our observance was that capital expenditure levels of
RBOCs and other telecommunications carriers remained at reduced levels in 2003.
However, we have reduced costs and improved our business operations so that our
current monthly break-even sales requirement is approximately 50% of our
requirement in 2002. This, coupled with our observed signs of increased buying
activities of the RBOCs in the fourth quarter of 2003, provide us with a
cautiously optimistic view of our 2004 test equipment sales.

         Communications equipment manufacturers design, develop, install and
maintain voice, data and video communications equipment. Network equipment
manufacturers such as Cisco and Nortel rely on our test equipment products to
verify the proper functioning of their products during final assembly and
testing. Increasingly, because communications service providers are choosing to
outsource installation and maintenance functions to the equipment manufacturers
themselves, equipment manufacturers are using our instruments, systems and
software to assess the performance of their products during installation and
maintenance of a customer's network.

         The continuing general downturn in business activity in the
telecommunications market during 2003 also seriously impacted communications
equipment manufacturers, particularly following the collapse of many
Internet-based companies. As a result, sales of our telecommunications central
office equipment to telecommunications carriers and communications equipment
manufacturers have been seriously impacted.

SALES, MARKETING AND CUSTOMER SUPPORT

     ELECTRONIC COMPONENTS

         We market and sell our electronic components through XET Corporation's
Digitran Division, based in Rancho Cucamonga, California, XCEL Corporation Ltd.,
a wholly-owned subsidiary of XET Corporation based in England, XPS, a
wholly-owned subsidiary of XCEL Corporation Ltd. based in England, and XCEL
Japan, Ltd., a wholly-owned subsidiary of XET Corporation based in Japan. In
some European countries and the Pacific Rim, these products are sold through a
combination of direct sales and through third-party distributors.

                                       17
<PAGE>

         We sell our electronic components primarily to OEMs in the electronics
industry, including manufacturers of aerospace and military systems,
communications equipment and industrial instruments. Our efforts to market our
electronic components generally are limited in scope since we rely on sales to a
broad base of historical customers with whom we have long-term business
dealings.

         XCEL Japan, Ltd. resells digital and rotary switch and keypad products
of the Digitran Division and some third-party-sourced components primarily into
Japan and also into other highly industrialized Asian countries. Other marketing
of our electronic components is primarily through referrals from our existing
customers, with sales either direct or via a small number of selected
representatives.

         We rely on long-term orders and repeat business from our existing
customers. We also approach our existing customers and their competitors to
discuss opportunities for us to provide them with additional types of switches
they may need. Also, the Digitran Division's history spans over 40 years in the
electronic components industry and major OEMs have designed many of our switches
and subsystem assemblies into their product specifications. These factors have
frequently resulted in customers seeking us out to manufacture for them unique
subsystem assemblies as well as special variations of our standard digital
switches.

    COMMUNICATIONS EQUIPMENT

         Our sales and marketing staff consists primarily of engineers and
technical professionals. Our staff undergo extensive training and ongoing
professional development and education. We believe that the skill level of our
sales and marketing staff has been instrumental in building longstanding
customer relationships. In addition, our frequent dialogue with our customers
provides us with valuable input on systems and features they desire in future
products. We believe that our consultative sales approach and our product and
market knowledge differentiate our sales forces from those of our competitors.

         Our local sales forces are highly knowledgeable about their respective
markets, customer operations and strategies and regulatory environments. In
addition, our representatives' familiarity with local languages and customs
enables them to build close relationships with our customers.

         We provide repair and training services to enable our customers to
improve performance of their networks. We also offer on-line support services to
supplement our on-site application engineering support. Customers can also
access information regarding our products remotely through our domestic,
European and Japanese technical assistance centers.

         We sell many of our communications test instruments and network access
and transmission products to large telecommunications service providers. These
prospective customers generally commit significant resources to an evaluation of
our and our competitors' products and require each vendor to expend substantial
time, effort and money educating them about the value of the vendor's solutions.
Consequently, sales to this type of customer generally require an extensive
sales effort throughout the prospective customer's organization and final
approval by an executive officer or other senior level employee. The result is
lengthy sales and approval cycles, which make sales forecasting difficult. In
addition, even after a large telecommunications service provider has approved
our product for purchase, their future purchases are uncertain because while we
generally enter into long-term supply agreements with those parties, these
agreements do not require specific levels of purchases. Delays associated with
potential customers' internal approval and contracting procedures, procurement
practices, testing and acceptance processes are common and may cause potential
sales to be delayed or foregone. As a result of these and related factors, the
sales cycle of new products for large customers typically ranges from six to
twelve months or more.

                                       18
<PAGE>

COMPETITION

    ELECTRONIC COMPONENTS

         The market for our components is highly fragmented and composed of a
diverse group of OEMs, including Power One, Interpoint/Grenson, Martec and Celab
Ltd. for power supplies and Esterline (Janco), Greyhill, Inc., Omron
Electronics, Transico Inc. and C&K Components Inc. for digital switches. We
believe that the principal competitive factors affecting our components business
include:

         o    capability and quality of product offerings;
         o    status as qualified products; and
         o    compliance with government and industry standards.

         We have made substantial investments in machinery and equipment
tooling. In addition, XET's Digitran Division's history spans over 40 years in
the electronic components industry, and major OEMs have designed many of our
digital switches into their product specifications. We believe that these
factors have acted as barriers to entry for other potential competitors, making
us a sole source supplier for approximately 30% to 50% of the digital switches
that we sell and causing some customers to seek us out to manufacture for them
unique as well as our standard digital switches.

         Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.

    COMMUNICATIONS EQUIPMENT

         The markets for our network access and transmission products and
communications test instruments and services are fragmented and intensely
competitive, both inside and outside the United States, and are subject to rapid
technological change, evolving industry standards and regulatory developments.
We believe that the principal competitive factors affecting our network access
and transmission products and communications test instruments business include:

         o    quality of product offerings;
         o    adaptability to evolving technologies and standards;
         o    ability to address and adapt to individual customer requirements;
         o    price and financing terms;
         o    strength of distribution channels;
         o    ease of installation, integration and use of products;
         o    system reliability and performance; and
         o    compliance with government and industry standards.

         Our principal competitors for our network access and transmission
products and communications test instruments include RAD, Paradyne, Patton
Electronics Corporation, Digital Engineering, Ltd., GDC and Telenetics
Corporation for network access and transmission products and TTC Corporation (a
subsidiary of Dynatech Corporation), Ameritech Corporation, Fluke, Sunrise
Telecom, Inc. and Electrodata, Inc. for test instruments.

         The Digitran Division's history spans over 40 years in the electronic
components industry. We believe this factor aids us in establishing and
maintaining both distribution channels and customers for our products.


                                       19
<PAGE>

         The design of many of our data transmission products enables us to
offer numerous different product combinations to our customers and to serve both
central site data communications needs and remote access and transmission sites
on both the enterprise-wide and single location level. We believe that this
design flexibility helps us to excel at many of the above competitive factors by
enabling us to offer quality products that meet and are adaptable to evolving
customer requirements, technologies and government and industry standards.

         We currently derive a significant portion of our revenues from sales to
RBOCs. We believe we derive a competitive advantage from efforts we expended to
establish many of our communications equipment products as approved products for
all of the RBOCs and for other key customers in the United States and abroad.
Our products' approved status facilitates the ability of our customers to order
additional products from us as their needs arise without the long delays that
might otherwise be needed to obtain the approval of our customers' upper
management or governing body prior to each purchase.

         Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

         Our network access and transmission communications test instruments
generally are assembled from outsourced components, with final assembly,
configuration and quality testing performed in house.

         Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead-times for delivery often are
available. Typically, our electronic components segment produces products in
one- to 300-piece batches, with a ten- to thirty-week lead-time. The lead-time
is predominantly to source sub-component piece parts such as electronic
components, mechanical components and services. Typical build time is six to
eight weeks from receipt of external components.

         We operate six manufacturing and assembly facilities worldwide. Five of
these facilities are certified as ISO 9001- or 9002-compliant. We have
consolidated all of our network access and transmission manufacturing for our
North American and European markets at our French manufacturing facility at
CXR-AJ. We manufacture all of our test equipment products at the Fremont,
California facility of CXR Telcom. We manufacture all of our digital and rotary
switches in our Rancho Cucamonga, California facility. We manufacture our
electronic power supplies in Ashford, Kent, England.

         The purchased components we use to build our products are generally
available from a number of suppliers. We rely on a number of limited-source
suppliers for specific components and parts. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
components to ensure an adequate supply, particularly for products that require
lead-times of up to nine months to manufacture. If we were required to locate
new suppliers or additional sources of supply, we could experience a disruption
in our operations or incur additional costs in procuring required materials.

                                       20
<PAGE>

         We intend to increase the use of outsource manufacturing for our
communications equipment products. We believe that outsourcing will lower our
manufacturing costs, in particular our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.

PRODUCT DEVELOPMENT AND ENGINEERING

         We believe that our continued success depends on our ability to
anticipate and respond to changes in the electronics hardware industry and
anticipate and satisfy our customers' preferences and requirements. We
continually review and evaluate technological and regulatory changes affecting
the electronics hardware industry and seek to offer products and capabilities
that solve customers' operational challenges and improve their efficiency.

         For the years ended December 31, 2003, 2002 and 2001, our engineering
and product development costs were approximately $950,000, $1,020,00 and
$1,080,000, respectively. We closed our St. Charles, Illinois engineering office
in August 2001 and terminated the four engineers who worked at that facility. We
hired an engineering director at the Fremont, California facility in December
2001 and developed engineering capability at that facility primarily through the
use of services provided by outside contractors.

         Our product development costs during the past three years were related
to development of new communications test equipment and voice, data and video
transmission equipment and development of a new line of rotary switches at our
Digitran facility. We expect to continue incurring engineering costs applicable
to the development of rotary switches during 2004. Current research expenditures
in the communications equipment segment are directed principally toward
enhancements to the current test instrument product line and the expansion of
our range of network access and transmission products. These expenditures are
intended to improve market share and gross profit margins, although we cannot
assure you that we will achieve these improvements.

         We strive to take advantage of the latest computer-aided engineering
and engineering design automation workstation tools to design, simulate and test
advanced product features or product enhancements. Our use of these tools helps
us to speed product development while maintaining high standards of quality and
reliability for our products. Our use of these tools also allows us to
efficiently offer custom designs for OEM customers whose needs require the
integration of our electronic components with their own products.

INTELLECTUAL PROPERTY

         We regard our software, hardware and manufacturing processes as
proprietary and rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. We have filed patent applications, and intend to file
additional patent applications in the future, for various products with the
United States Patent and Trademark Office. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford some limited protection. The laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. Our research and development and manufacturing process typically
involves the use and development of a variety of forms of intellectual property
and proprietary technology. In addition, we incorporate technology and software
that we license from third party sources into our products. These licenses
generally involve a one-time fee and no time limit. We believe that alternative
technologies for this licensed technology are available both domestically and
internationally.


                                       21
<PAGE>

         We may receive in the future notices from holders of patents that raise
issues as to possible infringement by our products. As the number of test
equipment products and transmission instruments increases and the functionality
of these products further overlaps, we believe that we may become subject to
allegations of infringement given the nature of the telecommunications and
information technology industries and the high incidence of these kinds of
claims. Questions of infringement and the validity of patents in the fields of
telecommunications and information technology involve highly technical and
subjective analyses. These kinds of proceedings are time consuming and expensive
to defend or resolve, result in substantial diversion of management resources,
cause product shipment delays or could force us to enter into royalty or license
agreements rather than dispute the merits of the proceeding initiated against
us.

GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the United States Federal Communications Commission, or
FCC, and Underwriters Laboratories as well as industry standards established by
Telcordia Technologies, Inc., formerly Bellcore, and the American National
Standards Institute. Internationally, our products must comply with standards
established by the European Committee for Electrotechnical Standardization, the
European Committee for Standardization, the European Telecommunications
Standards Institute and telecommunications authorities in various countries, as
well as with recommendations of the International Telecommunications Union. The
failure of our products to comply, or delays in compliance, with the various
existing and evolving standards could negatively impact our ability to sell our
products.

         Our product lines are subject to statutes governing safety and
environmental protection. We believe that we are in substantial compliance with
these statutes and are not aware of any proposed or pending safety or
environmental rule or regulation that, if adopted, would have a material impact
on our business or financial condition.

EMPLOYEES

         As of February 29, 2004, we employed a total of 181 persons in our
various divisions and subsidiaries. None of our employees are represented by
labor unions, and there have not been any work stoppages at any of our
facilities. We believe that our relationship with our employees is good.

ITEM 2.  PROPERTIES.

         As of March 12, 2004, we leased or owned approximately 94,000 square
feet of administrative, production, storage and shipping space. All of this
space was leased other than the Abondant, France facility.
<TABLE>
                                                                                                   FUNCTION /
         BUSINESS UNIT                                     LOCATION                          LEASE EXPIRATION DATE
         -------------                                     --------                          ---------------------
<S>                                              <C>
MicroTel International Inc.                      Rancho Cucamonga, California           Administrative;
(corporate headquarters)                                                                Expires October 2005

XET Corporation/Digitran                         Rancho Cucamonga, California           Manufacturing;
(electronic components)                                                                 Expires November 2004
                                                 Monrovia, California                   Expires February 2005
                                                                                        Administrative/

XCEL Power Systems, Ltd.                         Ashford, Kent, United Kingdom          Manufacturing;
 and XCEL Corporation Ltd.                                                              Expires March 2013
 (electronic components)


                                       22
<PAGE>
                                                                                                   FUNCTION /
         BUSINESS UNIT                                     LOCATION                          LEASE EXPIRATION DATE
         -------------                                     --------                          ---------------------

Belix Wound Components Ltd.                      Newtown, Wales, United Kingdom         Manufacturing;
(electronic components)                                                                 Expires December 2008

XCEL Japan, Ltd. Higashi-Gotanda                 Tokyo, Japan                           Sales;
(electronic components)                                                                 Expires December 2005

CXR-AJ                                           Paris, France                          Administration/Sales;
(network access and transmission products)                                              Expires April 2007

CXR-AJ                                           Abondant, France                       Manufacturing/Engineering;
(network access and transmission products)                                              Facility is owned

CXR Telcom                                       Fremont, California                    Administrative/Engineering/
(network access and transmission products,                                              Manufacturing;
communications test instruments)                                                        Expires July 2004
</TABLE>

         On November 1, 2002, CXR Telcom relocated from its Fremont facility to
another facility in Fremont that is smaller and less expensive than the former
facility. This new lease expired on July 31, 2003 and was extended for one year
to July 31, 2004.

         The lease for the Ashford, Kent, United Kingdom facility is a
fifteen-year lease that expires in March 2013, subject to the rights of the
landlord or us to terminate the lease after ten years.

         We believe the listed facilities are adequate for our current business
operations.

ITEM 3.  LEGAL PROCEEDINGS.

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

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

         None.


                                       23
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES.

         Our common stock has been traded on the OTC Bulletin Board under the
symbol "MCTL" since May 13, 1999. The table below shows for each fiscal quarter
indicated the high and low bid prices per share of our common stock. This
information has been obtained from Pink Sheets LLC. The prices shown reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
                                                                 PRICE RANGE
                                                                 -----------
                                                                LOW       HIGH
                                                                ---       ----
2002:
First Quarter (January 1 - March 31)........................   $0.28      $0.37
Second Quarter (April 1 - June 30)..........................    0.15       0.32
Third Quarter (July 1 - September 30).......................    0.11       0.22
Fourth Quarter (October 1 - December 31)....................    0.16       0.25

2003:
First Quarter ..............................................   $0.15      $0.20
Second Quarter..............................................    0.20       0.37
Third Quarter...............................................    0.28       1.00
Fourth Quarter..............................................    0.85       1.37

         As of March 12, 2004, we had 23,481,866 shares of common stock
outstanding held of record by approximately 3,600 stockholders, and the closing
bid price of our common stock on the OTC Bulletin Board was $0.99.

         We have not paid dividends on our common stock to date. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. We currently intend to retain future earnings to
fund the development and growth of our business and, therefore, do not
anticipate paying cash dividends on our common stock within the foreseeable
future. Any future payment of dividends on our common stock will be determined
by our board of directors and will depend on our financial condition, results of
operations, contractual obligations and other factors deemed relevant by our
board of directors.

         We issued an aggregate of 14,663 shares of our common stock in November
and December 2003 in connection with the exercise of outstanding warrants.

         Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide. In each case,
appropriate investment representations were obtained, stock certificates were
issued with restricted stock legends, and stop transfer orders were placed with
our transfer agent.


                                       24
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The selected consolidated financial data presented below for each of
the five years in the period ended December 31, 2003 have been derived from
audited financial statements which for the most recent three years appear
elsewhere herein. The data presented below should be read in conjunction with
such financial statements, including the related notes thereto and the other
information included herein. The historical results are not necessarily
indicative of results to be expected for any future periods.
<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS AND              ---------------------------------------------------------
COMPREHENSIVE INCOME DATA:                               2003         2002        2001       2000         1999
                                                       ---------   ---------   ---------   ---------   ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>         <C>         <C>         <C>         <C>
Net sales ..........................................   $ 25,519    $ 22,664    $ 27,423    $ 28,050    $ 25,913
Cost of sales ......................................     14,835      14,147      15,456      15,529      17,066
                                                       ---------   ---------   ---------   ---------   ---------
Gross profit .......................................     10,684       8,517      11,967      12,521       8,847
Selling, general and administrative expenses .......      7,812       7,731      10,129       9,827      10,584
Engineering and product development expenses .......        951       1,015       1,076       1,167       1,841
                                                       ---------   ---------   ---------   ---------   ---------
Income (loss) from operations ......................      1,921        (229)        762       1,527      (3,578)
Total other income (expense) .......................       (474)       (361)       (414)        207        (492)
                                                       ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations
   before income taxes .............................      1,447        (590)        348       1,734      (4,070)
Income tax (benefit) expense .......................        286         (20)         77          31         128
                                                       ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations ...........      1,161        (570)        271       1,703      (4,198)
Discontinued operations:
   Loss from operations of discontinued segment ....         --          --          56        (212)       (847)
   Gain (loss) on disposal of discontinued
    segment including provision for phase
    out period of $122 in 2000 .....................         --          --          --        (487)        449
                                                       ---------   ---------   ---------   ---------   ---------
Net income (loss) ..................................      1,161        (570)        327       1,004      (4,596)
Foreign currency translation adjustment ............        705         446        (312)       (505)       (325)
                                                       ---------   ---------   ---------   ---------   ---------
Total comprehensive income (loss) ..................   $  1,866    $   (124)   $     15    $    499    $ (4,921)
                                                       =========   =========   =========   =========   =========
Basic earnings (loss) per share from
   continuing operations ...........................   $   0.05    $  (0.03)   $   0.01    $   0.09    $  (0.26)
                                                       =========   =========   =========   =========   =========
Diluted earnings (loss) per share from
   continuing operations ...........................   $   0.05    $  (0.03)   $   0.01    $   0.07    $  (0.26)
                                                       =========   =========   =========   =========   =========
Basic earnings (loss) per share from
   discontinued operations .........................   $     --    $     --    $     --    $  (0.04)   $  (0.02)
                                                       =========   =========   =========   =========   =========
Diluted earnings (loss) per share from
   discontinued operations .........................   $     --    $     --    $     --    $  (0.03)   $  (0.02)
                                                       =========   =========   =========   =========   =========
Basic earnings (loss) per share ....................   $   0.05    $  (0.03)   $   0.02    $   0.05    $  (0.28)
                                                       =========   =========   =========   =========   =========
Diluted earnings (loss) per share ..................   $   0.05    $  (0.03)   $   0.01    $   0.04    $  (0.28)
                                                       =========   =========   =========   =========   =========
Weighted average shares outstanding, basic .........     22,567      21,208      20,594      19,504      16,638
Weighted average shares outstanding, diluted .......     23,811      21,208      23,782      23,027      16,638

</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>

                                                         YEARS ENDED DECEMBER 31,
                                              ------------------------------------------------
                                                2003      2002      2001      2000      1999
                                              --------  --------  --------  --------  --------
BALANCE SHEET DATA:                                            (IN THOUSANDS)
<S>                                           <C>       <C>       <C>       <C>       <C>
Cash and cash equivalents .................   $ 1,174   $   254   $   604   $   756   $   480
Working capital ...........................     5,696     3,961     3,686     2,780     1,080
Total assets ..............................    17,169    16,786    17,688    19,484    16,489
Long-term debt, net of current portion ....       819       927       763       282       143
Stockholders' equity ......................     7,916     5,732     5,862     5,807     3,801
Convertible redeemable preferred stock ....        --       282       270       259       588
</TABLE>

         No cash dividends on our common stock were declared during any of the
periods presented above. In October 2000, we decided to discontinue our circuits
segment's operations. Accordingly, all current and prior financial information
related to the circuits segment operations have been presented as discontinued
operations in historical financial data above.

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

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

         o    the projected growth or contraction in the electronic components
              and communications equipment markets in which we operate;
         o    our business strategy for expanding, maintaining or contracting
              our presence in these markets;
         o    anticipated trends in our financial condition and results of
              operations; and
         o    our ability to distinguish ourselves from our current and future
              competitors.

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

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

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

                                       26
<PAGE>

OVERVIEW

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

         o    Electronic Components

              --   digital and rotary switches

              --   electronic power supplies

              --   subsystem assemblies

         o    Communications Equipment

              --   network access and transmission products

              --   communications test instruments

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

         Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 63.4%,
59.1% and 46.1% of our total net sales during 2003, 2002 and 2001, respectively.
Sales of communications equipment and related services, primarily to
telecommunications equipment customers, were 36.6%, 40.9% and 53.9% of our total
net sales during 2003, 2002 and 2001, respectively.

         In 2003, our communication equipment segment sales increased slightly
from the historically low level experienced in 2002. We experienced a 37.2%
decline in our communications equipment segment sales during 2002 as compared to
2001. We believe this decline primarily was due to a general business downturn
experienced by many of our telecommunications customers, the disruption caused
by the French political elections in 2002 and our decision to discontinue the
resale in Europe of test equipment not manufactured by us. As a result of the
general business downturn, we experienced significant reductions in sales and
gross profit as well as changes in our product mix. Consequently, we shifted our
overall focus toward growing our electronic components business. However, we
also continued working to improve the growth and performance of our
communications equipment business, particularly customer premises network access
and transmission products.

         During 2003, our electronic components segment improved its sales and
profits as compared to 2002 by 20.7% and 46.4%, respectively. Our communications
equipment segment reported a pretax profit in 2003 as compared to a pretax loss
in 2002. This improvement was $1,331,000 and was related to improved performance
at both CXR Telcom and CXR-AJ. CXR-AJ's 11.7% increase in sales was offset by a
20.3% decline in sales at CXR Telcom in Fremont, California. CXR Telcom mainly
sells to telecommunications carrier companies in the United States but also has
begun marketing and selling to non-telecommunications customers such as electric
utilities, construction contractors and government agencies. During the first
half of 2003, we reduced costs at CXR Telcom by reducing its work force and
increasing our sources of test equipment components from Asian manufacturers
that produce components for lower prices than we previously paid to our former
suppliers.

                                       27
<PAGE>

         We have reduced costs in our communications equipment segment and
lowered the breakeven point both in our United States and France operations
through various cost-cutting methods, such as using Asian contract
manufacturers, reducing facility rent expense and downsizing our administrative
office in Paris, France. These cost-cutting efforts were a major factor in
restoring our communication equipment segment to profitability in 2003. However,
we cannot predict if the recent improvement in telecom sales indicates the end
of the severity of the telecommunications market downturn or the extent to which
the downturn may continue to negatively affect our ability to sell our products
and services to customers in the telecommunications industry. A further
reduction in sales would reduce our accounts receivable balances, which in turn
would adversely affect our financial position by reducing cash availability
under our lines of credit.

CRITICAL ACCOUNTING POLICIES

         Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this report. We believe
our most critical accounting policies include inventory valuation, foreign
currency translation and goodwill impairment.

     INVENTORY VALUATION

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

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

     FOREIGN CURRENCY TRANSLATION

         We have foreign subsidiaries that together accounted for 68.8% of our
net revenues, 70.6% of our assets and 70.3% of our total liabilities as of and
for the year ended December 31, 2003. In preparing our consolidated financial
statements, we are required to translate the financial statements of our foreign
subsidiaries from the currencies in which they keep their accounting records
into United States dollars. This process results in exchange gains and losses
which, under relevant accounting guidance, are either included within our
statement of operations or as a separate part of our net equity under the
caption "cumulative translation adjustment."


                                       28
<PAGE>

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

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

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

         Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries to be each
subsidiary's local currency. Accordingly we had a cumulative translation gain of
$108,000 that was included as part of accumulated other comprehensive gain
within our balance sheet at December 31, 2003. During 2003, we included
translation adjustments of a gain of approximately $705,000 under accumulated
other comprehensive income and loss.

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

     GOODWILL IMPAIRMENT

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

         In assessing potential impairment of goodwill, we consider these
factors as well as forecasted financial performance of the acquired businesses.
If forecasts are not met, we may have to record additional impairment charges
not previously recognized. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of those respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets that were not previously
recorded. Explain what will happen if you have to record impairment. If that
were the case, we would have to record an expense in order to reduce the
carrying value of our goodwill. On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
or SFAS No. 142, and were required to analyze our goodwill for impairment issues
by June 30, 2002, and then at least annually after that date. At December 31,
2003, the reported goodwill totals $2,447,000 (net of accumulated amortization
of $1,070,000). However, during 2003, we did not record any impairment losses
related to goodwill and other intangible assets.


                                       29
<PAGE>

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, selected
statements of operations data expressed as a percentage of total net sales.

                                                       YEARS ENDED DECEMBER 31,
                                                     ---------------------------
                                                      2003      2002      2001
                                                     -------   -------   -------
Net sales .......................................     100.0%    100.0%    100.0%
Cost of sales ...................................      58.1      62.4      56.4
                                                     -------   -------   -------
Gross profit ....................................      41.9      37.6      43.6
Selling, general and administrative expenses ....      30.6      34.1      36.9
Engineering and product development expenses ....       3.8       4.5       3.9
                                                     -------   -------   -------
Operating income (loss) .........................       7.5      (1.0)      2.8
Interest expense ................................      (1.6)     (1.9)     (1.4)
Other income (expense) ..........................      (0.2)      0.3      (0.1)
                                                     -------   -------   -------
Income (loss) from continuing operations
  before income taxes ...........................       5.7      (2.6)      1.3
Income tax expense (benefit) ....................       1.2      (0.1)      0.3
                                                     -------   -------   -------
Income (loss) from continuing operations ........       4.5      (2.5)      1.0
Income (loss) from discontinued operations ......        --        --       0.2
                                                     -------   -------   -------
Net income (loss) ...............................       4.5%     (2.5)%     1.2%
                                                     =======   =======   =======

     YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

         NET SALES. Net sales for 2003 increased by $2,855,000 (12.6%) to
$25,519,000 as compared to $22,664,000 for 2002.

         Net sales of our electronic components for 2003 increased by $2,778,000
(20.7%) to $16,168,000 as compared to $13,390,000 for 2002. Net sales of power
supplies by XPS for 2003 increased by $1,665,000 (23.5%) to $8,763,000 as
compared to $7,098,000 for 2002 due to an increase in the number of products
shipped under long-term programs. XPS also shipped $1,226,000 of electronic
subassemblies in 2003 as compared to $50,000 in 2002. However, we anticipate
that sales of power supplies in 2004 will decline from 2003 levels based on
expected timing of shipments. Sales of digital switches manufactured by our
Digitran Division for 2003 increased by $563,000 (11.9%) to $5,307,000 as
compared to $4,744,000 for 2002. The increase in sales of digital switches was
primarily a result of an increase in orders for spare parts that we believe was
mainly due to increased military activities. Sales of electronic subsystem
assemblies were $1,226,000 in 2003 as compared to $1,125,000 in 2002 due to an
increased volume of subsystem assemblies sold by XPS, which was offset by a
reduction in subsystem assembly sales by XET's Digitran Division due to the
completion of a major contract in 2002. XET's Digitran Division recently
introduced a new standard rotary switch and patent pending VLP(TM) and ELP(TM)
rotary switches that we expect will be additive to switch sales in 2004 and
beyond.

         Net sales of our communications equipment products and services for
2003 increased slightly by $77,000 (0.8%) to $9,351,000 as compared to
$9,274,000 for 2002. We improved sales of network access and transmission
equipment products by $740,000, which improvement was partially offset by a
$583,000 decline in sales of test equipment by CXR Telcom and CXR-AJ. We decided
to terminate the resale of test equipment by CXR-AJ in November 2000 and now
have only residual sales of these products in Europe. Network access and
transmission equipment net sales for 2003 increased by $740,000 (13.7%) to
$6,139,000 as compared to $5,399,000 for 2002. Test equipment net sales for 2003
decreased by $528,000 (18.3%) to $2,353,000 as compared to $2,881,000 for 2002.
The sales decrease resulted from a reduction in orders from telecommunication
customers in the United States, which we believe was primarily due to the weak
telecom market and the continuing effect of CXR-AJ's discontinuation of test
equipment resales.


                                       30
<PAGE>

         CXR-AJ produces all of our transmission products and network access
equipment. Total net sales by CXR-AJ, including both test equipment and
networking and transmission equipment, increased by $771,000 (13.2%) to
$6,626,000 as compared to $5,855,000 for 2002. This sales increase was achieved
even though we terminated our resale of test equipment business in Europe,
except for residual obligations, at the end of 2002.

         Net sales of our CXR HALCYON 704 series field test equipment increased
slightly by $37,000 (1.9%) to $1,994,000 as compared to $1,957,000 for 2002.
Although this sales level for our CXR HALCYON product line is historically low,
the fact that there was an increase for 2003 as compared to 2002 indicates, in
our opinion, that the telecommunication downturn may have bottomed out. In
addition, we have aggressively marketed to non-telecommunication customers, such
as government agencies, electric utilities and transportation agencies and this
has resulted in improved sales of our CXR HALCYON products to
non-telecommunications customers. Nevertheless, CXR Telecom's major customers
are the large U.S. telecommunication companies, and their capital budget
expenditures for CXR HALCYON equipment are still low in terms of our historical
experience.

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

         GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 41.9% for 2003 as compared to 37.6% for 2002. In dollar terms, total gross
profit increased by $2,167,000 (25.4%) to $10,683,000 as compared to $8,517,000
for 2002.

         Gross profit for our electronic components segment increased in dollar
terms by $1,434,000 (27.6%) to $6,637,000 as compared to $5,203,000 for 2002,
and increased as a percentage of related net sales to 41.1% for 2003 from 38.9%
for 2002. This increase primarily was the result of increases in the profit
margins of both digital switches and power supplies due to changes in product
mix for both switch and XPS's power supply products. Also, increased volume
helped increase gross margins of power supplies by reducing per unit costs.

         Gross profit for our communications equipment segment increased in
dollar terms by $733,000 (22.1%) to $4,046,000 as compared to $3,313,000 for
2002, and increased as a percentage of net sales to 43.3% for 2003 from 35.7%
for 2002. The increase in gross profit as a percentage of net sales primarily
was due to reduced costs. CXR Telcom and CXR-AJ increased their gross margins as
a percent of sales to 45.0% and 42.6% from 34.1% and 36.7%, respectively, due to
cost reductions and higher sales at CXR-AJ.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 2003 increased slightly by $81,000 (1.0%) to
$7,812,000 as compared to $7,731,000 for 2002. Selling, general and
administrative expenses decreased as a percentage of total net sales, to 30.6%
of net sales during 2003 from 34.1% of net sales during 2002. Selling expenses
remained static in 2003 as compared to 2002. General and administrative expenses
increased modestly by $77,000 or 1.5%.


                                       31
<PAGE>

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment and XET's Digitran Division.
These expenses decreased by $64,000 (6.3%) to $951,000 as compared to $1,015,000
for 2002, primarily because of cost reductions in the communications equipment
segment.

         OTHER INCOME (EXPENSE). Interest expense decreased by $25,000 (5.7%) to
$416,000 for 2003 as compared to $441,000 for 2002 generally due to lower
average debt balances at XPS and CXR-AJ. Other expense was $58,000 for 2003 as
compared to other income of $80,000 for 2002 primarily due to foreign currency
losses.

         INCOME TAX EXPENSE (BENEFIT). Income tax expense for 2003 was $286,000
as compared to an income tax benefit of $20,000 for 2002. The majority of the
increase related to the recording by XPS of a provision for U.K. income tax that
was required because XPS produced greater taxable income for 2003 than in 2002
and has consumed its net operating loss carryforwards.

         NET INCOME (LOSS). The net income for 2003 was $1,161,000 as compared
to the net loss of $570,000 for 2002, an improvement of $1,731,000. The largest
contributions to this positive change were the $1,099,000 and $856,000 increases
in operating income of XPS and CXR-AJ, respectively, due to increased sales of
XPS and increased sales and reduced costs at CXR-AJ. In addition, CXR Telcom
improved its operating income by $486,000 by reducing costs. We continue to
closely monitor costs throughout our operations and have reduced costs through
staffing reductions in our communications equipment operations in the United
States and France and through various other cost-cutting methods, such as using
contract manufacturers and reducing facility rent expense. These actions have
substantially reduced the sales volume required to produce profitability at both
CXR Telcom and CXR-AJ.

     YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     CONTINUING OPERATIONS

         NET SALES. Net sales for 2002 decreased by $4,759,000 (17.4%) to
$22,664,000 as compared to $27,423,000 for 2001.

         Net sales of our electronic components increased by $744,000 (5.9%) to
$13,390,000 for 2002 as compared to $12,646,000 for 2001. Sales of power
supplies by XPS increased by $1,616,000 (29.5%) to $7,098,000 for 2002 as
compared to $5,482,000 for 2001 due to an increase in the number of products
shipped under long-term programs. Sales of digital switches manufactured by
XET's Digitran Division declined by $1,593,000 (25.1%) to $4,744,000 for 2002 as
compared to $6,337,000 for 2001. The decline in sales of digital switches was a
result of lower than expected orders, which we believe was primarily due to a
deferral of government orders. XET Corporation increased its sales of
subassemblies by $892,000 (383%) to $1,125,000 for 2002 as compared to $233,000
for 2001 due to new contracts for electronic subsystems from a major aerospace
company. These contracts were executed beginning in January 2002, and the final
shipments under these contracts were in November 2002.

         Net sales of our communications equipment products and services for
2002 declined by $5,503,000 (37.2%) to $9,274,000 as compared to $14,777,000 for
2001. Test equipment net sales for 2002 declined by $4,439,000 (60.6%) to
$2,881,000 as compared to $7,320,000 for 2001. The sales decline resulted from a
$2,546,000 reduction in sales of test equipment by CXR Telcom and a $1,893,000
reduction in resales by CXR-AJ of test equipment not manufactured by us
following our decision to discontinue those resales due to the lower gross
margin trends on resale products. Management believes the sales decline for CXR
Telcom resulted primarily from reductions in capital spending in 2002 as
compared to capital spending in 2001 by many of our telecommunications customers
due to generally weak telecommunications markets. The sales decline for CXR-AJ
occurred primarily because the exclusive distribution agreement that CXR-AJ had
with Sunrise Telecom, Inc. terminated as of November 1, 2001, and CXR-AJ decided
not to remain in the test instruments resale business except to support a
limited number of existing customers.


                                       32
<PAGE>

         Net sales of our CXR HALCYON 704 series field test equipment decreased
by $1,892,000 (49.2%) to $1,957,000 for 2002 as compared to $3,849,000 for 2001.
Net sales of our T-Com central office test equipment product line declined by
$642,000 (54.1%) to $527,000 for 2002 as compared to $1,187,000 for 2001,
primarily due to continued weakening in the market for central office test
equipment.

         We believe that many of the United States telecom customers that CXR
Telcom serves built networks to handle an anticipated demand for voice and data
traffic that has not yet occurred. Consequently, many of these customers reduced
their purchasing budgets for 2002. This had a negative impact on CXR Telcom's
sales.

         Net sales of transmission products and networking equipment produced by
CXR-AJ decreased by $1,379,000 (20.3%) to $5,399,000 for 2002 as compared to
$6,778,000 for 2001. We believe this decrease occurred primarily because of the
weak telecom market and the disruption caused by the French elections in
mid-2002. Total net sales by CXR-AJ, including both test equipment and
transmission and networking equipment, decreased by $1,992,000 (25.4%) to
$5,855,000 for 2002 as compared to $7,847,000 for 2001. We believe that the
decreases in CXR-AJ's and CXR Telcom's sales relate to the overall slowdown in
the telecom markets and the termination of the Sunrise Telecom contract
discussed above, and that the French national and local elections in April and
May 2002 may have caused a delay in purchases by major governmental customers of
CXR-AJ.

         GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 37.6% for 2002 as compared to 43.6% for 2001. In dollar terms, total gross
profit decreased by $3,450,000 (28.8%) for 2002 to $8,517,000 as compared to
$11,967,000 for 2001.

         Gross profit for our electronic components segment decreased in dollar
terms by $271,000 (5.0%) to $5,203,000 for 2002 as compared to $5,505,000 for
2001, and decreased as a percentage of related net sales from 43.3% for 2001 to
38.9% for 2002. This decrease primarily was the result of a larger proportion of
power supply sales in comparison to sales of digital switches and electronic
subassemblies, both of which carry higher gross margins than power supplies.

         Gross profit for our communications equipment segment decreased in
dollar terms by $3,149,000 (48.7%) to $3,313,000 for 2002 as compared to
$6,462,000 for 2001, and decreased as a percentage of net sales from 43.7% for
2001 to 35.7% for 2002. The decrease in gross profit as a percentage of net
sales primarily was due to the substantial reduction in sales volume that
increased overhead costs on a per unit basis.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $2,398,000 (23.7%) to $7,731,000 for 2002
as compared to $10,129,000 for 2001. Selling, general and administrative
expenses also declined as a percentage of total net sales, from 36.9% of net
sales during 2001 to 34.1% of net sales during 2002. The decrease in selling,
general and administrative expenses was due to several factors. For example, we
incurred $608,000 in legal and accounting fees during 2001 in connection with
amendments to a securities registration statement and periodic reports but did
not incur any of those expenses during 2002. Selling expenses were reduced by
$624,000 in our communications equipment segment and $117,000 in our electronic
components segment primarily due to lower commissions on reduced sales and cost
reductions during 2002. Administrative costs were reduced by $546,000 in our
communications equipment segment primarily due to staff reductions at CXR Telcom
and CXR-AJ. Also, because of the new accounting rules of SFAS No. 142, effective
January 1, 2002 we no longer amortize goodwill. Goodwill accounted for $370,000
of our amortization expense in 2001.

                                       33
<PAGE>

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment. These expenses remained
relatively unchanged at $1,015,000 for 2002 as compared to $1,076,000 for 2001.
We achieved cost savings from the closure of our St. Charles, Illinois
engineering facility in August 2001 and the relocation, consolidation and
downsizing of that engineering function into our Fremont, California facility.
The cost savings were partially offset with increases in engineering expenses
for the development of a new rotary switch at XET's Digitran Division operation
in Rancho Cucamonga, California.

         OTHER INCOME AND EXPENSE. Interest expense increased by $45,000 (11.4%)
to $441,000 for 2002 from $396,000 for 2001 due to higher debt loads at our
foreign subsidiaries. Other income was $80,000 in 2002 as compared to $18,000 of
other expense reported in 2001. This positive change primarily resulted from
miscellaneous tax refunds and miscellaneous expense reductions that occurred
during 2002.

         INCOME TAX EXPENSE (BENEFIT). Income tax benefit for 2002 was $20,000
as compared to $77,000 of income tax expense for 2001. The income tax benefit in
2002 consisted of U.K. income tax refundable amounts due to the availability of
net operating loss deductions. This benefit was net of $19,000 of state income
taxes and $14,000 of French income tax.

         NET LOSS. Net loss for 2002 was $570,000 as compared to net income of
$327,000 for 2001. The major cause of this change was the reduction in sales of
our communications equipment segment below the level needed to cover fixed
costs. We took in 2002 and 2001 various actions to reduce costs through staffing
reductions in our communications equipment operations in the United States and
France and through various other cost-cutting methods, such as using contract
manufacturers, reducing facility rent expense and phasing out our administrative
office in Paris, France. These actions substantially reduced the sales volume
required to turn a profit at both CXR Telcom and CXR-AJ.

     DISCONTINUED OPERATIONS

         As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported income of $56,000 in 2001 as a result of
reversal of excess accruals.

LIQUIDITY AND CAPITAL RESOURCES

         During the year ended December 31, 2003, we funded our operations
primarily through revenue generated from our operations and through our lines of
credit with Wells Fargo Business Credit, Inc. and various foreign banks. As of
December 31, 2003, we had working capital of $5,696,000, which represented an
increase of $1,735,000 (43.8%) over working capital of $3,961,000 at December
31, 2002. Also, at December 31, 2003, we had an accumulated deficit of
$17,886,000, accumulated other comprehensive gains of $108,000, cash and cash
equivalents of $1,174,000, and $5,393,000 of accounts receivable. As of December
31, 2002, we had an accumulated deficit of $19,042,000, accumulated other
comprehensive loss of $597,000, cash and cash equivalents of $254,000, and
$5,356,000 of accounts receivable.

         Cash provided by our operating activities totaled $1,039,000 for 2003,
an improvement of $1,696,000 as compared to cash used in our operating
activities of $657,000 for 2002. This increase in cash provided by operations
during 2003 primarily resulted from generation of net income as compared to our
recording of a net loss in the prior year, and from the reduction of inventory
levels, which were partially offset with reductions in accounts payable.

                                       34
<PAGE>

         Cash used in our investing activities totaled $38,000 for 2003 as
compared to $176,000 used in our investing activities for 2002. The investments
for 2003 were mostly fixed asset purchases.

         Cash used in our financing activities totaled $687,000 for 2003 as
compared to $206,000 of cash used in our financing activities for 2002, due to
repayments of bank debt in both years.

         On August 16, 2000, our subsidiaries, CXR Telcom and XET, together with
MicroTel acting as guarantor, obtained a credit facility from Wells Fargo
Business Credit, Inc. In April 2002, the maturity date of the facility was
extended by two years to August 16, 2005. Since April 17, 2002, the facility has
provided for a revolving loan of up to $3,000,000 secured by inventory and
accounts receivable and a term loan in the amount of $687,000 secured by
machinery and equipment. On December 31, 2003, the interest rate was the prime
rate (then 4.0%) plus 1%, subject to a minimum interest charge of $13,500 per
month. The balance outstanding at December 31, 2003 was $1,077,000 on the
revolving loan and $114,000 on the term loan, and we had available to us
$238,000 of additional borrowings under the revolving loan. The credit facility
contains restrictive financial covenants that are set by mutual agreement each
year. At December 31, 2003, we were in compliance with these covenants, which
include a minimum net income covenant and a minimum debt service ratio to be
measured quarterly. The credit facility also contains an annual net worth
covenant.

         As of December 31, 2003, our foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Venture Finance PLC,
a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution,
in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National
de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in
Japan. At December 31, 2003, the balances outstanding under our U.K., France and
Japan credit facilities were $1,946,000, $657,000 and $73,000, respectively.

         XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years and carries an annual
fixed interest rate of 3.25%. The balance of the loan as of December 31, 2003
was $73,000 using the exchange rate in effect at that date for conversion of
Japanese yen into United States dollars.

         Our U.K. subsidiary, XPS, obtained a credit facility with Venture
Finance PLC as of November 12, 2002. This credit facility expires on November
15, 2005. Using the exchange rate in effect at December 31, 2003 for the
conversion of British pounds into United States dollars, the facility is for a
maximum of $2,685,000 and includes a $627,000 unsecured cash flow loan, a
$143,000 term loan secured by fixed assets and the remainder is a loan secured
by accounts receivable and inventory. The interest rate is the base rate of
Venture Finance PLC (3.75% at December 31, 2003) plus 2%, and is subject to a
minimum rate of 4% per annum. There are no financial performance covenants
applicable to this credit facility.

         As of December 31, 2003, CXR-AJ had several credit facilities with
balances totaling up to approximately $657,000 in the aggregate. Each credit
facility has a specified repayment term. However, each lender had the right to
demand payment in full at any time prior to the scheduled maturity date of a
particular credit facility. Because CXR-AJ experienced a substantial reduction
in revenue in 2002, some of its lenders made reductions in the total available
credit. Banque Hervet reduced availability to $78,000 from $159,000 effective
December 31, 2002. CXR-AJ paid Banque Hervet balance down to zero in 2003. On
February 10, 2003, Societe Generale notified CXR-AJ that CXR-AJ had to pay back
its credit line balance by April 30, 2003. Societe Generale agreed to an
alternative pay back schedule for the full balance owed as of March 31, 2003 so
that $54,000 was due by May 31, 2003 and another $54,000 was due by June 30,
2003. The overdraft loan from Societe Generale was paid off in accordance with
the bank's demand.


                                       35
<PAGE>

         On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. The credit line is for a maximum of $1,516,000,
based on the exchange rate in effect at December 31, 2003 for the conversion of
euros into United States dollars. This is substantial increase over the total of
credit lines that CXR-AJ had with its other banks. The IFN Finance facility
replaces the several smaller credit lines. The IFN Finance facility is secured
by accounts receivable and carries an annual interest rate of 1.6% above the
French "T4M" rate. The French T4M rate was 2.6% as of December 31, 2003.

         Our backlog was $9,630,000 as of December 31, 2003 as compared to
$12,702,000 as of December 31, 2002. The reduction in backlog was primarily due
to substantial initial shipments as long-term contracts by XCEL Power Systems in
the U.K. Such initial programs will continue with annual new orders being
released to sustain ongoing levels of product requirement. Our backlog as of
December 31, 2003 was 96.0% related to our electronic components business, which
business tends to provide us with long lead-times for our manufacturing
processes due to the custom nature of the products, and 4.0% related to our
communications equipment business, which business tends to deliver standard
products from stock as orders are received. The amount of backlog orders
represents revenue that we anticipate recognizing in the future, as evidenced by
purchase orders and other purchase commitments received from customers, but on
which work has not yet been initiated or with respect to which work is currently
in progress. However, there can be no assurance that we will be successful in
fulfilling such orders and commitments in a timely manner or that we will
ultimately recognize as revenue the amounts reflected as backlog.

         During 2003, 63.4% and 36.6% of our total net sales were generated by
our electronic components segment and our communications equipment segment,
respectively. We experienced an 18.3% decrease in our test equipment sales for
2003 as compared to 2002. The test equipment decline was due to our
discontinuation of test equipment resales in Europe and the general
telecommunications public carrier company downturn in the United States. Based
on recent orders received, it appears to our management that the worst of the
public carrier telecommunications downturn and its effect on the test equipment
market has passed. However, a further reduction in sales could reduce our total
accounts receivable balances, which in turn would have an adverse effect on our
financial position by reducing the amount of cash available under our lines of
credit. While our United States test equipment sales decreased by $338,000
(13.6%) in 2003 as compared to 2002, our sales of network access and
transmission equipment for customer premises increased by $740,000 (13.7%) in
the same period. The market for network access and transmission equipment did
not experience the major capital equipment spending downturn that the public
carrier companies in the United States experienced which negatively impacted
sales of our test equipment.

         We took various actions to reduce costs in 2003. These actions were
intended to reduce the cash outlays of our telecommunications equipment segment
to match its revenue rate. In February 2003, we reduced the staffing level by
50% at CXR Telcom, which we estimate has reduced costs at an annualized rate of
approximately $360,000. This savings is in addition to the approximate $325,000
annualized savings we are realizing from moving CXR Telcom into a lower cost
facility in November 2002. We also have contracted with Asian manufacturers for
production of test equipment components at lower prices than we previously paid
to our former suppliers and have received shipments of quality components from
these suppliers.

         The following table outlines payments due from us or our subsidiaries
under our lines of credit and other significant contractual obligations over the
next five years, exclusive of interest. The symbol "P" represents the prime
rate, and the symbol "B" represents the lender's base rate.

                                       36
<PAGE>
<TABLE>
                                                        PAYMENTS DUE BY PERIOD
                                                        ----------------------
                                                             (in thousands)
          CONTRACTUAL
        OBLIGATIONS AT                                                                      THERE-
       DECEMBER 31, 2003               2004       2005      2006       2007       2008      AFTER        TOTAL
  ----------------------------      ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                  <C>         <C>        <C>        <C>        <C>        <C>       <C>
  Line of Credit (Domestic)          $ 1,077     $  --      $  --      $  --      $  --      $  --     $ 1,077
     Average Interest Rate             P+1%
  Line of Credit (U.K.)              $ 1,227     $  --      $  --      $  --      $  --      $  --     $ 1,227
     Average Interest Rate             B+2%
  Overdraft (France)                 $   578     $  --      $  --      $  --      $  --      $  --     $   578
     Average Interest Rate          5.2%-7.2%
  Term Loan (Domestic)               $    72     $  42      $  --      $  --      $  --      $  --     $   114
     Average Interest Rate             P+1%
  Term Loan (U.K.)                   $    50     $ 669      $  --      $  --      $  --      $  --     $   719
     Average Interest Rate             B+2%
  Term Loan (France)                 $    68     $  11      $  --      $  --      $  --      $  --     $    79
     Average Interest Rate          5.2%-5.6%
  Term Loan (Japan)                  $    19     $  19      $  18      $  17      $  --      $  --     $    73
     Average Interest Rate            3.25%
  Capitalized Lease
    Obligations                      $   108     $  39      $   3      $  --      $  --      $  --     $   150
  Operating Leases                   $   718     $ 497      $ 425      $ 404      $ 589      $  --     $ 2,633
                                    ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                     $ 3,917    $ 1,277     $ 446      $ 421      $ 589      $  --     $ 6,650
</TABLE>

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

EFFECTS OF INFLATION

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

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

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

                                       37
<PAGE>

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

         In November 2002, the EITF reached a consensus on Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. This Issue
provides guidance on when and how to separate elements of an arrangement that
may involve the delivery or performance of multiple products, services and
rights to use assets into separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal periods,
interim or annual, beginning after June 15, 2003. We adopted Issue No. 00-21 on
July 1, 2003. The adoption of Issue No. 00-21 did not have a material impact to
our consolidated financial position, results of operations, or cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, compensation expense for stock options is measured
as the excess, if any, of the estimate of the market value of our stock at the
date of the grant over the amount an employee must pay to acquire the stock. We
adopted the annual disclosure provisions of SFAS No. 148 for our financial
reports for the year ended December 31, 2002 and also adopted the interim
disclosure provisions for our financial reports beginning with the quarter ended
March 31, 2003. Because this standard involves disclosures only, the adoption of
SFAS No. 148 did not impact our results of operations, financial position or
liquidity.

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

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

                                       38
<PAGE>

         In November 2003, the EITF reached a consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF Issue No. 03-1 provides guidance on other-than-temporary
impairment and its application to debt and equity investments. The requirements
apply to investments in debt and marketable equity securities that are accounted
for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The provisions of Issue No. 03-1 are effective for annual periods
ending after December 15, 2003. The adoption of this Statement is not expected
to have a material effect on our financial condition or results of operations.

         In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits," an
amendment of SFAS No. 87, 88 and 106, and a revision of SFAS No. 132. The
statement is effective for fiscal years and interim periods ending after
December 15, 2003. This Statement revises employers' disclosures about pension
plans and other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, 88 and 106. The new rules
require additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The adoption of this Statement is not expected to
have a material effect on our financial condition or results of operations.

         In December 2003, the FASB issued FASB Staff Position No. FAS 106-1
(FSP 106-1), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." The guidance is
effective for initial interim or annual fiscal periods ending after December 7,
2003. FSP 106-1 permits employers that sponsor postretirement benefit plans
(plan sponsors) that provide prescription drug benefits to retirees to make a
one-time election to defer accounting for any effects of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, or the "Act."
Without FSP 106-1, plan sponsors would be required under SFAS No. 106 to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law. The adoption of this Statement
is not expected to have a material effect on our financial condition or results
of operations.

         In December 2003 the SEC issued Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. SAB 104 codifies, revises and rescinds certain
sections of SAB No. 101 in order to make this interpretive guidance consistent
with current authoritative accounting and auditing guidance and SEC rules and
regulations. Accordingly, there is no impact to our results of operations,
financial position or cash flows as a result of the issuance of SAB No. 104.

         In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R).
FIN 46R requires the application of either FIN 46 or FIN 46R by Public Entities
to all Special Purpose Entities ("SPEs") created prior to February 1, 2003 as of
December 31, 2003 for calendar year-end companies. FIN 46R is applicable to all
non-SPEs created prior to February 1, 2003 at the end of the first interim or
annual period ending after March 15, 2004. For all entities created subsequent
to January 31, 2003, Public Entities were required to apply the provisions of
FIN 46. The adoption of FIN 46 did not have a material impact to our
consolidated financial position, results of operations or cash flows. The
adoption of FIN 46R for SPEs did not have an impact to our consolidated
financial position, results of operations or cash flows, and we do not believe
the adoption of FIN 46R for non-SPEs will have a material impact to our
consolidated financial position, results of operations or cash flows.

                                       39
<PAGE>

RISK FACTORS

         AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS REPORT, YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT
IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT
IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE
HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.

     OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT
     OUR BUSINESS IF DEMAND IS REDUCED.

         During 2003, the sale of electronic components accounted for 63.4% of
our total net sales, and the sale of communications equipment and related
services accounted for 36.6% of our total net sales. In many cases we have
long-term contracts with our electronic components and communications equipment
customers that cover the general terms and conditions of our relationships with
them but that do not include long-term purchase orders or commitments. Rather,
our customers issue purchase orders requesting the quantities of communications
equipment they desire to purchase from us, and if we are able and willing to
fill those orders, then we fill them under the terms of the contracts.
Accordingly, we cannot rely on long-term purchase orders or commitments to
protect us from the negative financial effects of a reduced demand for our
products that could result from a general economic downturn, from changes in the
electronic components and communications equipment industries, including the
entry of new competitors into the market, from the introduction by others of new
or improved technology, from an unanticipated shift in the needs of our
customers, or from other causes.

     WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND ADEQUATE FINANCING MAY
     NOT BE AVAILABLE TO US ON ACCEPTABLE TERMS, OR AT ALL.

         Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any additional financing will be available to us on acceptable terms, or at
all. Depressed global economic conditions may cause prolonged declines in
investor confidence and accessibility to capital markets. If we raise additional
funds by issuing equity securities, further dilution to existing stockholders
may result. If adequate funds are not available, we may be required to delay,
scale back or eliminate portions of our operations and product development and
marketing efforts or to obtain funds through arrangements with partners or
others that may require us to relinquish rights to some of our technologies or
potential products, services or other assets. Accordingly, the inability to
obtain financing could result in a significant loss of ownership and/or control
of our proprietary technology and other important assets and could also
adversely affect our ability to fund our continued operations and our product
development and marketing efforts that historically have contributed
significantly to our competitiveness.

     OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR
     PRODUCTS FROM OUTSIDE SUPPLIERS.

         The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications equipment products have been in short supply and are
frequently on allocation by semiconductor manufacturers. We have, from time to
time, experienced difficulty in obtaining some components. We do not have
guaranteed supply arrangements with any of our suppliers, and there can be no


                                       40
<PAGE>

assurance that our suppliers will continue to meet our requirements. Further,
disruption in transportation services as a result of enhanced security measures
in response to terrorism threats or attacks may cause some increases in costs
and timing for both our receipt of components and shipment of products to our
customers. If our existing suppliers are unable to meet our requirements, we
could be required to alter product designs to use alternative components or, if
alterations are not feasible, we could be required to eliminate products from
our product line.

         Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could adversely
affect our results of operations because our products compete on price and,
therefore, we may not be able to adjust product pricing to reflect the increases
in component costs. Also, an extended interruption in the supply of components
or a reduction in their quality or reliability would adversely affect our
financial condition and results of operations by impairing our ability to timely
deliver quality products to our customers. Delays in deliveries due to shortages
of components or other factors may result in cancellation by our customers of
all or part of their orders. Although customers who purchase from us products,
such as many of our digital switches and all of our custom power supplies, that
are not readily available from other sources would be less likely than other
customers of ours to cancel their orders due to production delays, we cannot
assure you that cancellations will not occur.

     WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
     ADVERSELY AFFECT OUR BUSINESS.

         Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, our Executive Vice President, Graham
Jefferies, and our Senior Vice President and Chief Financial Officer, Randolph
Foote. Mr. Oliva co-founded XET Corporation and has developed personal contacts
and other skills that we rely upon in connection with our financing, acquisition
and general business strategies. Mr. Jefferies is a long-time employee of
MicroTel who we have relied upon in connection with our United Kingdom
acquisitions and who fulfills significant operational responsibilities in
connection with our foreign and domestic operations. Mr. Foote joined us in
October 1999, and we have relied upon his skills in financial reporting,
accounting and tax matters in addition to his skills in the analysis of
potential acquisitions and general corporate administration. Consequently, the
loss of Mr. Oliva, Mr. Jefferies, Mr. Foote or one or more other key members of
management could adversely affect us. Although we have entered into employment
agreements with each of our executive officers, those agreements are of limited
duration and are subject to early termination by the officers under some
circumstances. We maintain key-man life insurance on Mr. Oliva and Mr.
Jefferies. However, we cannot assure you that we will be able to maintain this
insurance in effect or that the coverage will be sufficient to compensate us for
the loss of the services of Mr. Oliva or Mr. Jefferies.

     MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE
     SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND
     RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND
     COMMUNICATIONS EQUIPMENT INDUSTRIES.

         Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
electronic components and communications equipment markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential


                                       41
<PAGE>

competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could reduce our
competitiveness, revenues, profit margins or market share.

     IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING
     US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS OF
     OPERATIONS WILL SUFFER.

         As of December 31, 2003, we had $9,630,000 in backlog orders for our
products. These orders were due in large part to the long lead-times associated
with our electronic components products. The amount of backlog orders represents
revenue that we anticipate recognizing in the future, as evidenced by purchase
orders and other purchase commitments received from customers, but on which work
has not yet been initiated or with respect to which work is currently in
progress. However, we cannot assure you that we will be successful in fulfilling
orders and commitments in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

     FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE
     RELEVANT FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS
     FOR INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT,
     EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF
     OPERATIONS.

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could affect our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. Sales of
our products and services to customers located outside of the United States
accounted for approximately 68.8% of our net sales for 2003. We currently
anticipate that foreign sales will account for a similar proportion of our net
sales for 2004. However, because historically the majority of our currency
exposure has related to financial statement translation rather than to
particular transactions, we do not intend to enter into, nor have we
historically entered into, forward currency contracts or hedging arrangements in
an effort to mitigate our currency exposure.

     IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS OR
     ALLIANCES, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.

         Our business strategy includes growth through acquisitions, strategic
alliances and original equipment manufacturer resale agreements, among other
arrangements, that we believe will improve our competitive capabilities or
provide additional market penetration or business opportunities in areas that
are consistent with our business plan. Identifying and pursuing strategic
acquisition or other opportunities and integrating acquired products and
businesses requires a significant amount of management time and skill.
Acquisitions and alliances may also require us to expend a substantial amount of
cash or other resources, not only as a result of the direct expenses involved in
the acquisition transaction or the creation of the alliance, but also as a
result of ongoing research and development activities that may be required to
maintain or enhance the long-term competitiveness of acquired products,
particularly those products marketed to the rapidly evolving telecommunications
industry. If we are unable to make strategic acquisitions, alliances or other
arrangements due to our inability to identify appropriate targets, allies or
arrangements, to raise the necessary funds, particularly while our stock price
is low, or to manage the difficulties or costs involved in the acquisitions,
alliances or arrangements, our long-term competitive positioning could suffer.


                                       42
<PAGE>

     OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
     FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND IN LITIGATION
     AGAINST US.

         The market prices of securities of technology-based companies currently
are highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during 2003, the high and low closing sale
prices of a share of our common stock were $1.37 and $0.15, respectively. The
market price of our common stock may continue to fluctuate in response to the
following factors, many of which are beyond our control:

         o    changes in market valuations of similar companies and stock market
              price and volume fluctuations generally;
         o    economic conditions specific to the communications electronics
              industry;
         o    announcements by us or our competitors of new or enhanced
              products, technologies or services or significant contracts,
              acquisitions, strategic relationships, joint ventures or capital
              commitments;
         o    regulatory developments;
         o    additions or departures of key personnel; and
         o    future sales of our common stock or other securities.

         The price at which you purchase shares of common stock may not be
indicative of the price of our stock that will prevail in the trading market.
You may be unable to sell your shares of common stock at or above your purchase
price, which may result in substantial losses to you. Moreover, in the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources.

     IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY
     STANDARDS AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our communications equipment products must
comply with various regulations defined by the United States Federal
Communications Commission, or FCC, and Underwriters Laboratories as well as
industry standards established by Telcordia Technologies, Inc., formerly
Bellcore, and the American National Standards Institute. Internationally, our
communications equipment products must comply with standards established by the
European Committee for Electrotechnical Standardization, the European Committee
for Standardization, the European Telecommunications Standards Institute,
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunications Union. The failure of
our products to comply, or delays in compliance, with the various existing and
evolving standards could negatively impact our ability to sell our products.

     BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
     MISAPPROPRIATION OF THESE RIGHTS COULD ADVERSELY IMPACT OUR FINANCIAL
     CONDITION.

         Our future success will be highly dependent on proprietary technology,
particularly in our communications equipment business. However, we do not hold
any patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness


                                       43
<PAGE>

and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology. Our financial condition would be adversely impacted if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.

     THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE
     OF OUR COMMON STOCK TO FLUCTUATE OR DECLINE.

         Our quarterly operating results have varied significantly in the past
and will likely continue to do so in the future due to a variety of factors,
many of which are beyond our control. Fluctuations in our operating results may
result from a variety of factors.

         For example, the general decline in telecommunications market activity
and other changes affecting the telecommunications industry, including
consolidations and restructuring of United States and foreign telephone
companies, cause our sales to decrease or increase. Our sales may increase if we
obtain new customers as a result of the consolidations or restructurings.
However, our sales may decrease, either temporarily or permanently to the extent
our customers are acquired by or combined with companies that are and choose to
remain customers of our competitors.

         In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of RBOCs has had and will continue to have for the
foreseeable future an impact on our quarterly operating results. RBOCs generally
obtain approval for their annual budgets during the first quarter of each
calendar year. If an RBOC's annual budget is not approved early in the calendar
year or is insufficient to cover its desired purchases for the entire calendar
year, we are unable to sell products to the RBOC during the period of the delay
or shortfall.

         Quarter to quarter fluctuations may also result from the uneven pace of
technological innovation, the development of products responding to these
technological innovations by us and our competitors, our customers' acceptance
of these products and innovations, the varied degree of price, product and
technological competition and our customers' and competitors' responses to these
changes.

         Due to these factors and other factors, including changes in general
economic conditions, we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful in predicting future
performance. If our operating results do not meet the expectations of investors,
our stock price may fluctuate or decline.

     BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING
     ACTIVITY IN OUR STOCK MAY BE REDUCED.

         Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on some national securities exchanges or quoted on Nasdaq). The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and,
if the broker-dealer is the sole market maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market, and monthly


                                       44
<PAGE>

account statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.

     BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY
     FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.

         Our common stock trades under the symbol "MCTL" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.

     OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF MICROTEL, POSSIBLY
     PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES.

         Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 200 have been designated as
Series A Preferred, of which none were outstanding as of December 31, 2003. In
addition, 150,000 shares have been designated as Series B Preferred Stock, 570.3
of which were outstanding as of December 31, 2003. The rights of the holders of
our common stock are subject to the rights of the holders of our currently
outstanding preferred stock and will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may issue
in the future. The issuance of preferred stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock, which would delay, defer or
prevent a change in control of MicroTel. Furthermore, preferred stock may have
other rights, including economic rights senior to the common stock, and, as a
result, the issuance of preferred stock could adversely affect the market value
of our common stock.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Exchange Rate Sensitivity
         -------------------------

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar affects our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure. For further information regarding our exchange rate sensitivity, see
Item 7 of this report under the heading "Critical Accounting Policies - Foreign
Currency Translation."


                                       45
<PAGE>

         Interest Rate Sensitivity
         -------------------------

         A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates.

         The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "B" represents the lender's
base rate. Balances are as of December 31, 2003.
<TABLE>
<CAPTION>
                                                                                                           FAIR
                                                                                        THERE-             VALUE
      LIABILITIES                      2004      2005      2006      2007      2008     AFTER     TOTAL   12/31/03
----------------------------         -------   -------   -------   -------   -------   -------   -------   -------
<S>                                  <C>       <C>       <C>       <C>       <C>       <C>         <C>       <C>
Line of Credit (Domestic)            $ 1,077   $    --   $    --   $    --   $    --   $    --     1,077     1,077

  Average Interest Rate                P+ 1%

Line of Credit (U.K.)                $ 1,227   $    --   $    --   $    --   $    --   $    --     1,227     1,227

  Average Interest Rate                B+ 2%

Overdraft (France)                   $   578   $    --   $    --   $    --   $    --   $    --       578       578

  Average Interest Rate             5.5% -7.2%

Term Loan (Domestic)                 $    72   $    42   $    --   $    --   $    --   $    --                 114

  Average Interest Rate                P+ 1%
                                                                                                     114
Term Loan (U.K.)                     $    50   $   669   $    --   $    --   $    --   $    --       719       719

  Average Interest Rate                B+ 2%

Term Loan (France)                   $    68   $    11   $    --   $    --   $    --   $    --        79        79

  Average Interest Rate             5.2%-5.6%

Term Loan (Japan)                    $    19   $    19   $    18   $    17   $    --   $    --        73        73

  Average Interest Rate                3.25%
</TABLE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Reference is made to the financial statements included in this report,
which begin at page F-1.

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

         On September 24, 2002, we notified BDO Seidman, LLP, the independent
accounting firm that was engaged as our principal accountant to audit our
financial statements, that we intended to engage new certifying accountants, in
effect terminating our relationship with BDO Seidman. On October 1, 2002, we
engaged Grant Thornton LLP as our new certifying accountants.

         The audit report of BDO Seidman on our consolidated financial
statements and consolidated financial statement schedule as of and for the year
ended December 31, 2001 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.


                                       46
<PAGE>

         Our decision to change accountants was approved by our audit committee
and board of directors. In connection with the audit of the year ended December
31, 2001, and during the subsequent interim period through September 24, 2002,
there were no disagreements with BDO Seidman on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures which disagreements, if not resolved to BDO Seidman's satisfaction,
would have caused BDO Seidman to make reference to the subject matter of the
disagreement in connection with its opinion. In addition, there were no
reportable events as described in Item 304(a)(1)(v) of Regulation S-K under the
Securities Act of 1933, as amended.

         We had not consulted with Grant Thornton in the past regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on our financial statements or as to any
disagreement or reportable event as described in Item 304(a)(1)(iv) and Item
304(a)(1)(v).

ITEM 9A.   CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2003, that the design and operation
of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our principal executive
officer and our principal financial officer, as appropriate to allow timely
decisions regarding whether or not disclosure is required.

         During the quarter ended December 31, 2003, there were no changes in
our "internal controls over financial reporting" (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.




                                       47
<PAGE>

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

         The names, ages and positions held by our directors and executive
officers as of March 12, 2004 are as follows:
<TABLE>

        NAME                         AGE                      TITLES
        ----                         ---                      ------
<S>                                              <C>
Carmine T. Oliva                     61          Chairman of the Board, President, Chief Executive
                                                    Officer and Director

Graham Jefferies                     46          Executive Vice President and Chief Operating Officer of
                                                    our Telecommunications Group and Managing Director of
                                                    various subsidiaries

Randolph D. Foote                    55          Senior Vice President, Chief Financial Officer and
                                                    Assistant Secretary

Robert B. Runyon (1)(2)              78          Secretary and Director

Laurence P. Finnegan, Jr. (1)(3)     66          Director

Otis W. Baskin                       59          Director
___________
</TABLE>

(1) Member of the compensation committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.

         CARMINE T. OLIVA has been Chairman of the Board, President and Chief
Executive Officer and a Class III director of MicroTel since March 26, 1997 and
of our subsidiary, XET Corporation, since he founded XET Corporation in 1983.
Mr. Oliva has been Chairman of the Board of XCEL Corporation, Ltd. since 1985,
and Chairman and Chief Executive Officer of CXR Telcom since March 1997. In
2002, Mr. Oliva obtained a French government working permit and assumed
responsibility as President of our CXR-AJ subsidiary. From January 1999 to
January 2000, Mr. Oliva served as a director of Digital Transmission Systems
Inc. (DTSX), a publicly held company based in Norcross, Georgia. From 1980 to
1983, Mr. Oliva was Senior Vice President and General Manager, ITT Asia Pacific
Inc. Prior to holding that position, Mr. Oliva held a number of executive
positions with ITT Corporation and its subsidiaries over an eleven-year period.
Mr. Oliva attained the rank of Captain in the United States Army and is a
veteran of the Vietnam War. Mr. Oliva earned a B.A. degree in Social
Studies/Business from Seton Hall University in 1964 and an M.B.A. degree in
Business in 1966 from The Ohio State University.

         GRAHAM JEFFERIES was appointed Executive Vice President and Chief
Operating Officer of our Telecommunications Group on October 21, 1999. Mr.
Jefferies served as Executive Vice President of MicroTel from April 1999 through
October 1999. Mr. Jefferies has served CXR-AJ as a director since March 1997 and
as General Manager since July 2002, has served as Managing Director of Belix
Power Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since
our acquisition of those companies in April 2000, as Managing Director of XCEL
Power Systems, Ltd. since September 1996 and as Managing Director of XCEL
Corporation, Ltd. since March 1992. Prior to joining us in 1992, he was Sales
and Marketing Director of Jasmin Electronics PLC, a major United Kingdom
software and systems provider, from 1987 to 1992. Mr. Jefferies held a variety
of project management positions at GEC Marconi from 1978 to 1987. Mr. Jefferies
earned a B.S. degree in Engineering from Leicester University, and has
experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident
of the United Kingdom.

                                       48
<PAGE>

         RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief
Financial Officer on October 4, 1999 and as our Assistant Secretary on February
12, 2001. Mr. Foote has been Vice President and Chief Financial Officer of CXR
Telcom Corporation and XET Corporation since March 2000 and has been Chief
Financial Officer of CXR Anderson Jacobson Inc., a California corporation that
is a subsidiary of CXR-AJ, since February 2000. Mr. Foote was the Corporate
Controller of Unit Instruments, Inc., a publicly traded semiconductor equipment
manufacturer, from October 1995 to May 1999. From March 1985 to October 1995,
Mr. Foote was the Director of Tax and Financial Reporting at Optical Radiation
Corporation, a publicly traded company that designed and manufactured products
using advanced optical technology. Prior to 1985, Mr. Foote held positions with
Western Gear Corporation and Bucyrus Erie Company, which were both publicly
traded companies. Mr. Foote earned a B.S. degree in Business Management from
California State Polytechnic University, Pomona and an M.B.A. degree in
Tax/Business from Golden Gate University.

         ROBERT B. RUNYON has served as a Class III director since March 26,
1997 and was appointed as our Secretary on that date. He has been the owner and
principal of Runyon and Associates, a human resources and business advisory
firm, since 1987. He has acted as Senior Vice President of Sub Hydro Dynamics
Inc., a privately held marine services company based in Hilton Head, South
Carolina, since September 1995. Prior to our merger with XET Corporation, Mr.
Runyon served XET Corporation both as a director since August 1983 and as a
consultant in the areas of strategy development and business planning,
organization, human resources and administrative systems. He also consults for
companies in environmental products, marine propulsion systems and architectural
services sectors in these same areas. From 1970 to 1978, Mr. Runyon held various
executive positions with ITT Corporation, including Vice President,
Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to
1970, Mr. Runyon held executive positions at BP Oil including Vice President,
Corporate Planning and Administration of BP Oil Corporation, and director,
organization and personnel for its predecessor, Sinclair Oil Corporation. Mr.
Runyon was Executive Vice President, Human Resources at the Great Atlantic &
Pacific Tea Company from 1978 to 1980. Mr. Runyon earned a B.S. degree in
Economics/Industrial Management from University of Pennsylvania.

         LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of XET Corporation from 1985 to March
1997, Mr. Finnegan was XET Corporation's Chief Financial Officer from 1994 to
1997. Mr. Finnegan has held positions with ITT (1970-1974) as controller of
several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief
Financial Officer, Executive Vice President and Chief Operating Officer, and
Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial Officer
and Treasurer. Since August 1995, he has been a principal of GwynnAllen
Partners, Bethlehem, Pennsylvania, an executive management consulting firm.
Since December 1996, Mr. Finnegan has been a director and the President of GA
Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. From
September 1997 to January 2001, Mr. Finnegan served as Vice President Finance
and Chief Financial Officer of QuestOne Decision Sciences, an efficiency
consulting firm based in Pennsylvania. Since August 2001, Mr. Finnegan has
served as a director and the Vice President and Chief Financial Officer of
VerdaSee Solutions, Inc., a consulting and software company based in
Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's
University.

         OTIS W. BASKIN has served as a Class I director since February 6, 2004.
He is a Professor of Management at The George L. Graziadio School of Business
and Management at Pepperdine University in Malibu, California where he served as
dean from 1995 to 2001. He has been a member of the full time faculty of the
University of Houston - Clear Lake (1975-87) where he served as Coordinator of
the Management Faculty and Director of the Center for Advanced Management
Programs. He has also been Professor of Management at Arizona State University,
West Campus (1987-91) and The University of Memphis (1991-95), in addition to
serving as dean at both universities. Dr. Baskin has worked with AACSB
International (Association for the Advancement of Collegiate Schools of


                                       49
<PAGE>

Business) as Special Advisor to the President and as Chief Executive Officer
since 2002. He is an Associate with the Family Business Consulting Group, where
he advises family owned and closely held businesses. He has served as a advisor
to Exxon/Mobile Research and Engineering Corporation, NASA and the United States
Air Force. He earned a Ph.D. in management, public relations and communication
theory from The University of Texas at Austin in 1975, an M.A. degree in speech
communication by the University of Houston in 1970, and a B.A. degree in
religion from Oklahoma Christian University in 1968.

         Our bylaws provide that the board of directors shall consist of at
least four directors. The board of directors is divided into three classes. The
term of office of each class of directors is three years, with one class
expiring each year at the annual meeting of stockholders. There are currently
four directors, one of which is a Class I director whose term expires in 2006,
one of which is a Class II director whose term expires in 2004, and two of which
are Class III directors whose term expires in 2005. Officers are appointed by,
and serve at the discretion of, our board of directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. These officers, directors and stockholders
are required by the Securities and Exchange Commission regulations to furnish
MicroTel with copies of all reports that they file.

         Based solely upon a review of copies of the reports furnished to us
during the year ended December 31, 2003 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during 2003, all Section 16(a) filing
requirements applicable to our reporting persons were met.

CODE OF ETHICS

         Our board of directors has adopted a Code of Business Conduct and
Ethics that applies to all of our directors, officers and employees and an
additional Code of Business Ethics that applies to our Chief Executive Officer
and Senior Financial Officers. We have filed these codes as exhibits to this
report.

         We intend to satisfy the disclosure requirement under Item 10 of Form
8-K relating to amendments to or waivers from provision of these codes that
relate to one or more of the items set forth in Item 406(b) of Regulation S-K,
by describing on our Internet website, within five business days following the
date of a waiver or a substantive amendment, the date of the waiver or
amendment, the nature of the amendment or waiver, and the name of the person to
whom the waiver was granted.

         Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.


ITEM 11.   EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

         The following table provides information concerning the annual and
long-term compensation for the years ended December 31, 2003, 2002 and 2001
earned for services in all capacities as an employee by our Chief Executive
Officer and each of our other executive officers who received an annual salary
and bonus of more than $100,000 for services rendered to us during 2003
(collectively, the "named executive officers"):

                                       50
<PAGE>
<TABLE>

                                SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                               LONG-TERM
                                                                           COMPENSATION AWARD
                                                     ANNUAL COMPENSATION   ------------------
                                                     -------------------       SECURITIES           ALL OTHER
         NAME AND PRINCIPAL POSITION          YEAR     SALARY     BONUS     UNDERLYING OPTIONS     COMPENSATION
         ---------------------------          ----     ------     -----     ------------------     ------------
<S>                                           <C>     <C>        <C>               <C>               <C>
    Carmine T. Oliva ....................     2003    $262,510   $70,000           53,000            $4,821(1)
      President and Chief Executive           2002    $250,010     --               --               $4,821(1)
      Officer                                 2001    $250,010   $40,000                             $4,821(1)
                                                                                  100,000

    Graham Jefferies ....................     2003    $200,801   $55,000           54,000           $10,320(3)
      Executive Vice President and Chief      2002    $152,093     --               --               $9,000(3)
      Operating Officer of Telecommuni-       2001    $142,639   $20,000            --               $7,697(3)
      cations Group (2)

    Randolph D. Foote....................     2003    $150,000   $30,000           35,000            $1,886(4)
      Senior Vice President, Chief            2002    $144,168     --               --               $1,604(4)
      Financial Officer and Assistant         2001    $130,005   $15,000            --                 --
      Secretary(4)
_______________
</TABLE>

(1)  Represents the dollar value of insurance premiums we paid with respect to a
     $1,000,000 term life insurance policy for the benefit of Mr. Oliva's
     spouse.
(2)  Mr. Jefferies is based in the United Kingdom and receives his remuneration
     in British pounds. The compensation amounts listed for Mr. Jefferies are
     shown in United States dollars, converted from British pounds using the
     average conversion rates in effect during the time periods of compensation.
(3)  Represents company contributions to Mr. Jefferies' retirement account.
(4)  Represents company contributions to Mr. Foote's 401(k) retirement account.

                    RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS

         We match up to the lesser of $2,000 and 20% of Mr. Foote's
contributions to his 401(k) account. During 2003, our matching contribution
amounted to $1,886. This matching arrangement was generally made available to
all employees of MicroTel and provides for the same method of allocation of
benefits between management and non-management participants.

         Also, makes matching contributions of up to 6% of Mr. Jefferies' salary
to an executives' defined contribution plan. Other employees of XPS may receive
matching contributions to a defined contribution plan of up to 4% of their
salary. Amounts contributed to the defined contribution plans are intended to
used to purchase annuities upon retirement. During 2003, 2002 and 2001, Mr.
Jefferies received matching contributions of $10,320, $9,000 and $7,697,
respectively.

                        OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides information regarding options granted in
the year ended December 31, 2003 to the executive officers named in the summary
compensation table. We did not grant any stock appreciation rights during 2003.
This information includes hypothetical potential gains from stock options
granted in 2003. These hypothetical gains are based entirely on assumed annual
growth rates of 5% and 10% in the value of our common stock price over the
ten-year life of the stock options granted in 2003. These assumed rates of
growth were selected by the Securities and Exchange Commission for illustrative
purposes only and are not intended to predict future stock prices, which will
depend upon market conditions and our future performance and prospects.

                                       51
<PAGE>
<TABLE>
<CAPTION>
                                                                                                    POTENTIAL
                                                                                                 REALIZABLE VALUE
                                                   PERCENTAGE OF                                 AT ASSUMED RATES
                                      NUMBER OF        TOTAL                                      OF STOCK PRICE
                                      SECURITIES      OPTIONS                                    APPRECIATION FOR
                                      UNDERLYING    GRANTED TO      EXERCISE                      OPTION TERM(3)
                            GRANT      OPTIONS     EMPLOYEES IN      PRICE       EXPIRATION    ---------------------
     NAMED OFFICER          DATE      GRANTED(1)   FISCAL YEAR(2)  PER SHARE        DATE          5%         10%
     -------------          ----      ----------   --------------  ---------        ----          --         ---
<S>                        <C>          <C>            <C>           <C>           <C>          <C>          <C>
Carmine T. Oliva......     1/22/03      53,000         15.4%         $0.35         1/22/13      $11,666      $29,564
Graham Jefferies......     1/22/03      54,000         15.7%         $0.35         1/22/13      $11,887      $30,122
Randolph D. Foote.....     1/22/03      35,000         10.2%         $0.35         1/22/13      $ 7,704      $19,523
_________________________
</TABLE>

(1) Options vested in two equal semi-annual installments on July 22, 2003 and
    January 22, 2004.
(2) Based on options to purchase 344,000 shares granted to our employees during
    2003.
(3) Calculated using the potential realizable value of each grant.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR-END OPTION VALUES

         The following table provides information regarding the value of
unexercised options held by the named executive officers as of December 31,
2003. None of the named executives officers acquired shares through the exercise
of options during 2003.
<TABLE>
<CAPTION>
                                                NUMBER OF
                                          SECURITIES UNDERLYING            VALUE ($) OF UNEXERCISED
                                          UNEXERCISED OPTIONS AT            IN-THE-MONEY OPTIONS AT
                                            DECEMBER 31, 2003                 DECEMBER 31, 2003 (1)
                                        ---------------------------       ---------------------------
                 NAME                   EXERCISABLE   UNEXERCISABLE       EXERCISABLE   UNEXERCISABLE
                 ----                   -----------   -------------       -----------   -------------
<S>                                       <C>            <C>                 <C>            <C>
Carmine T. Oliva...................       180,633        265,000             82,405         20,405
Graham Jefferies...................       126,287         27,000             75,990         20,790
Randolph D. Foote..................        85,000         17,500             59,475         13,474
______________
</TABLE>

(1)  Based on the last reported sale price of our common stock of $1.12 on
     December 31, 2003 (the last trading day during 2003) as reported on the OTC
     Bulletin Board, less the exercise price of the options.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

     CARMINE T. OLIVA

         As of January 1, 2001, we entered into an employment agreement with
Carmine T. Oliva, our Chairman of the Board, President and Chief Executive
Officer. The agreement is subject to automatic renewal for consecutive two-year
terms beginning on January 1, 2006, unless, during the required notice periods
(which run from September 1 to November 1 of the second year preceding the year
in which a two-year renewal period is to begin), either party gives written
notice of its desire not to renew. The agreement provides for a base salary of
$250,000 per year and states that Mr. Oliva is eligible to receive merit or
promotional increases and to participate in other benefit and incentive programs
we may offer.

         If the board of directors makes a substantial addition to or reduction
of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Oliva
the value of three years of his annual salary or the value of his annual salary
that would have been due through January 1, 2006, whichever is greater.


                                       52
<PAGE>

         If we terminate Mr. Oliva for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Oliva without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. If the termination without cause occurs prior to
the expiration of the initial term of the agreement on December 31, 2005, Mr.
Oliva will be entitled to be paid his annual salary for three years following
the termination or until December 31, 2005, whichever is the longer period. If
the termination occurs during a renewal period, Mr. Oliva will be entitled to be
paid his annual salary through the expiration of the particular renewal period
or for two years, whichever is the longer period, and to be paid all other
amounts payable under the agreement.

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:

         o    if the termination occurs prior to the expiration of the initial
              term of the agreement on December 31, 2005, Mr. Oliva will be
              entitled to be paid his annual salary and all other amounts
              payable under the agreement for three years following the
              termination or until December 31, 2005, whichever is the longer
              period, which amounts shall be payable at his election in a lump
              sum within 30 days after the termination or in installments;

         o    if the termination occurs during a renewal period, Mr. Oliva will
              be entitled to be paid his annual salary through the period ending
              two years after the expiration of the particular renewal period,
              and to be paid all other amounts payable under the agreement;

         o    Mr. Oliva will be entitled to receive the average of his annual
              executive bonuses awarded to him in the three years preceding his
              termination, over the same time span and under the same conditions
              as his annual salary;

         o    Mr. Oliva will be entitled to receive any executive bonus awarded
              but not yet paid;

         o    Mr. Oliva will be entitled to receive a gross up of all
              compensatory payments listed above so that he receives those
              payments substantially free of federal and state income taxes; and

         o    Mr. Oliva will continue to receive coverage in all benefit
              programs in which he was participating on the date of his
              termination until the earlier of the end of the initial term or
              renewal term in which the termination occurred and the date he
              receives equivalent coverage and benefits under plans and programs
              of a subsequent employer.

         If Mr. Oliva dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Oliva will continue to be
payable to Mr. Oliva's designee or legal representatives for two years following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability. However, we must continue to pay amounts payable under the
agreement to or for the benefit of Mr. Oliva for two years following the
effective date of the termination.


                                       53
<PAGE>

         If the agreement is terminated for any reason and unless otherwise
agreed to by Mr. Oliva and us, then in addition to any other severance payments
to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual
salary until:

         o    all obligations incurred by Mr. Oliva on our behalf, including any
              lease obligations signed by Mr. Oliva related to the performance
              of his duties under the agreement, have been voided or fully
              assumed by us or our successor;

         o    all loan collateral pledged by Mr. Oliva has been returned to Mr.
              Oliva; and

         o    all personal guarantees given by Mr. Oliva or his family on our
              behalf are voided.

         The agreement provides that we will furnish a life insurance policy on
Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in
the event of his death during the term of the agreement and any renewals of the
agreement. This benefit is in return for, and is intended to protect Mr. Oliva's
estate from financial loss arising from any and all personal guarantees that Mr.
Oliva provided in favor of us, as required by various corporate lenders. This
benefit is also intended to enable Mr. Oliva's estate to exercise all warrants
and options to purchase shares of our common stock.

         The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for two
years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Oliva of our
confidential information and assign ownership to us of inventions created by Mr.
Oliva in connection with his employment.

     RANDOLPH D. FOOTE

         On July 2, 2001, we entered into an employment agreement with Randolph
D. Foote at an initial annual salary of $130,000 that is subject to automatic
renewal for two successive one-year terms beginning on July 2, 2004, unless,
during the required notice periods (which run from May 2 to July 2 of the year
preceding the year in which the renewal period is to begin), either party gives
written notice of its desire not to renew. Mr. Foote is to act as Senior Vice
President and Chief Financial Officer and is to perform additional services as
may be approved by our board of directors.

         If the board of directors makes a substantial addition to or reduction
of Mr. Foote's duties, Mr. Foote may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Foote
the value of one year of his annual salary or the value of his salary through
July 1, 2004, whichever is greater, within 30 days after the effective date of
the resignation.

         If we terminate Mr. Foote for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Foote without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. Mr. Foote will be entitled to be paid his annual
salary for one year following termination or through July 2, 2004, whichever is
longer, if termination occurs during the initial term, or otherwise to be paid
his annual salary through the expiration of the current renewal period, and to
be paid all other amounts payable under the agreement.


                                       54
<PAGE>

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Foote is terminated
without cause within two years following a change of control, then:

         o    Mr. Foote will be entitled to be paid in installments or, at his
              election in a lump sum within 30 days after termination, his
              annual salary and other amounts payable under the agreement for
              1-1/2 years following termination or until July 2, 2004, whichever
              is longer, if termination occurs during the initial term, or
              otherwise to be paid through the expiration of the current renewal
              period plus one additional year;

         o    Mr. Foote will be entitled to receive the average of his annual
              executive bonuses awarded to him in the three years preceding his
              termination, over the same time span and under the same conditions
              as his annual salary;

         o    Mr. Foote will be entitled to receive any executive bonus awarded
              but not yet paid; and

         o    Mr. Foote will continue to receive coverage in all benefit
              programs in which he was participating on the date of his
              termination until the earlier of the end of the initial or current
              renewal term and the date he receives equivalent coverage and
              benefits under plans and programs of a subsequent employer.

         If Mr. Foote dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Foote will continue to be
payable to Mr. Foote's designee or legal representatives for one year following
his death. If Mr. Foote is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Foote following the 180th
day of disability; provided, however, that we must continue to pay amounts
payable under the agreement to or for the benefit of Mr. Foote for one year
following the effective date of the termination.

         The agreement contains non-competition provisions that prohibit Mr.
Foote from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for one
year afterward. The agreement also contains provisions that restrict disclosure
by Mr. Foote of our confidential information and assign ownership to us of
inventions created by Mr. Foote in connection with his employment.

     GRAHAM JEFFERIES

         On July 2, 2001, we entered into an employment agreement with Graham
Jefferies at an initial annual salary of 100,000 British pounds (approximately
$141,000 at the then current exchange rates) that is subject to automatic
renewal for two successive one-year terms beginning on July 2, 2004, unless,
during the required notice periods (which run from May 2 to July 2 of the year
preceding the year in which the renewal period is to begin), either party gives
written notice of its desire not to renew. Mr. Jefferies is to act as Managing
Director of XCEL Corporation, Ltd. and as Executive Vice President and Chief
Operating Officer of our Telecom Group and is to perform additional services as
may be approved by our board of directors. This agreement replaced a
substantially similar agreement that had been effective since May 1, 1998.


                                       55
<PAGE>

         If the board of directors makes a substantial addition to or reduction
of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given
within 30 days of the change in duties. Within 30 days after the effective date
of a resignation under these circumstances, we will be obligated to pay to Mr.
Jefferies the value of one year of his annual salary or the value of his salary
through July 1, 2004, whichever is greater, within 30 days after the effective
date of the resignation.

         If we terminate Mr. Jefferies for cause, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of termination. If we terminate Mr. Jefferies
without cause (including by ceasing our operations due to bankruptcy or by our
general inability to meet our obligations as they become due), we must provide
him with 60 days' prior written notice. Mr. Jefferies will be entitled to be
paid his annual salary for one year following termination or through July 2,
2004, whichever is longer, if termination occurs during the initial term, or
otherwise to be paid his annual salary through the expiration of the current
renewal period plus one additional year, and to be paid all other amounts
payable under the agreement.

         We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:

         o    Mr. Jefferies will be entitled to be paid in installments or, at
              his election in a lump sum within 30 days after termination, his
              annual salary and other amounts payable under the agreement for
              1-1/2 years following termination or until July 2, 2004, whichever
              is longer, if termination occurs during the initial term, or
              otherwise to be paid through the expiration of the current renewal
              period plus one additional year;

         o    Mr. Jefferies will be entitled to receive the average of his
              annual executive bonuses awarded to him in the three years
              preceding his termination, over the same time span and under the
              same conditions as his annual salary;

         o    Mr. Jefferies will be entitled to receive any executive bonus
              awarded but not yet paid; and

         o    Mr. Jefferies will continue to receive coverage in all benefit
              programs in which he was participating on the date of his
              termination until the earlier of the end of the initial or current
              renewal term and the date he receives equivalent coverage and
              benefits under plans and programs of a subsequent employer.

         If Mr. Jefferies dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Jefferies will continue to be
payable to Mr. Jefferies' designee or legal representatives for one year
following his death. If Mr. Jefferies is unable to substantially perform his
duties under the agreement for an aggregate of 180 days in any 18-month period,
we may terminate the agreement by ten days' prior written notice to Mr.
Jefferies following the 180th day of disability; provided, however, that we must
continue to pay amounts payable under the agreement to or for the benefit of Mr.
Jefferies for one year following the effective date of the termination.

         The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customers or employees during the initial term and any renewal terms and for
two years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Jefferies of our
confidential information and assign ownership to us of inventions created by Mr.
Jefferies in connection with his employment.


                                       56
<PAGE>

BOARD COMMITTEES

         Our board of directors currently has an audit committee, a compensation
committee and a nominating committee.

         The audit committee selects our independent auditors, reviews the
results and scope of the audit and other services provided by our independent
auditors and reviews our financial statements for each interim period and for
our year end. Since June 26, 1999, this committee has consisted of Laurence
Finnegan. Our board of directors has determined that Mr. Finnegan is an audit
committee financial expert. Our board of directors has also determined that
Robert Runyon, Otis Baskin and Mr. Finnegan are "independent" as defined in NASD
Marketplace Rule 4200(a)(15).

         The compensation committee is responsible for establishing and
administering our policies involving the compensation of all of our executive
officers and establishing and recommending to our board of directors the terms
and conditions of all employee and consultant compensation and benefit plans.
Since June 26, 1999, this committee has consisted of Robert B. Runyon and
Laurence Finnegan.

         The nominating committee selects nominees for the board of directors.
Beginning in and since 2000, the nominating committee has consisted of Robert B.
Runyon. The nominating committee utilizes a variety of methods for identifying
and evaluating nominees for director, including candidates that may be referred
by stockholders. Stockholders that desire to recommend candidates for the board
for evaluation may do so by contacting MicroTel in writing, identifying the
potential candidate and providing background information. Candidates may also
come to the attention of the nominating committee through current board members,
professional search firms and other persons. In evaluating potential candidates,
the nominating committee will take into account a number of factors, including,
among others, the following:

         o    Independence from management;

         o    Whether the candidate has relevant business experience;

         o    Judgment, skill, integrity and reputation;

         o    Existing commitments to other businesses;

         o    Corporate governance background;

         o    Financial and accounting background, to enable the nominating
              committee to determine whether the candidate would be suitable for
              Audit Committee membership; and

         o    The size and composition of the board.

COMPENSATION OF DIRECTORS

         During 2003, each non-employee director was entitled to receive $1,500
per month as compensation for their services. In addition, since November 1,
2002, each board member chairing a standing committee has been entitled to
receive $500 per month as compensation for their services. We reimburse all
directors for out-of-pocket expenses incurred in connection with attendance at
board and committee meetings. We may periodically award options or warrants to
our directors under our existing option and incentive plans. On January 22,
2003, we granted to each non-employee director an option to purchase up to
51,000 shares of our common stock at an exercise price of $0.35 per share. The
options vested in two equal installments on January 22, 2003 and January 22,
2004.

                                       57
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity. During 2003, Mr. Oliva made salary recommendations to our
executive compensation and management development committee regarding salary
increases for key executives.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

BENEFICIAL OWNERSHIP TABLE

         As of March 12, 2004, a total of 23,481,866 shares of our common stock
were outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock by:

         o    each person known by us to own beneficially more than five
              percent, in the aggregate, of the outstanding shares of our common
              stock as of the date of the table;
         o    each of our directors;
         o    each named executive officer in the Summary Compensation Table
              contained elsewhere in this report; and
         o    all of our directors and executive officers as a group.

         Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated in the footnotes to the
table, we believe each stockholder possesses sole voting and investment power
with respect to all of the shares of common stock owned by that stockholder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a stockholder and the percentage ownership of that
stockholder, shares of common stock subject to options or warrants held by that
person that are currently exercisable or convertible or are exercisable or
convertible within 60 days after the date of the table are deemed outstanding.
Those shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person or group. The address of each
person in this table is c/o MicroTel International Inc., 9485 Haven Avenue,
Suite 100, Rancho Cucamonga, CA 91730. Messrs. Oliva, Jefferies and Foote are
executive officers of MicroTel. Messrs. Oliva, Runyon, Finnegan and Baskin are
directors of MicroTel.


                                       58
<PAGE>
<TABLE>
<CAPTION>

                                                                AMOUNT AND NATURE
              NAME AND ADDRESS                                    OF BENEFICIAL       PERCENT
             OF BENEFICIAL OWNER            TITLE OF CLASS      OWNERSHIP OF CLASS    OF CLASS
             -------------------            --------------      ------------------    --------
<S>                                                                 <C>                <C>
Carmine T. Oliva..........................      Common              1,437,738(1)       6.1%
Robert B. Runyon..........................      Common                389,286(2)       1.6%
Laurence P. Finnegan, Jr..................      Common                253,231(3)       1.1%
Otis W. Baskin............................      Common                     --           --
Graham T. Jefferies.......................      Common                183,563(4)         *
Randolph D. Foote.........................      Common                 90,000(5)         *
All executive officers and directors
   as a group (6 persons).................      Common              2,109,938(6)      10.0%
_______________
</TABLE>

*    Less than 1.00%
(1)  Includes 81,889 shares of common stock held individually by Mr. Oliva's
     spouse, and 283,633 shares of common stock underlying options.
(2)  Includes 209,060 shares of common stock underlying options.
(3)  Includes 209,060 shares of common stock underlying options.
(4)  Includes 180,287 shares of common stock underlying options.
(5)  Includes 85,000 shares of common stock underlying options.
(6)  Includes 988,812 shares of common stock underlying options and 81,889
     shares of common stock held individually by Mr. Oliva's wife.

EQUITY COMPENSATION PLAN INFORMATION

         The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2003.
<TABLE>
<CAPTION>

                                                                                             NUMBER OF SECURITIES
                                                                                           REMAINING AVAILABLE FOR
                                      NUMBER OF SECURITIES TO       WEIGHTED-AVERAGE        FUTURE ISSUANCE UNDER
                                      BE ISSUED UPON EXERCISE        EXERCISE PRICE          EQUITY COMPENSATION
                                          OF OUTSTANDING        OF OUTSTANDING OPTIONS,       PLANS (EXCLUDING
                                         OPTIONS, WARRANTS             WARRANTS              SECURITIES REFLECTED
PLAN CATEGORY                               AND RIGHTS                AND RIGHTS                IN COLUMN (a))
-----------------------------         -----------------------   -----------------------   -------------------------
                                                (a)                       (b)                        (c)
<S>                                        <C>                          <C>                       <C>
Equity compensation plans
   approved by security holders            1,728,558(1)                 $0.96                     1,481,000(2)
Equity compensation plans not
   approved by security holders               652,500(3)                 $0.86                           --
                                        -----------------                                      ----------------
     Total                                  2,381,058                                             1,481,000
___________
</TABLE>

(1)      Represents shares of common stock underlying options that are
         outstanding under our 1993 Stock Option Plan, our Employee Stock and
         Stock Option Plan, our 1997 Stock Incentive Plan and our Amended and
         Restated 2000 Stock Option Plan. The material features of these plans
         are described in Note 8 to our consolidated financial statements for
         the years ended December 31, 2003, 2002 and 2001.
(2)      Represents shares of common stock available for issuance under options
         that may be issued under our Amended and Restated 2000 Stock Option
         Plan.
(3)      Represents shares of common stock underlying warrants that are
         described in Note 8 to our consolidated financial statements for the
         years ended December 31, 2003, 2002 and 2001.


                                       59
<PAGE>

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         We are or have been a party to employment and compensation arrangements
with related parties, as more particularly described above under the headings
"Compensation of Executive Officers," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Compensation of Directors."

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES.

         The following table sets forth the aggregate fees billed to us by Grant
Thorton LLP for professional services rendered for the years ended December 31,
2003 and 2002 and our predecessor auditors for the year ended December 31, 2002:

                    Fee Category                    2003               2002
                    ------------                    ----               ----

        Audit Fees                                 $177,000          $286,000
        Tax Fees                                     57,000            63,000
        All Other Fees                                5,000             4,000
                                                   --------          --------
                 Total                             $239,000          $353,000
                                                   ========          ========

         AUDIT FEES. Consists of fees billed for professional services rendered
for the audit of MicroTel's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Grant Thornton LLP in connection with
statutory and regulatory filings or engagements.

         TAX FEES. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense,
customs and duties, mergers and acquisitions, and international tax planning.

         ALL OTHER FEES. Consists of fees for products and services other than
the services reported above. In fiscal 2003, these services include assistance
regarding the change in the name of CXR, SA to CXR-AJ and other miscellaneous
services. In fiscal 2002, these services included filing reports regarding the
change of the official address of CXR-AJ and other miscellaneous services.

         Our audit committee pre-approves all services provided by Grant
Thornton LLP.

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1), (a)(2) and (d) Financial Statements and Financial Statement Schedules
                       ------------------------------------------------------

         Reference is made to the financial statements and financial statement
schedule listed on and attached following the Index to Financial Statements and
Financial Statement Schedule contained at page F-1 of this report.

(a)(3) and (c)    Exhibits
                  --------

         Reference is made to the exhibits listed on the Index to Exhibits that
follows the financial statements and financial statement schedule.

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

    None.



                                       60
<PAGE>


                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                                                                            Page
                                                                            ----
Financial Statements

Report of Grant Thornton LLP, Independent Certified Public Accountants...    F-2

Report of BDO Seidman, LLP, Independent Certified Public Accountants.....    F-3

Consolidated Balance Sheets as of December 31, 2003 and 2002.............    F-4

Consolidated Statements of Operations for the Years Ended December 31,
    2003, 2002 and 2001..................................................    F-5

Consolidated Statements of Comprehensive Income (Loss) for the
    Years Ended December 31, 2003, 2002 and 2001.........................    F-6

Consolidated Statements of Stockholders' Equity for the Years Ended
    December 31, 2003, 2002 and 2001.....................................    F-7

Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001.....................................    F-8

Notes to Consolidated Financial Statements for the Years Ended
    December 31, 2003, 2002 and 2001.....................................   F-10

Financial Statement Schedule
----------------------------

Consolidated Schedule II Valuation and Qualifying Accounts for the
    Years Ended December 31, 2003, 2002 and 2001.........................   F-37


                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
MicroTel International Inc.

         We have audited the accompanying consolidated balance sheets of
MicroTel International Inc. as of December 31, 2003 and 2002 and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements and financial statement schedule. We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTel
International Inc. at December 31, 2003 and 2002 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

         We have also audited Schedule II of MicroTel International Inc. for the
years ended December 31, 2003 and 2002. In our opinion, the schedule presents
fairly, in all material respects, the information required to be set forth
therein.

/S/ GRANT THORNTON LLP

Los Angeles, California
March 5, 2004

                                      F-2
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors
MicroTel International Inc.
Rancho Cucamonga, California

         We have audited the consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows of MicroTel
International Inc. for the year ended December 31, 2001. We have also audited
the information for the year ended December 31, 2001 in the consolidated
financial statement schedule listed in the accompanying index. These
consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
consolidated financial statement schedule based on our audit.

         We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial statement schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and the financial
statement schedule. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements and the financial statement
schedule. We believe that our audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of MicroTel International Inc. for the year ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the consolidated financial statement schedule
referred to above presents fairly, in all material respects, the information set
forth therein.

/S/ BDO Seidman, LLP
BDO Seidman, LLP

Costa Mesa, California
February 25, 2002


                                      F-3
<PAGE>
<TABLE>

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


ASSETS (Notes 5 and 6)                                                            2003            2002
                                                                                ---------      ---------
<S>                                                                             <C>            <C>
Current assets:
   Cash and cash equivalents                                                    $  1,174       $    254
   Accounts receivable, net of allowance for doubtful accounts
     of $161 and $130, respectively                                                5,393          5,356
   Inventories (Note 2)                                                            6,683          7,505
   Prepaid and other current assets                                                  555            343
                                                                                ---------      ---------
Total current assets                                                              13,805         13,458
Property, plant and equipment, net (Note 3)                                          322            588
Goodwill, net of accumulated amortization of $1,070 and $1,050 in 2003 and
   2002, respectively                                                              2,447          2,346
Other assets                                                                         595            394
                                                                                ---------      ---------
                                                                                $ 17,169       $ 16,786
                                                                                =========      =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable (Note 5)                                                       $  2,882       $  3,475
   Current portion of long-term debt (Note 6)                                        316            318
   Accounts payable                                                                1,637          2,439
   Accrued expenses                                                                3,274          3,265
                                                                                ---------      ---------
Total current liabilities                                                          8,109          9,497
Long-term debt, less current portion (Note 6)                                        819            927
Other liabilities                                                                    325            348
                                                                                ---------      ---------
Total liabilities                                                               $  9,253       $ 10,772

Commitments and contingences (Note 11)

Convertible redeemable Series A Preferred Stock, $10,000 unit value
   Authorized 200 shares; issued and outstanding 0 shares and 25 shares in
   2003 and 2002, respectively (aggregate liquidation preferences of $0
   and $250, respectively) (Note 7)                                                   --            282

Stockholders' equity (Notes 7, 8 and 11):
   Preferred stock, authorized 10,000,000 shares;
     Convertible Series B Preferred Stock, $0.01 par value,
       issued and outstanding 1,000 shares and 64,000 shares in 2003 and
       2002, respectively (aggregate liquidation preference of $4 and $410
       in 2003 and 2002, respectively)                                                 4            400
   Common stock, $0.0033 par value. Authorized 50,000,000 shares;
     issued and outstanding 23,476,000 and 21,535,000 shares in 2003 and
     2002, respectively                                                               77             71
   Additional paid-in capital                                                     25,613         24,900
   Accumulated deficit                                                           (17,886)       (19,042)

   Accumulated other comprehensive income (loss)                                     108           (597)
                                                                                ---------      ---------

Total stockholders' equity                                                         7,916          5,732
                                                                                ---------      ---------
                                                                                $ 17,169       $ 16,786
                                                                                =========      =========
</TABLE>
                              See accompanying notes to financial statements.
                                                     F-4
<PAGE>
<TABLE>

                                 MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                 YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>

                                                                      2003           2002           2001
                                                                    ---------      ---------      ---------
<S>                                                                 <C>            <C>            <C>
Net sales (Note 12)                                                 $ 25,519       $ 22,664       $ 27,423
Cost of sales                                                         14,835         14,147         15,456
                                                                    ---------      ---------      ---------
Gross profit                                                          10,684          8,517         11,967
Operating expenses:
   Selling, general and administrative                                 7,812          7,731         10,129
   Engineering and product development                                   951          1,015          1,076
                                                                    ---------      ---------      ---------
Income (loss) from operations                                          1,921           (229)           762
Other income (expense):
   Interest expense                                                     (416)          (441)          (396)
   Other, net                                                            (58)            80            (18)
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations before income
   taxes                                                               1,447           (590)           348
Income tax expense (benefit) (Note 9)                                    286            (20)            77
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations                               1,161           (570)           271
                                                                    ---------      ---------      ---------

Income (loss) from discontinued operations (Note 13)                      --             --             56
                                                                    ---------      ---------      ---------
Net income (loss)                                                   $  1,161       $   (570)      $    327
                                                                    =========      =========      =========

Basic earnings (loss) per share from continuing
   operations                                                       $   0.05       $  (0.03)      $   0.01
                                                                    =========      =========      =========
Diluted earnings (loss) per share from continuing
   operations                                                       $   0.05       $  (0.03)      $   0.01
                                                                    =========      =========      =========
Basic earnings (loss) per share from discontinued operations        $     --       $     --       $   0.00
                                                                    =========      =========      =========
Diluted earnings (loss) per share from discontinued operations      $     --       $     --       $   0.00
                                                                    =========      =========      =========

Basic earnings (loss) per share (Note 10)                           $   0.05       $  (0.03)      $   0.02
                                                                    =========      =========      =========

Diluted earnings (loss) per share (Note 10)                         $   0.05       $  (0.03)      $   0.01
                                                                    =========      =========      =========
</TABLE>

                              See accompanying notes to financial statements.
                                                     F-5
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)


                                                  2003        2002         2001
                                                -------     -------      -------

Net income (loss)                               $1,161      $ (570)      $  327
Other comprehensive income (loss):
   Foreign currency translation adjustment         705         446         (312)
                                                -------     -------      -------
Comprehensive Income (loss)                     $1,866      $ (124)      $   15
                                                =======     =======      =======


                 See accompanying notes to financial statements.

                                      F-6
<PAGE>
<TABLE>

                                           MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                           YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                                          (IN THOUSANDS)
<CAPTION>


                                                        Series B                                               Accumulated
                                                       Convertible                        Additional Accumu-      Other
                                                     Preferred Stock       Common Stock     Paid-in   lated    Comprehensive
                                                    Shares     Amount   Shares      Amount  Capital  Deficit   Income (Loss)  Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>   <C>          <C>     <C>       <C>       <C>        <C>        <C>
Balance at December 31, 2000                         150        938     20,570        68    24,307   (18,775)      (731)     5,807
Warrants issued for services                          --         --         --        --        21        --         --         21
Stock issued for services                             --         --        100        --        30        --         --         30
Stock issued under stock purchase plan                --         --          1        --        --        --         --         --
Foreign currency translation adjustment               --         --         --        --        --        --       (312)      (312)
Accretion of redeemable preferred stock               --         --         --        --        --       (11)        --        (11)
Net income                                            --         --         --        --        --       327         --        327
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                         150        938     20,671        68    24,358   (18,459)    (1,043)     5,862
Preferred Series B conversions                       (86)      (538)       864         3       535        --         --         --
Accretion of redeemable preferred stock               --         --         --        --        --       (13)       (13)
Warrants issued for services                          --         --         --        --         6        --         --          6
Common stock issued for services                      --         --         --        --         1        --         --          1
Foreign currency translation adjustment               --         --         --        --        --        --        446        446
Net loss                                              --         --         --        --        --      (570)        --       (570)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                          64   $    400     21,535  $     71  $ 24,900  $(19,042)  $   (597)  $  5,732
Preferred Series A conversions                        --         --      1,263         4       283        --         --        287
Preferred Series B conversions                       (63)      (396)       635         2       395        (1)        --         --
Foreign currency translation adjustment               --         --         --        --        --        --        705        705
Accretion of redeemable preferred stock               --         --         --        --        --        (4)        --         (4)
Warrants issued for services                          --         --         --        --        19        --         --         19
Exercise of warrants and options                      --         --         43        --        16        --         --         16
Net income                                            --         --         --        --        --     1,161         --      1,161
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                           1   $      4     23,476  $     77  $ 25,613  $(17,886)  $    108   $  7,916
===================================================================================================================================

                                         See accompanying notes to financial statements.

                                                               F-7
</TABLE>

<PAGE>

<TABLE>

                                      MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                                     (IN THOUSANDS)
<CAPTION>


                                                                                  2003          2002          2001
                                                                                --------      --------      --------
<S>                                                                             <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                               $ 1,161       $  (570)      $   327
   Adjustments to reconcile net income (loss) to cash provided by
     (used in) operating activities:
       Depreciation and amortization                                                249           349           345
       Amortization of intangible assets                                             --            --           370
       Provision for doubtful accounts                                               61           118           216
       Provision for inventory obsolescence                                         924           438           659
       Gain on sale of fixed assets                                                   1            (9)           --
       Stock and warrants issued for services                                        19             7            51
       Net change in operating assets of discontinued operations                     --            --           (15)
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                                           (106)           22         1,609
     Inventories                                                                   (113)         (657)       (1,755)
     Prepaids and other assets                                                     (341)          219           458
     Accounts payable                                                              (802)          114        (1,439)
     Accrued expenses and other liabilities                                         (14)         (688)         (926)
                                                                                --------      --------      --------
Cash provided by (used in) operating activities                                   1,039          (657)         (100)
                                                                                --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                                   (63)         (193)         (120)
   Cash received from sale of fixed assets                                           13            --            --
   Cash collected on notes receivable                                                12            17            82
                                                                                --------      --------      --------
Cash used in investing activities                                                   (38)         (176)          (38)
                                                                                --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (repayments) of notes payable                                    (703)         (206)          (34)
   Net proceeds of long-term debt                                                    --            --           392
   Cash from warrant/option exercise                                                 16            --            --
                                                                                --------      --------      --------
Cash provided by (used in) financing activities                                    (687)         (206)          358
                                                                                --------      --------      --------

Effect of exchange rate changes on cash                                             606           689          (372)
Net increase (decrease) in cash and cash equivalents                                920          (350)         (152)
Cash and cash equivalents at beginning of year                                      254           604           756
                                                                                --------      --------      --------
Cash and cash equivalents at end of year                                        $ 1,174       $   254       $   604
                                                                                ========      ========      ========
</TABLE>

                                                          F-8
<PAGE>
<TABLE>


                                 MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                                (IN THOUSANDS)

<CAPTION>


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                         2003          2002          2001
                                                                           ----          ----          ----
<S>                                                                      <C>           <C>           <C>
   Cash paid during the year for:
     Interest                                                            $   382       $   361       $   400
                                                                         ========      ========      ========
     Income taxes                                                        $    81       $    95       $    45
                                                                         ========      ========      ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
   Equipment acquired under capital lease                                $    --       $   143       $   150
                                                                         ========      ========      ========
   Common stock issued upon conversion of redeemable preferred stock     $   287       $    --       $    --
                                                                         ========      ========      ========
   Accretion of redeemable preferred stock                               $     4       $    13       $    11
                                                                         ========      ========      ========

</TABLE>


                                                     F-9
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

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

         In October 2000, the Company discontinued its circuits segment
operations (see Note 13). At that time, the circuits segment operations
consisted of XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits
Division ("XCD"), a division of XET. XCEL Etch Tek was offered for sale and sold
in November 2000. XCD, predominantly a captive supplier of printed circuit
boards to the electronic components segment, has been retained and is now
included in the electronic components segment. Accordingly, all current and
prior financial information related to the circuits segment operations has been
presented as discontinued operations in the accompanying consolidated financial
statements.

BASIS OF PRESENTATION

         The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and each of its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

REVENUE RECOGNITION

         Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist of all highly liquid investments with
an original maturity of three months or less when purchased. As of December 31,
2003, cash in foreign accounts was $535,000.

INVENTORIES

         Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the useful lives of the assets
(or lease term, if shorter) as follows:

                                      F-10
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


        Buildings                                              50 years
        Machinery, equipment and fixtures                      3-7 years
        Leasehold improvements                                 5 years

         Maintenance and repairs are expensed as incurred, while renewals and
betterments are capitalized.

LONG-LIVED ASSETS

         The Company reviews the carrying amount of its long-lived assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

DEBT ISSUANCE COSTS

         The costs related to the issuance of debt are, and the costs related to
the issuance of the redeemable preferred stock were, capitalized and amortized
over the life of the instruments.

PRODUCT WARRANTY LIABILITIES

         Estimated warranty costs are based on actual warranty costs as a
percentage of sales and a liability is recorded and reviewed in order to reflect
current activity. The Company's electronic components carry a one-year limited
parts and labor warranty, and the Company's communications equipment products
carry a two-year limited parts and labor warranty. The Company's communications
equipment products may be returned within 30 days of purchase if a new order is
received, and the new order will be credited with 80% of the selling price of
the returned item. Products returned under warranty typically are tested and
repaired or replaced at the Company's option. Historically, the Company has not
experienced significant warranty costs or returns. During the fourth quarter of
2001, the Company performed a study of its warranty costs incurred over the
previous two years. Based on the study, the Company determined that it was
over-accrued and, accordingly, reduced its warranty accrual by approximately
$85,000, which amount is included in cost of sales in the accompanying 2001
consolidated statement of operations.

         The Company records a liability for an estimate of costs that it
expects to incur under its basic limited warranties when product revenue is
recognized. Factors affecting the Company's warranty liability include the
number of units sold, historical and anticipated rates of claim, and costs per
claim. The Company periodically assesses the adequacy of its warranty liability
accrual based on changes in these factors.

                                      F-11
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         The changes in the Company's product warranty liability during 2003 and
2002 were as follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                                2003                  2002
                                                                       --------------------------------------------
<S>                                                                            <C>                   <C>
Liability, beginning of year                                                   $ 32,000              $ 32,000
Expense for new warranties issued                                                14,000                32,000
Expense related to accrual revision for prior year warranties                        --                    --
Warranty claims                                                                 (14,000)              (32,000)
                                                                       --------------------------------------------
Liability, end of year                                                         $ 32,000              $ 32,000
                                                                       ============================================
</TABLE>

INCOME TAXES

         The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the year and the change during the
year in deferred tax assets and liabilities.

STOCK-BASED COMPENSATION

         The Company applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for its employee stock option plans unless the
exercise price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."

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


                                      F-12
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                        2003               2002               2001
                                                                        ----               ----               ----
<S>                                                                  <C>               <C>               <C>
NET INCOME (LOSS)
       As reported                                                   $     1,161       $     (570)       $      327
       Pro forma                                                     $     1,116       $     (590)       $      211

NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS (LESS
ACCRETION OF PREFERRED STOCK)
       As reported                                                   $     1,157       $     (583)       $      316
       Pro forma                                                     $     1,112       $     (603)       $      200

BASIC EARNINGS (LOSS) PER SHARE
       As reported                                                   $      0.05       $    (0.03)       $     0.02
       Pro forma                                                     $      0.05       $    (0.03)       $     0.01

DILUTED EARNINGS (LOSS) PER SHARE
       As reported                                                   $      0.05       $    (0.03)       $     0.01
       Pro forma                                                     $      0.05       $    (0.03)       $     0.01
</TABLE>

         The above calculations include the effects of all grants in the years
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income (loss) in future years. The additional stock based
employee compensation expense determined under the fair value method totaled
$45, $20 and $110 in 2003, 2002 and 2001, respectively.

EARNINGS (LOSS) PER SHARE

         Earnings (loss) per share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings
(loss) per share includes no dilution and is computed by dividing net income
(loss) available to common stockholders by the weighted average number of shares
outstanding during the year. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the earnings of the
Company.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. This statement defines fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. As of December 31, 2003 and 2002, the fair value of all
financial instruments approximated carrying value.

         The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value because of the short maturity of these items. The Company believes the
carrying amounts of its notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.

                                      F-13
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the fourth quarter of 2001, the Company finalized a sales tax
audit, resulting in a final tax assessment at a lower amount than had been
accrued for at December 31, 2000. The Company reversed the over-accrual in the
amount of approximately $78,000 in the fourth quarter of 2001, which amount is
included in selling, general and administrative expenses in the accompanying
2001 consolidated statement of operations.

CONCENTRATION OF CREDIT RISK

         Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and accounts receivable.
The Company places its cash with high quality financial institutions. At times,
cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.

         The Company's accounts receivable result from sales to a broad customer
base. The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. Accounts receivable are generally due within 30 days in the
Company's U.S. operations and are stated net of allowance for doubtful accounts.
Accounts outstanding for longer than the contractual payment terms are
considered past due. Provisions for uncollectible accounts are made based on the
Company's specific assessment of the collectibility of all past due accounts.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations. Sales to various BAE Systems companies in
the U.S. and Europe represented approximately 13% and 14% of the Company's total
net revenues during 2003 and 2002, respectively.

FOREIGN CURRENCY TRANSLATION

         The accounts of foreign subsidiaries have been translated using the
local currency as the functional currency. Accordingly, foreign currency
denominated assets and liabilities have been translated to U.S. dollars at the
current rate of exchange on the balance sheet date. The effects of translation
are recorded as a separate component of stockholders' equity in accumulated
other comprehensive income (loss). Exchange gains and losses arising from
transactions denominated in foreign currencies are translated at average
exchange rates and included in operations. Such amounts are not material to the
accompanying consolidated financial statements.

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior years' financial
statements to be consistent with the 2003 presentation.

                                      F-14
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(2)      INVENTORIES
<TABLE>
<CAPTION>

         Inventories are summarized as follows:

                                                                     2003         2002
                                                                     ----         ----
<S>                                                               <C>           <C>
Raw materials.................................................    $3,230,000    $2,904,000
Work-in-process...............................................    $1,963,000     2,988,000
Finished goods................................................    $1,490,000     1,613,000
                                                                  ----------    ----------
                                                                  $6,683,000    $7,505,000
                                                                  ==========    ==========
</TABLE>

         Included in the amounts above are allowances for inventory obsolescence
of $1,692,000 and $1,497,000 at December 31, 2003 and 2002, respectively.
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically reserve
for obsolete inventory that the Company intends to dispose of. The inventory
items identified for disposal at each year end are generally discarded during
the following year.

(3)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>

                                                                     2003             2002
                                                                     ----             ----
<S>                                                             <C>             <C>
Land and buildings............................................  $    365,000    $    309,000
Machinery, equipment and fixtures.............................  $  3,591,000    $  3,717,000
Leasehold improvements........................................  $    435,000    $    450,000
                                                                -------------   -------------
                                                                $  4,391,000    $  4,476,000
Accumulated depreciation......................................  $ (4,069,000)   $ (3,888,000)
                                                                -------------   -------------
                                                                $    322,000    $    588,000
                                                                =============   =============
</TABLE>

                                      F-15
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(4)      GOODWILL AMORTIZATION AND IMPAIRMENT TESTING

         The Company initially applied Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on
January 1, 2002. SFAS No. 142 provides for impairment testing of goodwill
carrying values and disallows the amortization of goodwill. In applying SFAS No.
142, the Company performed the transitional reassessment and impairment tests
required as of January 1, 2002 and determined that goodwill had indefinite
useful lives and that there was no impairment of these assets. At the time of
adoption, the Company had $1,060,000 of accumulated amortization of goodwill.
The Company performed its annual required tests of impairment as of December 31,
2003 and 2002. The following table includes a reversal of the Company's goodwill
amortization expenses for 2001 so that 2001 can be compared with 2003 and 2002,
during which years the Company had no goodwill amortization expense in
accordance with SFAS No. 142.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                     2003              2002             2001
                                                --------------     ------------    --------------
<S>                                             <C>                <C>              <C>
Reported net income (loss) from continuing
  operations                                    $   1,161,000      $  (570,000)     $    271,000

    Add back: goodwill amortization                        --               --           370,000
                                                --------------     ------------    --------------
    Adjusted net income (loss) excluding
      amortization of goodwill                  $   1,161,000      $  (570,000)    $     641,000
                                                ==============     ============    ==============

Income (loss) from discontinued operations                 --               --            56,000
Pro forma net income (loss)                     $   1,161,000      $  (570,000)    $     697,000
                                                ==============     ============    ==============
Earnings (loss) per share:
Basic
Reported net income (loss) from continuing
  operations                                    $        0.05      $     (0.03)    $        0.01
    Add back: goodwill amortization             $          --      $        --     $        0.02
    Adjusted net income (loss) excluding
      amortization of goodwill                  $        0.05      $     (0.03)    $        0.03
                                                ==============     ============    ==============
Income (loss) from discontinued operations                 --               --                --
Net income (loss)                               $        0.05      $     (0.03)    $        0.03
                                                ==============     ============    ==============

Diluted
Reported net income (loss) from continuing
  operations                                    $        0.05      $     (0.03)    $        0.01
    Add back: goodwill amortization                        --               --              0.02
    Adjusted net income (loss) excluding
      amortization of goodwill                  $        0.05      $     (0.03)    $        0.03
                                                ==============     ============    ==============
Income (loss) from discontinued operations                 --               --                --
Pro forma net income (loss)                     $        0.05      $     (0.02)    $        0.03
                                                ==============     ============    ==============
</TABLE>

                                      F-16
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(5)      NOTES PAYABLE

         A summary of notes payable is as follows:

                                                      2003              2002
                                                      ----              ----
Line of credit with a U.S. commercial lender        $1,077,000      $1,070,000
Lines of credit with foreign banks                   1,805,000       2,405,000
                                                    -----------     -----------
                                                    $2,882,000      $3,475,000
                                                    ===========     ===========

         In April 2002, the maturity date of the facility with Wells Fargo
Business Credit, Inc. was extended by two years to August 16, 2005. Since April
17, 2002, the facility has provided for a revolving loan of up to $3,000,000
secured by the Company's inventory and accounts receivable and a term loan in
the amount of $687,000 secured by the Company's machinery and equipment. On
December 31, 2003, the interest rate was the prime rate (then 4.0%) plus 1%
subject to a minimum interest charge of $13,500 per month. Due to the minimum
interest charge, the effective interest rate the Company paid for this credit
facility during 2003 was 20.3%. The balance outstanding at December 31, 2003 was
$1,077,000 on the revolving loan and $114,000 on the term loan, and $238,000 of
additional borrowings were available under the revolving loan. The credit
facility contains restrictive financial covenants that are set by mutual
agreement each year. At December 31, 2003, the Company was in compliance with
the covenants.

         The Company's U.K. subsidiary, XPS, obtained a credit facility with
Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO Holdings, N.V.
financial institution which new facility replaced a Lloyds Bank facility as of
November 12, 2002 and expires on November 12, 2005. Using the exchange rate in
effect at December 31, 2003 for the conversion of British pounds into United
States dollars, the new facility is for a maximum of $2,685,000 and includes a
$627,000 unsecured cash flow loan, a $143,000 term loan secured by XPS' fixed
assets and the remainder of the loan is secured by XPS' accounts receivable and
inventory. The interest rate is the base rate of Venture Finance PLC (3.75% at
December 31, 2003) plus 2%, and is subject to a minimum rate of 4% per annum.
There are no financial performance covenants applicable to this credit facility.

         On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO Holdings N.V. The new credit line is for a maximum of
$1,516,000, based on the exchange rate in effect at December 31, 2003 for the
conversion of euros into United States dollars. The IFN Finance facility
replaced several smaller credit lines. The IFN Finance facility is secured by
CXR-AJ's accounts receivable and carries an annual interest rate of 1.6
percentage points above the French "T4M" rate. The French T4M rate was 2.6% as
of December 31, 2003. Funds that become available under the new IFN Finance
credit line as new accounts receivables develop have been used to retire the
prior existing CXR-AJ credit facilities. CXR-AJ currently also has term loan
balances with Banc Nacional de Paris and Sogelease with aggregate balances
totaling $80,000 as of December 31, 2003.

         XCEL Japan Ltd. ("XJL") obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years and carries a fixed
annual interest rate of 3.25%. The balance of the loan on December 31, 2003 was
$73,000 using the exchange rate in effect at December 31, 2003 for conversion of
Japanese yen into United States dollars.

                                      F-17
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         The Company cannot offer assurance that the various lenders to the
Company's U.K. and/or French subsidiaries will not seek immediate payment of all
amounts owed by them under their respective credit facilities or seek to
terminate any of the existing credit facilities. Similarly, the Company cannot
offer assurance that if either of these events were to occur, the Company would
be successful in obtaining the required replacement financing for its operations
in the U.K. and/or France or, if the Company were able to obtain such financing,
that the financing would occur on a timely basis, would be on acceptable terms
and would be sufficient to allow the Company to maintain its business operations
in the U.K. and/or France. Accordingly, any of these actions on the part of the
lenders to the Company's U.K. and/or French subsidiaries could adversely impact
the Company's results of operations and cash flows.

(6)      LONG-TERM DEBT

         A summary of long-term debt follows:

                                                      2003              2002
                                                      ----              ----
Term notes payable to commercial lender (a)       $   114,000       $    95,000
Term notes payable to foreign banks (b)               871,000           901,000
Capitalized lease obligations (c)                     150,000           249,000
                                                  ------------      ------------
                                                    1,135,000         1,245,000
Current portion                                      (316,000)         (318,000)
                                                  ------------      ------------
                                                  $   819,000       $   927,000
                                                  ============      ============
---------------
         (a)      Two term notes payable to Wells Fargo Business Credit, Inc.
                  bearing interest at the lender's prime rate (4.0% at December
                  31, 2003) plus 1%, subject to a minimum interest charge of
                  $13,500 per month. The term notes payable are subject to the
                  same provisions and covenants as the credit facility discussed
                  in Note 5. The notes are collateralized by machinery and
                  equipment and are payable in total monthly principal
                  installments plus interest through the final maturity date of
                  August 16, 2005.

         (b)      The Company has agreements with several foreign banks that
                  include term borrowings that mature at various dates through
                  2007. Interest rates on the borrowings bear interest at rates
                  ranging from 2.9% to 6.5% and are payable in monthly
                  installments.

         (c)      Capital lease agreements are calculated using interest rates
                  appropriate at the inception of the lease and range from 6% to
                  16%. Lease liabilities are amortized over the lease term using
                  the effective interest method. The leases all contain bargain
                  purchase options and expire at dates through 2004.

                                      F-18
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         Principal maturities related to long-term debt as of December 31, 2003
are as follows:

                       Year Ending December 31,               Amount
                       ------------------------               ------
                                 2004                       $ 316,000
                                 2005                       $ 780,000
                                 2006                       $  22,000
                                 2007                       $  17,000
                                 2008                       $      --

(7)      REDEEMABLE PREFERRED STOCK

CONVERTIBLE REDEEMABLE PREFERRED STOCK

         In June 1998, the Company sold 50 shares of convertible redeemable
Series A Preferred Stock (the "Series A Shares") at $10,000 per share to one
institutional investor. In July 1998, the Company sold an additional 150 Series
A Shares at the same per share price to two other institutional investors.
Included with the sale of such Series A Shares were warrants to purchase a total
of 1,000,000 shares of the Company's common stock exercisable at $1.25 per share
that expired May 22, 2001. The estimated fair value of these warrants (based
upon a Black-Scholes pricing model with the following assumptions: no dividend
yield; expected volatility of 28%; risk-free interest rate of 5.1%; and an
expected life of 3 years) totaled $163,000 and reduced the convertible
redeemable preferred stock balance as of the date of issuance.

         The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. Under the
original certificate of designation, the Series A Shares were convertible into
common stock of the Company at the option of the holder thereof at any time
after the ninetieth (90th) day of issuance thereof at the conversion price per
share of Series A Shares equal to $10,000 divided by the lesser of (x) $1.26 and
(y) One Hundred Percent (100%) of the arithmetic average of the three lowest
closing bid prices over the forty (40) trading days prior to the exercise date
of any such conversion. Also under the original certificate of designation, no
more than 20% of the aggregate number of Series A Shares originally purchased
and owned by any single entity could be converted in any thirty (30) day period
after the ninetieth (90th) day from issuance. In the event of any liquidation,
dissolution or winding up of the Company, the holders of shares of Series A
Shares are entitled to receive, prior and in preference to any distribution of
any assets of the Company to the holders of the Company's common stock, an
amount per share equal to $10,000 for each outstanding Series A Share. Any
unconverted Series A Shares were redeemable at the option of the Company for
cash at a per share price equal to $11,500 per Series A Share, and any Series A
Shares that remained outstanding as of May 22, 2003 were subject to mandatory
redemption by the Company at the same per-share redemption price. The excess of
the redeemable value over the carrying value was accreted by periodic charges to
retained earnings over the original life of the issue.

         In November 1998, the holders of the Series A Shares agreed to revise
the certificate of designations relating to the Series A Shares to provide that:
(i) the conversion price would be fixed at $10,000 divided by $0.50 for so long
as the Company's common stock continued to be traded on the Nasdaq SmallCap
Market and the Company did not conduct a reverse split of its outstanding common
stock; and (ii) the Company would not exercise its redemption rights for the
outstanding shares of the Series A Shares for six months. The agreement also


                                      F-19
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


provided that the existing restriction on the right of each holder of the Series
A Shares to convert more than 20% of the aggregate number of shares of the
Series A Shares originally purchased by such holder in any 30-day period would
be eliminated. Also, the agreement provided that the Company would replace the
existing warrants, which warrants had an exercise price of $1.25 per share, with
warrants that had an exercise price of $0.75 per share.

         The Company inadvertently failed to obtain the required approval of the
Company's common stockholders and to file an amended certificate of designations
to effectuate the amendments to the certificate of designations that were
contained in the November 1998 agreement. However, between November 18, 1998 and
March 26, 1999, the holders of the Series A Shares converted shares of the
Series A Shares into shares of common stock at the rate of 20,000 shares of
common stock per share of the Series A Shares, as agreed to in the November 1998
agreement. Use of the $10,000 divided by $0.50 conversion price in four of the
conversions resulted in the stockholders receiving an aggregate of 46,437 more
shares of common stock than they would have received under the original
conversion price formula that was contained in the certificate of designations.
The Company has determined, however, that the excess shares were in fact validly
issued under Delaware law.

         In May 1999, the Company's common stock was delisted from the Nasdaq
SmallCap Market due to a failure to meet Nasdaq's minimum closing bid price
listing requirement, and the Company's common stock began trading on the OTC
Bulletin Board (see Note 8). Based upon the terms of the November 1998
agreement, the conversion price of the Series A Shares reverted back to the
floating conversion price shown in the certificate of designations, which
conversion price was $10,000 divided by the lesser of $1.26 and 100% of the
arithmetic average of the three lowest closing bid prices over the 40 trading
days prior to a conversion.

         In December 1999, two institutional investors sold all of their
outstanding Series A Shares and the prorated portion of warrants applicable to
the then outstanding Series A Shares. The purchasers of such Series A Shares and
prorated warrants included an executive officer of the Company and certain
related parties. Also in December 1999, the holders of the 59.5 outstanding
shares of the Series A Shares agreed to modify the conversion ratio to a fixed
factor of $10,000 divided by $0.1979, or 50,530 shares of common stock per
Series A Share, in exchange for a reduction in the exercise price of the
warrants to $0.25 per share and an extension of the expiration date of the
warrants to December 2002. In the event a holder of the Series A Shares had
converted its Series A Shares to common stock immediately before the December
1999 agreement, each Series A Share would have been converted into approximately
52,632 shares of common stock at a per share conversion price of $10,000 divided
by $0.19, based on the original conversion ratio. In connection with the
repricing of the warrants, the Company recognized $91,000 of non-cash expense in
1999. This expense represents the excess of the fair value of the warrants after
repricing over the value of the warrants immediately before the repricing. The
estimated fair values of the old and revised warrants was calculated using a
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 81%; a risk free interest rate of 6%; and an expected
life of 1.5 and 3 years, respectively.

         The Company filed an amended certificate of designation with the
Delaware Secretary of State to give effect to the December 1999 agreements by
fixing the conversion price of the Series A Shares at $10,000 divided by
$0.1979. However, because the Company inadvertently failed to obtain approval of
the Company's common stockholders for the amendment to the certificate of
designation, the amendment was invalid under the Delaware General Corporation
Law. However, in June 2000, a holder of Series A Shares converted 34.5 shares of


                                      F-20
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


the Series A Shares into 1,743,285 shares of common stock based upon the $10,000
divided by $0.1979 per share conversion price that the Company and the holders
of the Series A Shares believed to be in effect. This conversion resulted in the
issuance of 1,048,654 more shares of common stock than would otherwise have been
issued upon conversion of the 34.5 shares of the Series A Shares under the
certificate of designations that was then in effect. The Company has determined,
however, that the excess shares were in fact validly issued under Delaware law.

         In November 2000, the Company realized that the modifications to the
conversion price of the Series A Shares were invalid because the Company had
inadvertently failed to obtain common stockholder approval for the modifications
to the certificate of designations and had also inadvertently failed to file an
amendment reflecting the November 1998 modifications. The Company's board of
directors distributed proxy materials requesting that holders of the Company's
common stock and the Series A Shares approve an amendment to the certificate of
designations that provided for a fixed conversion price of $10,000 divided by
$0.1979 and an amendment to the certificate of incorporation that increased the
authorized shares of common stock from 25,000,000 to 50,000,000. The amendments
were approved at a special meeting of stockholders that was held on January 16,
2001. The Company filed the amendments with the Delaware Secretary of State on
January 22, 2001, so that after that date, each outstanding Series A Share was
convertible into 50,530 shares of common stock. As of December 31, 2003, there
were no Series A Shares outstanding.

         The following table reflects the convertible redeemable preferred stock
activity:

                                                   Number
                                                  of Shares          Amount
                                                  ---------          ------
Balance at December 31, 2000                          25.0        $  259,000
Conversion to common stock                              --                --
Accretion of preferred stock                            --            11,000
----------------------------                        -------       -----------
Balance at December 31, 2001                          25.0           270,000
Conversion to common stock                              --                --
Accretion of preferred stock                            --            12,000
----------------------------                        -------       -----------
Balance at December 31, 2002                          25.0           282,000
                                                    -------       -----------
Accretion of preferred stock                            --             5,000
----------------------------                        -------       -----------
Conversion to common stock                           (25.0)         (287,000)
Balance at December 31, 2003                             0        $        0
                                                    =======       ===========

(8)      STOCKHOLDERS' EQUITY

STOCK OPTIONS AND WARRANTS

         The Company has four stock option plans:

         o        Employee Stock and Stock Option Plan, effective July 1, 1994,
                  providing for non-qualified stock options as well as
                  restricted and non-restricted stock awards to both employees
                  and outside consultants. Up to 520,000 shares were authorized
                  for issuance under this plan. Terms of related grants under
                  the plan are at the discretion of the board of directors. The
                  board of directors does not intend to issue any additional
                  options or make any additional stock grants under this plan.

                                      F-21
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         o        1993 Stock Option Plan, providing for the grant of up to
                  300,000 incentive and non-qualified stock options to purchase
                  stock at not less than the current market value on the date of
                  grant. Options granted under this plan vest ratably over three
                  years and expire 10 years after date of grant. The board of
                  directors does not intend to issue any additional options
                  under this plan.

         o        The MicroTel International Inc. 1997 Stock Incentive Plan (the
                  "1997 Plan") provides that options granted may be either
                  qualified or nonqualified stock options and are required to be
                  granted at fair market value on the date of grant. Subject to
                  termination of employment, options may expire up to ten years
                  from the date of grant and are nontransferable other than in
                  the event of death, disability or certain other transfers that
                  the committee of the board of directors administering the 1997
                  Plan may permit. Up to 1,600,000 stock options were authorized
                  to be granted under the 1997 Plan. All outstanding options of
                  former optionholders under the XET 1987 Employee Stock Option
                  Plan were converted to options under the 1997 Plan as of the
                  date of the merger between the Company and XET at the exchange
                  rate of 1.451478. The board of directors does not intend to
                  issue any additional options under this plan.

         o        The 2000 Stock Option Plan was adopted by the board of
                  directors in November 2000 and approved by the stockholders on
                  January 16, 2001. The board of directors adopted the Amended
                  and Restated 2000 Stock Option Plan ("2000 Plan") effective as
                  of August 3, 2001. Under the 2000 Plan, options granted may be
                  either incentive or nonqualified options. Incentive options
                  must have an exercise price of not less than the fair market
                  value of a share of common stock on the date of grant.
                  Nonqualified options must have an exercise price of not less
                  than 85% of the fair market value of a share of common stock
                  on the date of grant. Up to 2,000,000 options may be granted
                  under the 2000 Plan. No option may be exercised more than ten
                  years after the date of grant.

         The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for these
plans and arrangements for current employees whose grants provide for exercise
prices at or above the market price on the date of grant. Compensation or other
expense is recorded based on intrinsic value (excess of market price over
exercise price on date of grant) for employees, and fair value of the option
awards for others.

         The following table shows activity in the outstanding options for the
years ended December 31, 2003, 2002 and 2001:

<TABLE>
<CAPTION>

                                                   Weighted                    Weighted                     Weighted
                                                    Average                     Average                      Average
                                         2003       Exercise       2002         Exercise         2001        Exercise
                                        Shares       Price        Shares         Price          Shares        Price
                                        ------       -----        ------         -----          ------        -----
<S>                                    <C>           <C>         <C>             <C>          <C>             <C>
Outstanding at beginning of year       1,432,000     $1.11       1,718,000       $1.34        1,454,000       $1.34
Granted                                  344,000     $0.35          50,000        0.32          345,000        0.41
Exercised                                (28,000)    $0.24              --          --               --          --

Forfeited                                (19,000)    $2.21        (336,000)       1.37          (81,000)       0.64
                                       ----------               -----------      -----      ------------      -----
Outstanding at end of year             1,729,000     $0.96       1,432,000       $1.11        1,718,000       $1.18
                                       ==========               ===========      ======     ============      ======
</TABLE>

                                      F-22
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         The following table summarizes information with respect to stock
options at December 31, 2003:

<TABLE>
<CAPTION>
                                  Options Outstanding                                     Options  Exercisable
                        -------------------------------------                        ----------------------------
                           Number           Weighted Average                              Number
      Range of           Outstanding            Remaining             Weighted         Exercisable       Weighted
      Exercise          December 31,        Contractual Life          Average          December 31,       Average
       Price                2003                (Years)                Price              2003             Price
    -----------          ----------          ---------------        ------------     -----------------  --------
<S>                         <C>                   <C>                   <C>              <C>               <C>
$0.20 to $1.00              1,036,000             7.23                  $0.36            839,000           $0.36
$1.01 to $2.00                676,000             1.43                   1.83            676,000            1.83
$3.01 to $4.00                 17,000             2.33                   3.23             17,000            3.23
                          -----------             ----                  -----          ---------           -----
$0.20 to $4.00              1,729,000             4.91                  $0.96          1,532,000           $1.04
                          ===========             ====                  =====          =========           =====
</TABLE>

         The fair value of options granted during 2003 was $42,000, at a
weighted average value of $0.12 per share. The fair values of options granted
during 2002 and 2001 were $13,000 and $115,000, respectively, at weighted
average values of $0.26 and $0.41 per share, respectively.

         If the Company had instead elected the fair value method of accounting
for stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair value
at date of grant for options granted in 2003, 2002 and 2001 has been estimated
based on a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 92% in 2003, 92% in 2002 and 89% to 95%
in 2001; risk-free interest rate of 2.0% to 3.0%; and average expected lives of
approximately seven to ten years.

         The board of directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key employees
and other parties as follows:

<TABLE>
<CAPTION>
                                                                        Warrant Price
                                                 Number        ---------------------------------
                                               of Shares          Per Share          Total
                                              --------------------------------------------------
<S>                                            <C>             <C>                 <C>
Balance outstanding at December 31, 2000       2,172,000       $0.25 to 2.50         1,703,000
Warrants issued                                  100,000       0.25 to 0.39             33,000
Warrants expired/forfeited                      (300,000)      1.00 to 1.25           (362,000)
                                              --------------------------------------------------
Balance outstanding at December 31, 2001       1,972,000       $0.25 to 2.50       $ 1,374,000
Warrants issued                                  120,000       $        0.50            60,000
Warrants expired/forfeited                     1,688,000       0.25 to 1.73        $ 1,161,000
                                              --------------------------------------------------
Balance outstanding at December 31, 2002         404,000       $0.25 to $2.50      $   273,000
Warrants issued                                  401,000       $.75 to $1.00           325,000
Warrants expired/forfeited                      (138,000)                0.66          (91,000)
Warrants exercised                               (14,000)                0.66           (9,000)
                                              --------------------------------------------------
Balance outstanding at December 31, 2003         653,000       $0.25 to $2.50      $   498,000
                                              ==================================================
</TABLE>

         During 2003, the Company issued warrants to purchase up to 300,000
shares of common stock at the exercise price of $0.75 and 100,500 shares at the
exercise price of $1.00. The Company issued the warrants for services rendered
or to be rendered. The estimated value of the warrants was $19,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 1.6%, expected lives of 3 years, no dividend yield
and an expected volatility of 84.8%.

                                      F-23
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         During 2002, the Company issued warrants to purchase up to 120,000
shares of common stock at an exercise price of $0.50 per share. The Company
issued the warrants to a former executive of the Company as compensation for
services rendered. The estimated value of the warrants was $7,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 92%; a risk-free interest rate of
3.75%; and a contractual life of 3 years. Also, during 2002 the Company issued
5,000 shares of common stock in consideration for services rendered. The stock
was valued at $1,000 on the date of issuance and, accordingly, the Company
recorded a $1,000 expense.

         During 2001, the Company issued warrants to purchase up to 35,000,
50,000 and 15,000 shares of common stock at exercise prices of $0.39, $0.31 and
$0.25, respectively. The Company issued the warrants as compensation for
services rendered. The estimated value of the warrants was $21,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 91% to 94%; a risk-free interest rate
of 3.1% to 5%; and expected lives of 3 to 5 years. Also during 2001, the Company
issued 100,000 shares of common stock in consideration for investor relations
services. The stock was valued at $30,000 on the date of issuance and,
accordingly, the Company recorded a $30,000 expense.

         The Company had an Employee Stock Purchase Plan at its CXR Telcom
subsidiary allowing eligible subsidiary employees to purchase shares of the
Company's common stock at 85% of market value. During 2001, an aggregate of 900
shares were issued pursuant to the plan. The Company terminated this plan
effective as of July 1, 2001.

         As of December 31, 2003, the Company was authorized to issue 50,000,000
shares of common stock. As of that date, the Company had 23,476,163 shares of
common stock outstanding and 2,386,761 shares of common stock that could become
issuable pursuant to the exercise of outstanding stock options and warrants and
the conversion of convertible preferred stock.

DIVIDENDS

         No dividends on the Company's common stock have been paid to date. The
Company's line of credit with Wells Fargo Business Credit, Inc. prohibits the
payment of cash dividends on the Company's common stock. The Company currently
intends to retain future earnings to fund the development and growth of its
business and, therefore, does not anticipate paying cash dividends on its common
stock within the foreseeable future. Any future payment of dividends on the
Company's common stock will be determined by the Company's board of directors
and will depend on the Company's financial condition, results of operations,
contractual obligations and other factors deemed relevant by the Company's board
of directors.

(9)      INCOME TAXES

         The Company files a consolidated U.S. federal income tax return. This
return includes all domestic companies 80% or more owned by the Company. State
tax returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to the Company and its domestic subsidiaries.

                                      F-24
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         Income (loss) from continuing operations before income taxes was taxed
under the following jurisdictions:

<TABLE>
<CAPTION>
                                                      2003              2002              2001
                                                      ----              ----              ----
<S>                                               <C>               <C>               <C>
Domestic                                          $   961,000       $   497,000       $   718,000
Foreign                                               486,000        (1,087,000)         (370,000)
                                                  ------------      ------------      ------------
Total                                             $ 1,447,000       $  (590,000)      $   348,000
                                                  ============      ============      ============

         Income tax expense (benefit) consists of the following:

                                                      2003              2002            2001
                                                      ----              ----            ----
Current
   Federal                                        $   (12,000)      $        --       $     5,000
   State                                               55,000            18,000             5,000
   Foreign                                            351,000           (38,000)           67,000
                                                  ------------      ------------      ------------
Total Current                                     $   394,000       $   (20,000)      $    77,000
                                                  ============      ============      ============

Deferred
   Federal                                        $   (94,000)      $        --       $        --
   State                                              (14,000)               --                --
   Foreign                                                 --                --                --
                                                  ------------      ------------      ------------
Total Deferred                                    $  (108,000)      $        --       $        --

Total
   Federal                                        $  (106,000)      $        --       $     5,000
   State                                               41,000            18,000             5,000
   Foreign                                            351,000           (38,000)           67,000
                                                  ------------      ------------      ------------
Total                                             $   286,000       $   (20,000)      $    77,000
                                                  ============      ============      ============

         Income tax expense (benefit) differs from the amount obtained by
applying the statutory federal income tax rate of 34% to income (loss) from
continuing operations before income taxes as follows:

                                                      2003              2002              2001
                                                      ----              ----              ----
Tax (tax benefit) at U.S. federal statutory rate  $   492,000       $  (200,000)      $   118,000
State taxes, net of federal income tax benefit         43,000           (34,000)            5,000
Foreign income taxes                                  (63,000)          (38,000)           67,000
Change in valuation allowances                       (182,000)          258,000                --
Permanent differences                                  12,000            11,000            54,000
Utilization of net operating losses                        --                --          (167,000)
Other                                                 (16,000)          (17,000)               --
                                                  ------------      ------------      ------------
                                                  $   286,000       $   (20,000)      $    77,000
                                                  ============      ============      ============
</TABLE>

                                      F-25
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                           2003                 2002
                                                           ----                 ----
<S>                                                    <C>                <C>
Deferred tax assets:
    Fixed assets depreciation                          $    269,000       $    250,000
    Allowance for doubtful accounts                          10,000              3,000
    Inventory reserves and uniform capitalization           206,000            279,000
    Other accrued liabilities                               112,000            216,000
    Deferred compensation                                   110,000            144,000
    Research credit carryforwards                                --            224,000
    Alternative Minimum Tax credit carryforwards            142,000            135,000
    Capital loss carryforwards                              136,000                 --
    Net operating loss carryforwards                     12,315,000         12,123,000
                                                       -------------      -------------
Total deferred tax assets                                13,300,000         13,374,000
Valuation allowance for deferred tax assets             (13,192,000)       (13,374,000)
                                                       -------------      -------------
Net deferred tax assets                                $    108,000       $         --
                                                       =============      =============
</TABLE>

         Net deferred tax assets of $108,000 are included in prepaid and other
current assets as of December 31, 2003. As of December 31, 2003, the Company had
federal net operating loss carryforwards of approximately $36,056,000 which
expire at various dates through 2022, and state net operating loss carryforwards
of approximately $1,272,000, which expire at various dates through 2012. At
December 31, 2002, the Company had recorded a 100% valuation allowance on the
net deferred tax asset because of uncertainty regarding its realization. The
ultimate realization of the deferred tax asset is dependant upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. For the year ended December 31,
2003, management recorded a reduction in its valuation allowance of $108,000
based on the domestic income in 2003 and projections for future taxable income
over periods that the deferred assets are deductible. Management believes that
it is more likely than not that the Company will realize the benefits of these
deductible differences. The amount of the deferred tax assets considered
realizable, however, could materially change in the near future if estimates of
future taxable income during the carryforward period are changed.

         As a result of the merger in 1997 of the privately held XET with a
wholly-owned, newly formed subsidiary of the Company, with XET as the surviving
subsidiary, the Company experienced a more than 50% ownership change for federal
income tax purposes. As a result, an annual limitation will be placed upon the
Company's ability to realize the benefit of most of its net operating loss and
credit carryforwards. The amount of this annual limitation, as well as the
impact of the application of other possible limitations under the consolidated
return regulations, has not been definitively determined at this time.
Management believes sufficient uncertainty exists regarding the realizability of
the deferred tax asset items and that a valuation allowance, substantially equal
to the net deferred tax asset amount, is required.

                                      F-26
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(10)     EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                         2003               2002               2001
                                                                         ----               ----               ----
<S>                                                                  <C>                <C>                <C>
NUMERATOR:
Net income (loss)                                                    $  1,161,000       $   (570,000)      $    327,000
     Less: accretion of the excess of the redemption value over
     the carrying value of redeemable preferred stock                      (4,000)           (13,000)           (11,000)
Income (loss) attributable to common stockholders                    $  1,157,000       $   (583,000)      $    316,000
DENOMINATOR:
Weighted average number of common shares outstanding during the
   period - basic                                                      22,567,000         21,208,000         20,594,000
Incremental shares from assumed conversions of warrants,
   options and preferred stock                                          1,244,000                 --          3,188,000
Adjusted weighted average shares - diluted                             23,811,000         21,208,000         23,782,000

Basic earnings (loss) per share                                      $       0.05       $      (0.03)      $       0.02

Diluted earnings (loss) per share                                    $       0.05       $      (0.03)      $       0.01
</TABLE>

         The following table shows the common stock equivalents that were
outstanding as of December 31, 2003 and 2002 but were not included in the
computation of diluted earnings (loss) per share because the options' or
warrants' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be anti-dilutive:

<TABLE>
<CAPTION>

                                                            Number              Exercise Price
                                                          of Shares               Per Share
                                                          ---------               ---------
<S>                                                       <C>                   <C>
Anti-dilutive common stock options:
    As of December 31, 2003                                 693,000             $1.13 to $3.44
    As of December 31, 2002                               1,432,000             $0.20 to $3.44
Anti-dilutive common stock warrants:
    As of December 31, 2003                                  32,000                 $2.50
    As of December 31, 2002                                 404,000             $0.25 to $2.50
</TABLE>

         The computation of diluted loss per share for 2002 excludes the effect
of incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was anti-dilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 8.

(11)     COMMITMENTS AND CONTINGENCIES

LEASES

         The Company conducts most of its operations from leased facilities
under operating leases that expire at various dates through 2013. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2003, 2002 and 2001 was approximately $909,000, $1,097,000
and $1,091,000, respectively.

                                      F-27
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year are as
follows:

                        Year Ending December 31,                  Amount
                        ------------------------                  ------
                                  2004                         $    718,000
                                  2005                              497,000
                                  2006                              425,000
                                  2007                              404,000
                           2008 and thereafter                      585,000
                                                               ------------
                                                               $  2,629,000
                                                               ============
LITIGATION

         The Company is not currently a party to any material legal proceedings.
However, the Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.

EMPLOYEE BENEFIT PLANS

         Effective October 1, 1998, the Company instituted a defined
contribution plan ("401(k) Plan") covering the majority of its U.S. domestic
employees. Participants may make voluntary pretax contributions to such plans up
to the limit as permitted by law. Annual contributions to any plan by the
Company is discretionary. The Company made contributions of $20,000, $22,000 and
$16,000 to the 401(k) Plan for the years ended December 31, 2003, 2002 and 2001,
respectively.

EXECUTIVE MANAGEMENT

         Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into a new employment agreement that provides for an
annual base salary of $250,000, with annual merit increases, an initial term of
five years, two renewal periods of two years each, and severance pay of at least
three years' salary during the initial period or at least two years' salary
during a renewal period.

         Effective July 2, 2001, the Company and Randolph D. Foote, its Senior
Vice President and Chief Financial Officer, entered into an employment agreement
that provides for an initial annual salary of $130,000, an initial term of three
years, two renewal periods of one year each, and severance pay of at least one
years' salary.

                                      F-28
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         Effective July 2, 2001, the Company and Graham Jefferies, Managing
Director of XCEL Corporation Ltd. and Executive Vice President and Chief
Operating Officer of the Company's Telecommunications Group, entered into an
employment agreement that provides for an initial annual salary of 100,000
British pounds (approximately $141,000 at the then current exchange rates), an
initial term of three years, two renewal periods of one year each, and severance
pay of at least one years' salary.

(12)     SEGMENT AND MAJOR CUSTOMER INFORMATION

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

         In October 2000, the Company decided to discontinue its circuits
segment operations. At that time the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a
division of XET Corporation, a wholly-owned subsidiary of the Company. XCEL Etch
Tek was offered for sale. XCD is essentially a captive supplier of printed
circuit boards to the electronic components segment with total sales to external
customers of $153,000, $160,000 and $127,000 for the years ended December 31,
2003, 2002 and 2001, respectively. XCD has been retained and is now included in
the electronic components segment. Accordingly, all current and prior financial
information related to the circuits segment operations have been presented as
discontinued operations in the accompanying consolidated financial statements,
with the exception of XCD which has been included in the current and prior
financial information related to the electronic components segment in the
accompanying consolidated financial statements.

         The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes
exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.


                                      F-29
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


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

<TABLE>
<CAPTION>

                                       2003               2002              2001
                                       ----               ----              ----
<S>                                 <C>              <C>                <C>
SALES TO EXTERNAL CUSTOMERS:
     Electronic Components          $16,168,000      $ 13,390,000       $12,646,000
     Communications Equipment         9,351,000         9,274,000        14,777,000
                                    $25,519,000      $ 22,664,000       $27,423,000
INTEREST EXPENSE:
     Electronic Components          $   247,000      $    259,000       $   228,000
     Communications Equipment           162,000           168,000           158,000
                                    $   409,000      $    427,000       $   386,000
DEPRECIATION AND AMORTIZATION:
     Electronic Components          $    72,000      $     93,000       $   279,000
     Communications Equipment            65,000           177,000           322,000
                                    $   137,000      $    270,000       $   601,000
SEGMENT PROFITS (LOSSES):
     Electronic Components          $ 3,590,000      $  2,452,000       $ 2,882,000
     Communications Equipment            74,000        (1,257,000)          450,000
                                    $ 3,664,000      $  1,195,000       $ 3,332,000
SEGMENT ASSETS:
     Electronic Components          $ 9,466,000      $  9,445,000       $ 9,060,000
     Communications Equipment         6,969,000         6,773,000         8,317,000
                                    $16,435,000      $ 16,218,000       $17,377,000
</TABLE>

                                      F-30
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.

<TABLE>
<CAPTION>
                                                                        2003             2002               2001
                                                                        ----             ----               ----
<S>                                                               <C>                <C>                <C>
Net sales
---------
   Total sales for reportable segments                            $ 25,519,000       $ 22,664,000       $ 27,423,000
   Elimination of intersegment sales                                        --                 --                 --
Total consolidated revenues                                       $ 25,519,000       $ 22,664,000       $ 27,423,000

Profit (loss) from continuing operations
----------------------------------------
   before income taxes
   -------------------
     Total profit (loss) for reportable segments                  $  3,656,000       $  1,195,000       $  3,332,000
     Unallocated amounts:
       General corporate expenses                                   (2,209,000)        (1,785,000)        (2,984,000)
Consolidated income (loss) from continuing operations before
   income taxes                                                   $  1,447,000       $   (590,000)      $    348,000

Assets
------
   Total assets for reportable segments                           $ 16,437,000       $ 16,218,000       $ 17,377,000
   Other assets                                                        732,000            568,000            311,000
Total consolidated assets                                         $ 17,169,000       $ 16,786,000       $ 17,688,000

Interest expense
----------------
   Interest expense for reportable segments                       $    409,000       $    427,000       $    386,000
   Other interest expense                                                7,000             14,000             10,000
Total interest expense                                            $    416,000       $    441,000       $    396,000

Depreciation and amortization
-----------------------------
Depreciation and amortization expense
   for reportable segments                                        $    137,000       $    270,000       $    601,000
   Other depreciation and amortization expense                          64,000             79,000            114,000
Total depreciation and amortization                               $    201,000       $    349,000       $    715,000
</TABLE>

                                      F-31
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         A summary of the Company's net sales and identifiable assets by
geographical area follows:

                                    2003             2002              2001
                                    ----             ----              ----
Net sales:
----------
    United States               $ 7,971,000       $ 8,598,000       $12,461,000
    Japan                           838,000           768,000         1,085,000
    France                        6,627,000         5,854,000         7,848,000
    United Kingdom               10,083,000         7,444,000         6,029,000
                                ------------      ------------      ------------
                                $25,519,000       $22,664,000       $27,423,000
                                ============      ============      ============
Long-lived assets:
------------------
    United States               $   117,000       $   399,000       $   422,000
    Japan                            16,000            15,000            14,000
    France                          107,000           177,000           186,000
    United Kingdom                   82,000            97,000           136,000
                                ------------      ------------      ------------
                                $   322,000       $   688,000       $   758,000
                                ============      ============      ============

         Sales and purchases between geographic areas have been accounted for on
the basis of prices set between the geographic areas, generally at cost plus 5%.
Identifiable assets by geographic area are those assets that are used in the
Company's operations in each location. Net sales by geographic area have been
determined based upon the country from which the product was shipped.

         One customer in the electronic components segment accounted for 10% or
more of net sales during 2003, 2002 and 2001.

(13)     DISCONTINUED OPERATIONS

         In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary and XCD, a division of XET Corporation,
a wholly-owned subsidiary of the Company. During 1998 and 1999, the Company sold
substantially all of the assets of two other circuits operations, HyComp and
XCEL Arnold Circuits. XCD is essentially a captive supplier of printed circuit
boards to the electronic components segment with total sales to external
customers of $153,000, $160,000 and $127,000 for the years ended December 31,
2003, 2002 and 2001, respectively. XCD has been retained and is now included in
the electronics components segment. Accordingly, all current and prior financial
information related to the circuits segment operations (XCEL Etch Tek, HyComp
and XCEL Arnold) has been presented as discontinued operations in the
accompanying consolidated financial statements.

         Summarized results of operations for the discontinued operations for
2003, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                             2003              2002              2001
                                                             ----              ----              ----
<S>                                                        <C>               <C>              <C>
Net sales                                                  $    --           $    --          $    --
                                                      ================= ================ =================
Operating income (loss)                                    $    --           $    --          $   56,000
                                                      ================= ================ =================
Gain (loss) on sale of discontinued operations             $    --           $    --          $    --
                                                      ================= ================ =================
</TABLE>

                                      F-32
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         There were no assets and liabilities as of December 31, 2003, 2002 and
2001 relating to the circuits segment.

(14)     NEW ACCOUNTING PRONOUNCEMENTS

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

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

         In November 2002, the EITF reached a consensus on Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. This Issue
provides guidance on when and how to separate elements of an arrangement that
may involve the delivery or performance of multiple products, services and
rights to use assets into separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal periods,
interim or annual, beginning after June 15, 2003. The Company adopted Issue No.
00-21 on July 1, 2003. The adoption of Issue No. 00-21 did not have a material
impact to the Company's consolidated financial position, results of operations,
or cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123"
("SFAS No. 148"). This statement amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the estimate of the


                                      F-33
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


market value of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company has adopted the annual
disclosure provisions of SFAS No. 148 in its financial reports for the year
ended December 31, 2002 and adopted the interim disclosure provisions for its
financial reports beginning with the quarter ending March 31, 2003. Because the
adoption of this standard involves disclosures only, the adoption did not have a
material impact on the Company's results of operations, financial position or
liquidity.

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

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

         In November 2003, the EITF reached a consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF Issue No. 03-1 provides guidance on other-than-temporary
impairment and its application to debt and equity investments. The requirements
apply to investments in debt and marketable equity securities that are accounted
for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The provisions of Issue No. 03-1 are effective for annual periods
ending after December 15, 2003. The adoption of this Statement is not expected
to have a material effect on the Company's financial condition or results of
operations.

         In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits," an
amendment of SFAS No. 87, 88 and 106, and a revision of SFAS No. 132. The
statement is effective for fiscal years and interim periods ending after
December 15, 2003. This Statement revises employers' disclosures about pension
plans and other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, 88 and 106. The new rules
require additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The adoption of this Statement is not expected to
have a material effect on the Company's financial condition or results of
operations.

         In December 2003, the FASB issued FASB Staff Position No. FAS 106-1
(FSP 106-1), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." The guidance is
effective for initial interim or annual fiscal periods ending after December 7,
2003. FSP 106-1 permits employers that sponsor postretirement benefit plans
(plan sponsors) that provide prescription drug benefits to retirees to make a
one-time election to defer accounting for any effects of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (the "Act").
Without FSP 106-1, plan sponsors would be required under SFAS No. 106 to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law. The adoption of this Statement
is not expected to have a material effect on the Company's financial condition
or results of operations.

                                      F-34
<PAGE>

                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


         In December 2003 the SEC issued Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. SAB 104 codifies, revises and rescinds certain
sections of SAB No. 101 in order to make this interpretive guidance consistent
with current authoritative accounting and auditing guidance and SEC rules and
regulations. Accordingly, there is no impact to our results of operations,
financial position or cash flows as a result of the issuance of SAB No. 104.

         In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R).
FIN 46R requires the application of either FIN 46 or FIN 46R by Public Entities
to all Special Purpose Entities ("SPEs") created prior to February 1, 2003 as of
December 31, 2003 for calendar year-end companies. FIN 46R is applicable to all
non-SPEs created prior to February 1, 2003 at the end of the first interim or
annual period ending after March 15, 2004. For all entities created subsequent
to January 31, 2003, Public Entities were required to apply the provisions of
FIN 46. The adoption of FIN 46 did not have a material impact to our
consolidated financial position, results of operations or cash flows. The
adoption of FIN 46R for SPEs did not have an impact to our consolidated
financial position, results of operations or cash flows, and we do not believe
the adoption of FIN 46R for non-SPEs will have a material impact to our
consolidated financial position, results of operations or cash flows.

                                      F-35
<PAGE>


                  MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


(15)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of the quarterly operations for the years
ended December 31, 2003 and 2002 (in thousands, except for per share data).

<TABLE>
<CAPTION>

                    2003                           Mar. 31      June 30      Sept. 30      Dec. 31
                    ----                           -------      -------      --------      -------
<S>                                                 <C>          <C>          <C>           <C>
Net Sales                                           5,668        6,824        6,420         6,597
Gross Profit                                        2,141        2,829        2,715         2,999
Net income (loss)                                      44          359          504           254
Income (loss) available to common shareholder          42          357          504           254
Earnings (loss) per share:
     Basic                                             --         0.02         0.02          0.01
     Diluted                                           --         0.02         0.02          0.01

                    2002                           Mar. 31      June 30      Sept. 30      Dec. 31
                    ----                           -------      -------      --------      -------
Net Sales                                           4,820        6,118        5,764         5,962
Gross Profit                                        1,529        2,510        2,084         2,394
Net income (loss)                                    (699)         255         (330)          204
Income (loss) available to common shareholder        (702)         252         (333)          201
Earnings (loss) per share:
     Basic                                          (0.03)        0.01        (0.02)         0.01
     Diluted                                        (0.03)        0.01        (0.02)         0.01
</TABLE>


                                      F-36
<PAGE>
<TABLE>

                                 MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES
                                           CONSOLIDATED SCHEDULE II
                                       VALUATION AND QUALIFYING ACCOUNTS
                                 YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<CAPTION>



                                                                Additions
                                                Balance at      Charged to   Deductions
                                               Beginning of     Costs and   Write-offs of   Balance at
                Description                         Year         Expenses      Accounts     End of Year
                -----------                         ----         --------      --------     -----------
<S>                                              <C>              <C>          <C>           <C>
Allowance for doubtful accounts:
     Year ended December 31, 2003                  130,000         61,000       (30,000)       161,000
     Year ended December 31, 2002                  226,000        118,000      (214,000)       130,000
     Year ended December 31, 2001                  111,000        216,000      (101,000)       226,000

Allowance for inventory obsolescence:
     Year ended December 31, 2003                1,497,000        924,000      (729,000)     1,692,000
     Year ended December 31, 2002                1,152,000        438,000       (93,000)     1,497,000
     Year ended December 31, 2001                1,169,000        659,000      (676,000)     1,152,000
</TABLE>


                                      F-37
<PAGE>

                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                    DESCRIPTION
------                    -----------

2.1      Asset Purchase Agreement effective September 1, 2000 by and among the
         Registrant, CXR Telcom Corporation and T-Com, LLC (1)

2.2      Bill of Sale and Assignment and Assumption Agreement dated as of
         September 22, 2000 between T-Com, LLC and CXR Telcom Corporation (1)

2.3      Letter agreement dated October 2, 2000 among the Registrant, CXR Telcom
         Corporation and T-Com, LLC relating to Asset Purchase Agreement by and
         among the same parties (1)

2.4      Asset Purchase Agreement dated as of November 15, 2000 by and among XET
         Corporation, the Registrant, Bryan Fuller, Tama-Lee Mapalo and Etch Tek
         Electronics Corporation (2)

2.5      Asset Purchase Agreement dated as of July 31, 1995 by and among BNZ
         Incorporated, Robert Bertrand, and XCEL Arnold Circuits, Inc. (10)

3.1      Certificate of Incorporation of the Registrant, as filed with the
         Delaware Secretary of State on July 14, 1989 (9)

3.2      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on October
         12, 1989 (9)

3.3      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on October
         16, 1991 (9)

3.4      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on April 19,
         1994 (9)

3.5      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on March 6,
         1995 (9)

3.6      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on August 28,
         1996 (9)

3.7      Certificate of Designations, Preferences and Rights of Preferred Stock
         of the Registrant, as filed with the Delaware Secretary of State on May
         20, 1998 (9)

3.8      Amended Certificate of Designations, Preferences and Rights of
         Preferred Stock of the Registrant, as filed with the Delaware Secretary
         of State on July 1, 1998 (9)

3.9      Certificate of Correction of Amended Certificate of Designations,
         Preferences and Rights of Preferred Stock as filed with the Delaware
         Secretary of State on November 20, 2000 (9)

3.10     Second Amended and Restated Certificate of Designations, Preferences
         and Rights of Preferred Stock as filed with the Delaware Secretary of
         State on December 28, 1999 (3)

                                       61
<PAGE>
EXHIBIT
NUMBER                    DESCRIPTION
------                    -----------

3.11     Certificate of Correction of Second Amended Certificate of
         Designations, Preferences and Rights of Preferred Stock as filed with
         the Delaware Secretary of State on November 21, 2000 (9)

3.12     Certificate of Designations, Preferences and Rights of Series B
         Preferred Stock of the Registrant as filed with the Delaware Secretary
         of State on September 19, 2000 (1)

3.13     Certificate of Amendment of Certificate of Incorporation of the
         Registrant as filed with the Delaware Secretary of State on January 22,
         2001 (10)

3.14     Certificate of Amendment of Certificate of Designation of the
         Registrant as filed with the Delaware Secretary of State on January 22,
         2001 (10)

3.15     Bylaws of the Registrant (9)

3.16     Amendments to Bylaws effective as of June 1, 2001 (11)

10.1     1993 Stock Option Plan (#) (9)

10.2     Employee Stock and Stock Option Plan (#) (4)

10.3     1997 Stock Incentive Plan (#) (5)

10.4     Amended and Restated 2000 Stock Option Plan (#) (12)

10.5     Credit and Security Agreement dated as of August 16, 2000 by and among
         XET Corporation, CXR Telcom Corporation and Wells Fargo Business
         Credit, Inc. (1)

10.6     Revolving Note dated August 16, 2000 in the principal sum of $3,000,000
         made by CXR Telcom Corporation and XET Corporation in favor of Wells
         Fargo Business Credit, Inc. (1)

10.7     Term Note dated August 16, 2000 in the principal sum of $646,765 made
         by XET Corporation in favor of Wells Fargo Business Credit, Inc. (1)

10.8     Term Note dated August 16, 2000 in the principal sum of $40,235 made by
         CXR Telcom Corporation in favor of Wells Fargo Business Credit, Inc.
         (1)

10.9     Guarantee dated August 16, 2000 made by Carmine T. Oliva in favor of
         Wells Fargo Business Credit, Inc. (1)

10.10    Waiver of Interest dated August 16, 2000 made by Georgeann Oliva in
         favor of Wells Fargo Business Credit, Inc. (1)

10.11    Guarantee dated August 16, 2000 made by the Registrant in favor of
         Wells Fargo Business Credit, Inc. (1)

10.12    Guarantor Security Agreement dated August 16, 2000 made by the
         Registrant in favor of Wells Fargo Business Credit, Inc. (1)

                                       62
<PAGE>
EXHIBIT
NUMBER                    DESCRIPTION
------                    -----------

10.13    Lease agreement between the Registrant and Property Reserve Inc. dated
         September 16, 1999 (6)

10.14    Lease agreement between XET, Inc. and Rancho Cucamonga Development
         dated August 30, 1999 (6)

10.15    Lease Agreement between SCI Limited Partnership-I and CXR Telcom
         Corporation, dated July 28, 1997 (7)

10.16    Lease agreement between XET Corporation and P&S Development (8)

10.17    General Partnership Agreement between XET Corporation and P&S
         Development (8)

10.18    Letter dated January 26, 2001 from Wells Fargo Business Credit, Inc.
         confirming the release of Guarantee dated August 16, 2000 (10)

10.19    Employment Agreement dated as of January 1, 2001 between the Registrant
         and Carmine T. Oliva (#) (10)

10.20    Employment Agreement dated as of July 2, 2001 between the Registrant
         and Randolph D. Foote (#) (12)

10.21    Employment Agreement dated as of January 1, 2001 between the Registrant
         and Graham Jefferies (#) (12)

10.22    First Amendment to Credit and Security Agreement dated as of September
         29, 2000 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (13)

10.23    Second Amendment to Credit and Security Agreement dated as of November
         29, 2000 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (13)

10.24    Third Amendment to Credit and Security Agreement dated as of September
         20, 2001 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (13)

10.25    Fourth Amendment to Credit and Security Agreement dated as of April 17,
         2002 by and between CXR Telcom Corporation, XET Corporation and Wells
         Fargo Business Credit, Inc. (14)

10.26    Sublease Agreement dated as of October 29, 2002, by and between
         Novellis Systems, Inc. and CXR Telcom Corporation (16)

10.27    Deed of Guarantee and Indemnity dated November 12, 2002 made by
         MicroTel International Inc., XCEL Corporation Limited, Belix Power
         Conversion Limited and Belix Wound Components Limited in favor of
         Venture Finance PLC (16)

10.28    Advantage Facility dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC (16)

10.29    Cashflow Loan Agreement dated November 12, 2002 between XCEL Power
         Systems Limited and Venture Finance PLC (16)

                                       63
<PAGE>
EXHIBIT
NUMBER                    DESCRIPTION
------                    -----------

10.30    Term Loan Agreement dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC (16)

10.31    Deed of Subordination dated November 12, 2002 between Venture Finance
         PLC, MicroTel International Inc. and XCEL Corporation Limited (16)

10.32    Agreement for the Purchase of Debts dated November 12, 2002 between
         XCEL Power Systems Limited and Venture Finance PLC (16)

10.33    Letter Agreement dated October 23, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC regarding Amendments to Agreement for
         the Purchase of Debts (16)

10.34    Waiver of Default Agreement dated March 28, 2003 between XET
         Corporation, CXR Telcom Corporation and Wells Fargo Business Credit,
         Inc. (16)

10.35    Description of Retirement Account Matching Contributions (#)

10.36    Fifth Amendment to Credit and Security Agreement dated July 1, 2003 by
         and between CXR Telcom Corporation and XET Corporation, as borrowers,
         and Wells Fargo Business Credit, Inc., as lender (16)

10.37    Credit Facility Agreement dated April 8, 2003, between IFN Finance and
         CXR, S.A.S. (16)

10.38    English Summary of Credit Facility Agreement dated April 8, 2003
         between IFN Finance and CXR, S.A.S. (17)

14.1     Code of Business Conduct and Ethics

14.2     Code of Ethics for CEO and Senior Financial Officers

16       Letter dated October 4, 2002 from BDO Seidman, LLP regarding change in
         certifying accountant (15)

21       Subsidiaries of the Registrant

23.1     Consent of Grant Thornton LLP, Independent Certified Public Accountants

23.2     Consent of BDO Seidman, LLP, Independent Certified Public Accountants

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

32       Certification of Chief Executive Officer and Chief Financial Officer
         Pursuant to 18 U.S. C. Section 350, as Adopted Pursuant to Section 906
         of the Sarbanes-Oxley Act of 2002
_______________

(#)      Management contract or compensatory plan, contract or arrangement
         required to be filed as an exhibit.

                                       64
<PAGE>

(1)      Filed as an exhibit and incorporated by reference to the Registrant's
         quarterly report on Form 10-Q for the quarter ended September 30, 2000

(2)      Filed as an exhibit and incorporated by reference to the Registrant's
         current report on Form 8-K for November 15, 2000

(3)      Filed as an exhibit and incorporated by reference to the Registrant's
         annual report on Form 10-K for the year ended December 31, 1999

(4)      Filed as an exhibit and incorporated by reference to the Registrant's
         definitive proxy statement for the annual meeting of stockholders to be
         held June 11, 1998

(5)      Filed as an exhibit and incorporated by reference to the Registrant's
         definitive proxy statement for the special meeting of stockholders to
         be held January 16, 2001

(6)      Filed as an exhibit and incorporated by reference to the Registrant's
         registration statement on Form S-8 (Registration Statement No.
         333-29925)

(7)      Filed as an exhibit and incorporated by reference to the Registrant's
         annual report on Form 10-K/A for the year ended December 31, 1996

(8)      Filed as an exhibit and incorporated by reference to Amendment No. 1 to
         Registrant's registration statement on Form S-1 (Registration Statement
         No. 333-41580)

(9)      Filed as an exhibit and incorporated by reference to the Registrant's
         annual report on Form 10-K for the year ended December 31, 2000

(10)     Filed as an exhibit and incorporated by reference to the initial filing
         of the Registrant's registration statement on Form S-1 (Registration
         Statement No. 333-63024)

(11)     Filed as an exhibit and incorporated by reference to Post-Effective
         Amendment No. 1 to the Registrant's registration statement on Form S-1
         (Registration Statement No. 333-63024)

(12)     Filed as an exhibit and incorporated by reference to the Registrant's
         quarterly report on Form 10-Q for the nine months ended September 30,
         2001

(13)     Filed as an exhibit and incorporated by reference to the Registrant's
         quarterly report on Form 10-Q for the quarter ended June 30, 2002

(14)     Filed as an exhibit and incorporated by reference to the Registrant's
         current report on Form 8-K for September 24, 2002

(15)     Filed as an exhibit and incorporated by reference to the Registrant's
         annual report on Form 10-K for the year ended December 31, 2002.

(16)     Filed as an exhibit and incorporated by reference to the Registrant's
         quarterly report on Form 10-Q for the quarter ended June 30, 2003.

(17)     Filed as an exhibit and incorporated by reference to Amendment No. 1 to
         the Registrant's quarterly report on Form 10-Q for the quarter ended
         June 30, 2003.

                                       65
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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 on this 23rd day of
March, 2004.

                                          MICROTEL INTERNATIONAL INC.

                                          By:   /S/ Carmine T. Oliva
                                                --------------------------------
                                                Carmine T. Oliva
                                                Chairman of the Board, President
                                                and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE                              CAPACITY                              DATE
---------                              --------                              ----
<S>                            <C>
/s/ Carmine T. Oliva           Chairman of the Board, President,        March 23, 2004
----------------------------   Chief Executive Officer (principal
Carmine T. Oliva               executive officer) and Director


/s/ Randolph D. Foote          Chief Financial Officer                  March 23, 2004
----------------------------   (principal accounting and
Randolph D. Foote              financial officer),
                               Senior Vice President and
                               Assistant Secretary


/s/ Robert B. Runyon           Secretary and Director                   March 23, 2004
----------------------------
Robert B. Runyon


/s/ Laurence P. Finnegan, Jr.  Director                                 March 23, 2004
----------------------------
Laurence P. Finnegan, Jr.


/s/ Otis W. Baskin             Director                                 March 23, 2004
----------------------------
Otis W. Baskin

</TABLE>

                                       66
<PAGE>



                        EXHIBITS ATTACHED TO THIS REPORT

EXHIBIT
NUMBER                              DESCRIPTION
------                              -----------

10.35    Description of Retirement Account Matching Contributions

14.1     Code of Business Conduct and Ethics

14.2     Code of Ethics for CEO and Senior Financial Officers

21       Subsidiaries of the Registrant

23.1     Consent of Grant Thornton LLP, Independent Certified Public Accountants

23.2     Consent of BDO Seidman, LLP, Independent Certified Public Accountants

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

32       Certification of Chief Executive Officer and Chief Financial Officer
         Pursuant to 18 U.S. C. Section 350, as Adopted Pursuant to Section 906
         of the Sarbanes-Oxley Act of 2002



                                       67