<PAGE>

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

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

                               AMENDMENT NO. 2 TO
                                    FORM 10-K
(Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended DECEMBER 31, 2000.

                                       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
 incorporation or organization)                             Identification No.)

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

       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, $.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 in response
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]

         The aggregate market value of the voting stock held by nonaffiliates of
the registrant computed by reference to the closing price of such stock, was
approximately $9,624,920 at May 15, 2001.

         The number of shares of the registrant's common stock, $.0033 par
value, outstanding as of May 15, 2001 was 20,570,415.

         DOCUMENTS INCORPORATED BY REFERENCE: None.

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


<PAGE>

<TABLE>
<CAPTION>
                                           PART I
                                                                                        PAGE
<S>        <C>                                                                          <C>
ITEM 1.    BUSINESS.................................................................      3

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 AND RELATED STOCKHOLDER MATTERS....     24

ITEM 6.    SELECTED FINANCIAL DATA..................................................     26

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS....................................................     27

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............     46

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................     46

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.....................................................     46

                                          PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................     47

ITEM 11.   EXECUTIVE COMPENSATION...................................................     49

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........     60

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................     62

                                           PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........     68

           INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE...........    F-1

           INDEX TO EXHIBITS........................................................     69

           SIGNATURES...............................................................     74

           EXHIBITS FILED WITH THIS REPORT..........................................     75

                                             2
</TABLE>

<PAGE>

                                     PART I


ITEM 1.  BUSINESS.

CORPORATE OVERVIEW

         We are a Delaware corporation that was formed July 14, 1989 under the
name CXR Corp. to hold the shares of two of our three present direct
wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware
corporation formed in 1984 and based in the United States, and CXR, S.A., a
company organized under the laws of France in 1973 and based in France. These
two subsidiaries manufacture, assemble and distribute transmission and network
access products and telecommunications field and central office test
instruments. We amended our certificate of incorporation to change our name to
CXR Corporation in October 1989 and then to MicroTel International, Inc. in
March 1995.

         On March 26, 1997 we acquired our third present direct wholly-owned
operating subsidiary, XET Corporation (formerly, XIT Corporation). XET
Corporation was a private, closely-held New Jersey corporation that was formed
in 1983 and had been operating in the United States, England and Japan as a
designer, manufacturer and marketer of information display and input products
and printed circuit boards for the international telecommunications, medical,
industrial, military and aerospace markets.

         Our acquisition of XET Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of MicroTel with and into XET
Corporation. The merger involved an exchange by the former shareholders of XET
Corporation of all of the outstanding shares of XET Corporation for newly issued
shares of MicroTel representing a majority ownership interest in MicroTel.
Because the merger resulted in a change in control of MicroTel, the merger was
accounted for as a reverse acquisition, and historical financial information of
XET Corporation is used as the historical financial information of MicroTel.

         We previously organized our operations in three business segments:

         --        Instrumentation and Test Equipment;
         --        Components and Subsystem Assemblies; and
         --        Circuits.

         In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.

         Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com. T-Com was a privately-held
telecommunications test instruments manufacturer located in Sunnyvale,
California. T-Com produced central office equipment, which is equipment that is
typically used in telephone switching centers and network operating centers.
Prior to the T-Com acquisition, our telecommunications test instruments product
line was limited to equipment used in remote field locations.

         One of our main purposes for the T-Com acquisition was to acquire
rights to central office equipment products and access to customers who purchase
those products. We believe that on a long-term basis, telecommunications
companies and other purchasers of telecommunications test instruments may
attempt to enhance their efficiency by increasing reliance upon central office
equipment and decreasing reliance upon field equipment to the extent technology
and circumstances allow. We also believe that we may be able to take advantage
of cross-marketing opportunities for our central office and field equipment.

                                        3

<PAGE>

Further, we anticipated and have achieved initial success in increasing the
capacity of CXR Telcom Corporation's Fremont, California plant without
increasing our overhead by integrating T-Com's operations with those of CXR
Telcom Corporation.

         In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of XET Corporation. We intend to
retain our Monrovia, California circuit board manufacturing facility as a small
captive supplier of circuit boards to XET Corporation's Digitran Division in our
electronic components segment.

         Consequently, through our three direct wholly-owned operating
subsidiaries, XET Corporation, CXR Telcom Corporation and CXR, S.A., and through
the divisions and subsidiaries of our subsidiaries, we presently design,
manufacture, assemble, and market products and services in the following two
business segments:

         Telecommunications

         --       Telecommunications Test Instruments (analog and digital test
                  instruments used in the installation, maintenance, management
                  and optimization of public and private communication networks)

         --       Transmission and Network Access Products (range of products
                  for accessing public and private networks for the transmission
                  of data, voice and video)

         Electronic Components (digital switches and electronic power supplies)

         Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 2000 were to customers in the telecommunications
industry, we also have significant sales to industrial, aerospace and military
customers. Our objective in our telecommunication test instrument and
transmission business is to become a leader in quality, cost effective solutions
to meet the requirements of telecommunications customers. We believe that we can
achieve this objective through customer-oriented product development, superior
product solutions, and excellence in local market service and support. Our
objective in our electronic components business is to become the supplier of
choice for harsh environment switches and custom power supplies and to use
revenues from this segment to fund growth in our test instruments and
transmission and network access products segment.

INDUSTRY OVERVIEW

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

         Over the past decade, telecommunications and data communications
networks have undergone major growth and have become a critical part of the
global business and economic infrastructure. Many factors have contributed to
this growth, including:

         --       a surge in demand for both analog and high-speed Internet
                  access and data transmission service; among other uses,
                  high-speed access enables consumers to access bandwidth
                  intensive content and services, such as highly graphical web
                  sites and audio, video and software downloads, and enables
                  businesses to implement e-commerce strategies, to access the
                  Internet for a variety of purposes and to provide employees
                  with telecommuting capabilities;

                                        4

<PAGE>

         --       the enactment of the Telecommunications Act of 1996, which has
                  allowed competitive local exchange carriers in the United
                  States to compete with incumbent local exchange carriers,
                  including the regional Bell operating companies, or RBOCs, for
                  local carrier services; and

         --       an apparent worldwide trend toward deregulation of the
                  communications industry, which may enable a large number of
                  new communications service providers to enter the market.

         Responding to the growing demand for communications services and
increased competitive pressures, telecommunications companies and other
businesses that rely heavily on information technology are devoting significant
resources to the purchase of transmission instruments, such as high-speed
modems, through which data and voice information may be transmitted, and test
equipment, with which to test, deploy, manage and optimize their communications
networks, equipment and services.

         Communications networks historically were based on a limited number of
technologies, many of which were designed by a single vendor. Consequently,
service providers did not require a wide array of instruments or systems to test
and manage their performance. With the deployment of new types of communications
equipment, such as broadband, cable and wireless technologies, and the emergence
of multi-vendor environments, the process of deploying, testing and managing
communications networks has become increasingly complex.

         To support the rapidly changing needs of telecommunications companies
and information technology dependent businesses, we believe that
telecommunications test instruments, transmission and network access products
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 the Internet or intranets for a variety of purposes.

         Technicians who use service verification equipment in the field or in
central or branch offices allow businesses to verify and repair 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 transmission and integrated access
devices and advanced field and central or branch office testing and monitoring
solutions.

         ELECTRONIC COMPONENTS

         Electronic components are the building blocks for the high technology
applications that feed the information hungry society that is driving today's
world economy. 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, military, commercial, industrial and other
environments, each of which places constraints defining 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, military and
telecommunications segments. To support the myriad industrial, commercial and
government entities and agencies that rely on digital switches and electronic

                                        5

<PAGE>

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 military market, which is a predominant market for our electronic
components, makes use of sophisticated electronic subsystems 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., a subsidiary of our subsidiary XCEL Corporation Ltd., has
been manufacturing electronic power supplies since 1989.

OUR SOLUTION

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

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

         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 enable 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.

         IMPROVED NETWORK QUALITY AND RELIABILITY. Field and office technicians
use our test equipment products to diagnose and locate a variety of problems and
degradations in telecommunications service. For example, our Sentinel product
allows extensive diagnosis and analysis of a T-1 line, which is a type of
digital carrier system that transmits voice and data at high speed and is the
standard for digital transmission in North America used by large businesses for
broadband access. This product allows service providers to identify and repair
problems and to restore service efficiently. As a result, our test equipment
products support our customers' need to provide high quality and reliable
service.

         BROAD RANGE OF TRANSMISSION AND NETWORK ACCESS PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of industrial grade
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

                                        6

<PAGE>

power inputs. The design of many of our data transmission products enables them
to either interface 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.

         COMPREHENSIVE CONNECTIVITY. Our telecommunications test instruments,
transmission and network access products 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. Many of our digital switches and each of our
power supplies is highly tailored to our customers' needs. We manufacture
digital 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 several key accounts, which means that our products are designed
into equipment specifications of some of our customers for the duration of their
production of the 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 XCEL Power Systems Ltd.'s products are qualified products
that have been involved in many hours of flight trials.

OUR STRATEGY

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

         CONTINUE TO FOCUS ON TRANSMISSION AND NETWORK ACCESS PRODUCTS AND TEST
INSTRUMENT MARKETS. We will continue to focus and expand our efforts in the
telecommunications market and develop new products and enhancements to meet or
exceed the evolving requirements of both central office and field applications
of our technologies. The telecommunications segment constitutes the core of our
business and the focus of our growth strategy.

         CONTINUE TO MARKET ELECTRONIC COMPONENTS. We plan to continue to market
our electronic components products to their established market niches while
identifying opportunities to broaden our customer base for our power supply
products.


                                        7

<PAGE>

         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. For example, we intend to
expand our line of universal test equipment products that enable customers to
perform digital and analog tests with a single piece of equipment. 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.

         LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase transmission and network access 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.

         PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to increase
the functionality of our telecommunications 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 additional switches that we do not already
manufacture for them.

         DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. We plan to continue to
develop our strategic relationships with transmission and test instrument
vendors 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.

         PURSUE STRATEGIC ACQUISITIONS. The telecommunications test instruments,
transmission and network access products markets are 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 believe that
acquisitions and joint ventures, such as our acquisition of our CXR HALCYON 700
series of telecommunications test sets in 1997 and our acquisition of T-Com
central office telecommunications test sets in 2000, provide an efficient way of
expanding our business, product offerings and access to different customers and
market niches.

         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, such as 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 telecommunications 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.

                                        8

<PAGE>

PRODUCTS AND SERVICES

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

                  Telecommunications

                  --       Telecommunications Test Instruments (analog and
                           digital test instruments used in the installation,
                           maintenance, management and optimization of public
                           and private communication networks)

                  --       Transmission and Network Access Products (range of
                           products for accessing public and private networks
                           for the transmission of data, voice and video)

                  Electronic Components (digital switches and electronic power
                  supplies)

         During the years ended December 31, 2000, 1999 and 1998, our total
sales were $28,050,000, $25,913,000 and $30,100,000, respectively, and the
percentages of total sales contributed by each product group within our two main
business segments were as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
         SEGMENT AND PRODUCT TYPE                           2000         1999          1998
         ------------------------                           ----         ----          ----
<S>                                                       <C>          <C>           <C>
         Telecommunications

            Test Instruments                               28.2%        19.2%         26.7%

            Transmission and Network Access Products       26.2%        39.3%         29.9%

            Other Products and Services                     1.5%         1.9%          1.7%
                                                         -----------------------------------

                                                           55.9%        60.4%         58.3%
                                                         -----------------------------------
         Electronic Components

            Digital Switches                               28.6%        20.5%         21.6%

            Electronic Power Supplies                      14.8%        15.8%         14.2%

            Other Products and Services                     0.7%         3.3%          5.9%
                                                         -----------------------------------

                                                           44.1%        39.6%         41.7%
                                                         -----------------------------------

                                                          100.0%       100.0%        100.0%
                                                         ===================================
</TABLE>

           OUR TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION
                 AND NETWORK ACCESS PRODUCTS BUSINESS

         Our telecommunications business comprises telecommunications test
equipment and transmission and network access products. During the years ended
December 31, 2000 and 1999, the sale of telecommunications products, equipment
and related services accounted for approximately 55.9% and 60.4% of our total
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 Internet access, including:

                                        9

<PAGE>

         --       Traditional telephone services, such as modems and plain old
                  telephone service, or POTS
         -- Competitive local exchange carriers, or CLECs -- Bite error rate
         test, or BERT -- Dial tone multi-frequency, or DTMF -- Transmission
         impairment measurement, or TIMS -- 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
         --       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, 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, or 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
             II.  Worldwide 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

         TELECOMMUNICATIONS 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 telecommunications 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 also use service verification equipment to test simulated networks
during equipment development and to verify the successful production of
equipment.

                                       10

<PAGE>

         We acquired our CXR HALCYON 700 series of telecommunications test sets
in 1997 with the goal of gradually replacing our CXR 5200 series of
telecommunications test sets that are larger, heavier and not computer
compatible. 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. Recent 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:

         --       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;
         --       load-coil analysis, which identifies the presence of voice
                  coils that prevent high-speed digital access;
         --       installation and testing of DS3, which is a very high-speed
                  digital transmission service that is equivalent to 28 T-1
                  circuits; and
         --       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 large telecommunications services
market. Some of the key test equipment products we offer are described below:


              PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

         HALCYON                             704A-400 SERIES -- handheld
                                             transmission and signaling wideband
                                             test 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 704A-456           --       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

         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

                                       11

<PAGE>

              PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

         CXR 110A/111A              --       combination test line that provides
                                             a remote DTMF controlled
                                             transmission impairment tone source
                                             that enables rapid data impairment
                                             testing of subscriber data loops
                                             without technician assistance at
                                             the central office
                                    --       one-way transmissions tests can be
                                             made using any transmission test
                                             set with the required functional
                                             capability, such as HALCYON 704A

         CXR 156B                   --       this far-end responder is a
                                             microprocessor-based mini-responder
                                             used to terminate test calls for
                                             automatic testing of PBX connecting
                                             trunks
                                    --       designed for desk or bench-top use
                                    --       provides automatic, totally
                                             unattended two-way transmission
                                             testing of voice grade circuits
                                    --       includes self-test routines to
                                             check calibration of the responder
                                             during each test sequence, which
                                             avoids the need for frequent
                                             maintenance

         TRANSMISSION AND NETWORK ACCESS PRODUCTS

         Our subsidiary, CXR, S.A., develops, markets and sells a broad line of
transmission and network access products that are manufactured in France by CXR,
S.A. and sold under the name "CXR Anderson Jacobson." These products include
high-quality integrated access devices such as modems, ISDN terminal adapters,
ISDN concentrators, remote access servers and networking systems.

         Modems
         ------

         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. These modems are sold
as stand-alone devices for remote sites or as rack-mountable versions for
central sites. 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 digital equivalent of analog modems. 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.

         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.

The following are descriptions of a few of our more prominent modems, ISDN
terminal adapters and ISDN concentrators:

                                       12

<PAGE>

             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 in 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                    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

         CB2000                     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

         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

                                       13

<PAGE>

             PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

         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

         Remote Access Servers
         ---------------------

         In addition to the products described above, we market a line of remote
access servers targeted toward Internet service providers and corporate users.
In a corporate environment, these products are used to connect remote users to
the corporate local area network, commonly called the LAN, via the telephone
network or via the ISDN network using analog modems or ISDN terminal adapters.
Remote access server systems range from 8 to 64 ports, with built-in security
and full remote manageability.

         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 new high-speed MSDSL modems. The
optional 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.

                       OUR ELECTRONIC COMPONENTS BUSINESS

         Our electronic components segment includes digital switches and
electronic power supplies. During the years ended December 31, 2000 and 1999,
this segment accounted for approximately 44.1% and 39.6%, respectively, of our
net sales.

         DIGITAL SWITCHES

         XET Corporation's Digitran Division, based in Rancho Cucamonga,
California, manufactures, assembles and sells digital switch products serving
aerospace, military and industrial applications. Digital switches are manually
operated electromechanical devices used for routing electronic signals.
Thumbwheel, push button and lever actuated modules, together with assemblies
comprised of multiple modules, are manufactured in 16 different model families.
The Digitran Division also offers a wide variety of custom keypads and digital
switches for unique applications.

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

         --       8, 10, 11, 12, 16 or a special number of dial positions;
         --       special markings and dial characters;

                                       14

<PAGE>

         --       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;
         --       available with radio frequency interference shielding;
         --       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;
         --       provision for mounting components on output terminals on
                  special personal computer boards;
         --       wire wrap terminals, pin terminals or special terminations;
                  and
         --       night vision compatibility.

         ELECTRONIC POWER SUPPLIES

         XCEL Power Systems Ltd., 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 civil and military aerospace,
military vehicle and telecommunications markets.

         Power conversion units supplied by XCEL Power Systems Ltd. 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 DC. 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.

         BACKLOG

         Our business is not generally seasonal, with the exception that
telecommunications test instruments, transmission and network access products
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, 2000 and 1999, our
backlog of firm, unshipped orders was approximately $12.5 million and $6.2
million, respectively. Our December 31, 2000 backlog is related approximately
87% 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 13% to our telecommunications business, the majority of which
portion relates to our data transmission and network access products. Of these
backlog orders, we anticipate fulfilling approximately 80% of our electronic
components orders and 100% of our telecommunications 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 telecommunications products carry a two-year limited
parts and labor warranty. Typically our telecommunications 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.

                                       15

<PAGE>

CUSTOMERS

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

         We market our telecommunications test instruments and transmission and
network access products primarily to telecommunications service providers,
communications equipment manufacturers and end users. Telecommunications service
providers offer telecommunications, wireless and, increasingly, data
communication services to end users, enterprises or other service providers.
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 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.

         The major communications service providers to whom we market our
telecommunications test instruments and transmission and network access 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 2000, our top five telecommunications test instruments
and transmission and network access products customers in terms of revenues were
Verizon, Southeast Datacom Incorporated, La Poste (French post office), Nynex
and Bouygues Telecom. None of our telecommunications test instruments,
transmission or network access products customers represented more than ten
percent of our revenues during 2000. However, because we derive a significant
portion of our revenues from sales to regional Bell operating companies, or
RBOCs, we have experienced and will continue to experience for the foreseeable
future a significant 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.

         Communications equipment manufacturers design, develop, install and
maintain voice, data and video communications equipment. Network equipment
manufacturers such as Carrier Access Corporation 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.

         ELECTRONIC COMPONENTS

         We sell our components primarily to original equipment manufacturers in
the electronics industry, including manufacturers of aerospace and military
systems, communications equipment, industrial instruments and test equipment.
During 2000, our top five electronic components customers in terms of revenues
were BAE Systems Ltd. (including other U. K. companies affiliated with BAE
Systems, Ltd.), BAE Systems Canada, Inc., Smiths Industries Aerospace,
Electrical Maintenance, Inc. and Raytheon Systems Company. None of our
electronic components customers represented more than ten percent of our total
revenues during 2000.

                                       16

<PAGE>

SALES, MARKETING AND CUSTOMER SUPPORT

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

         Our sales and marketing staff consists primarily of engineers and
technical professionals. They 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 force from those of our competitors.

         Our local sales forces are highly knowledgeable of 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 telecommunications test instruments and
transmission and network access 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 the prospective customer
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.

         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, XCEL Power
Systems, Ltd., 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.

         We sell our electronic components primarily to original equipment
manufacturers in the electronics industry, including manufacturers of aerospace
and military systems, communications equipment, industrial instruments and test
equipment. Our efforts to market our electronic components generally are limited
in scope.

                                       17

<PAGE>

         XCEL Japan Ltd. resells the 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, Digitran Division's reputation spanning over 40 years in
the electronic components industry and the fact that major original equipment
manufacturers have designed many of our switches into their product
specifications has frequently resulted in customers seeking us out to
manufacture for them unique as well as our standard digital switches.

COMPETITION

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

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

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

         Our principal competitors for our telecommunications test instruments,
transmission and network access products include Patton Electronics Corporation,
Adtran, Digital Engineering. Ltd. and GDC for transmission and network access
products and TTC Corporation (a subsidiary of Dynatech Corporation), Ameritech
Corporation, Fluke and Sunrise Telecom, Inc. for test instruments. We believe
that 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.

         ELECTRONIC COMPONENTS

         The market for our components is highly fragmented and composed of a
diverse group of original equipment manufacturers, including Celab Ltd. and
Interpoint/Grenson for power supplies and EECO Switch Division, Transico Inc.,
C&K Components, Inc., Greyhill Inc., Omron Electronics and Janco Inc. for
digital switches. We believe that the principal competitive factors affecting
our components business include:

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

                                       18

<PAGE>

         We have made substantial investments in machinery and equipment
tooling. In addition, our Digitran Division has a reputation spanning over 40
years in the electronic components industry, and major original equipment
manufacturers have designed many of our digital switches into their product
specifications. 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.

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

         Our telecommunications test instruments, transmission and network
access products 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 are often
available. Typically, our electronic components segment produces products in 1
to 300 piece batches, with a ten- to thirty-week lead time. The lead time is
predominately 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 four manufacturing and assembly facilities worldwide. Three
of these facilities are certified as ISO 9002-compliant. We have consolidated
all of our transmission and network access manufacturing for our North American
and European markets at our French manufacturing facility at CXR, S.A. We
manufacture all of our test equipment products at the Fremont, California
facility of CXR Telcom Corporation. We manufacture all of our digital 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.

         We intend to increase the use of outsource manufacturing for our
telecommunications 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. Accordingly,
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.

                                       19

<PAGE>

         Accordingly, for the years ended December 31, 2000, 1999 and 1998, our
engineering and product development costs were approximately $1.17 million,
$1.84 million and $2.20 million, respectively. The decline in these expenses in
2000 as compared to 1999 was primarily due to the termination of engineering
activities at our Fremont, California facility and the consolidation of
engineering activities at our St. Charles, Illinois facility.

         Our product development costs in 2000, 1999 and 1998 were related
primarily to development of new telecommunications test equipment, trunk testing
system products and data communications equipment. Current research expenditures
are directed principally toward enhancements to the current test instrument
product line and development of increased bandwidth, or faster speed,
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 original equipment manufacturer 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 copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. 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.

         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.

                                       20

<PAGE>

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, 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 which, if adopted, would have a material impact
on our business or financial condition.

EMPLOYEES

         As of March 23, 2001, we employed a total of 221 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.

                                       21

<PAGE>

ITEM 2.  PROPERTIES.

         As of March 23, 2001, we leased or owned approximately 100,000 square
feet of administrative, production, storage and shipping space. All of this
space was leased other than the Abondant, France facility.

<TABLE>
<CAPTION>

       BUSINESS UNIT                                        LOCATION                       FUNCTION
       -------------                                        --------                       --------
<S>                                                <C>                                <C>
MicroTel International, Inc.                       Rancho Cucamonga, California       Administrative
(corporate headquarters)

XET Corporation/Digitran                           Rancho Cucamonga, California       Manufacturing
(electronic components)                            Monrovia, California

XCEL Power Systems, Ltd.
and XCEL Corporation Ltd.                          Ashford, United Kingdom            Administrative/
(electronic components)                            Wales, United Kingdom              Manufacturing

XCEL Japan, Ltd. Higashi-Gotanda                   Tokyo, Japan                       Sales
(electronic components)

CXR, S.A                                           Paris, France                      Administration/Sales
(telecommunications test instruments,
transmission and network access products)

CXR, S.A                                           Abondant, France                   Manufacturing/Engineering
(telecommunications test instruments,
transmission and network access products)

CXR Telcom Corporation                             Fremont, California                Administrative/
(telecommunications test instruments,                                                 Manufacturing
transmission and network access products)

CXR Telcom Corporation                             St. Charles, Illinois              Research, Development and
(test instruments)                                                                    Engineering/Customer Service
</TABLE>

         The lease for the Fremont, California facility expires in October 2002,
with one five-year renewal option. We have subleased to an unrelated party
approximately 12,000 square feet of this facility. The lease for the Paris,
France facility expires in April 2007. The lease for the Monrovia, California
facility expires in February 2002. The lease for the Ashford, United Kingdom
facility is a fifteen-year lease that expires in September 2011, subject to the
rights of the landlord or us to terminate the lease after ten years.

         In December 1996, XET Corporation acquired a 50% interest in Capital
Source Partners, a California general partnership that owned a 63,000
square-foot facility in Ontario, California. Our corporate headquarters and XET
Corporation and its Digitran Division operated from that facility from September
1990 through November 1999. To reduce our utility and monthly rental expenses,
we relocated our headquarters to a 5,400 square foot office suite and relocated
the Digitran Division's electronic components manufacturing operations to a
15,745 square foot manufacturing facility, which office suite and manufacturing
facility are located within approximately one mile of each other in the City of
Rancho Cucamonga, California. The lease on the manufacturing facility expires in

                                       22

<PAGE>

November 2004, and the lease on the headquarters facility expires in October
2002. Concurrent with the relocation, XET Corporation sold its interest in
Capital Source Partners in exchange for assumption of our rent debt of $152,000,
$75,000 in cash and forgiveness of some other debt of approximately $17,000. The
sale also included a provision to release us from our future lease obligations
consisting of seven remaining years and approximately $3,000,000 of future lease
payments regarding the property. As part of the mutual release, we relinquished
our claim on a $51,000 deposit and a $115,000 note receivable from the lessor.

         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 AND RELATED STOCKHOLDER MATTERS.

         Market Price
         ------------

         Until May 12, 1999, our common stock was traded on the Nasdaq SmallCap
Market. On May 13, 1999, the listing of our common stock on the Nasdaq SmallCap
Market was discontinued, and thereafter our common stock has been traded on the
NASD's OTC Bulletin Board under the symbol "MCTL." The table below shows for
each fiscal quarter indicated the high and low bid prices per share of our
common stock; as obtained from the Historical Research Department of The Nasdaq
Stock Market, Inc. 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
                                                        ---             ----
1998:
First Quarter (January 1 - March 31).............      $ .875          $ 1.625
Second Quarter (April 1 - June 30)...............        .75             1.28125
Third Quarter (July 1 - September 30)............        .4375           1.00
Fourth Quarter (October 1 - December 31).........        .375             .84375

1999:
First Quarter....................................        .375            1.125
Second Quarter...................................        .1875            .5625
Third Quarter....................................        .18              .40
Fourth Quarter...................................        .16              .44

2000:
First Quarter....................................        .42             2.8125
Second Quarter...................................        .4375           1.25
Third Quarter....................................        .4375            .8438
Fourth Quarter...................................        .20              .56

         As of March 23, 2001, we had 20,570,113 shares of common stock
outstanding held of record by approximately 3,600 stockholders, and the high and
low bid prices of our common stock on the OTC Bulletin Board were $.39 and $.37,
respectively.

         Dividend Policy
         ---------------

         No dividends on our common stock have been paid by us to date. Our line
of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designation related to our
Series A Preferred Stock and our Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by our board of directors.

                                       24

<PAGE>

         Recent Sales of Unregistered Securities
         ---------------------------------------

         In May 2000, we issued warrants to purchase an aggregate of 100,500
shares of common stock at an exercise price of $1.00 per share to three
individuals in connection with consulting services rendered.

         In May 2000, we issued warrants to purchase an aggregate of 49,375
shares of common stock at an exercise price of $1.00 per share to three
individuals and one entity to induce the individuals and the entity to exercise
warrants they previously had purchased in connection with their purchase of
Series A Preferred Stock.

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

                                       25

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected consolidated historical financial data should be
read in conjunction with the consolidated financial statements and the notes to
those statements and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report. The consolidated statements of operations and comprehensive income data
set forth below with respect to the years ended December 31, 1998, 1999 and 2000
and the consolidated balance sheet data at December 31, 1999 and 2000 are
derived from, and are qualified by reference to, the consolidated audited
financial statements included elsewhere in this report. The historical results
are not necessarily indicative of results to be expected for any future periods.

<TABLE>
<CAPTION>
                                                          THREE
                                               YEAR       MONTHS
                                               ENDED      ENDED
                                             SEPT. 30,    DEC. 31,             YEARS ENDED DECEMBER 31,
                                             ---------   ---------   ---------------------------------------------
                                                1996        1996        1997        1998        1999        2000
                                             ---------   ---------   ---------   ---------   ---------   ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:

Net sales ................................   $ 14,270    $  3,100    $ 27,251    $ 30,100    $ 25,913    $ 28,050
Cost of sales ............................      9,442       2,332      18,069      17,353      17,066      15,529
                                             ---------   ---------   ---------   ---------   ---------   ---------
Gross profit .............................      4,828         768       9,182      12,747       8,847      12,521
Selling, general and administrative

   expenses ..............................      3,426       1,045       8,608      10,202      10,584       9,827
Engineering and product development
   expenses ..............................         --          --       1,797       2,202       1,841       1,167
Write-down of goodwill ...................         --          --       5,693          --          --          --
                                             ---------   ---------   ---------   ---------   ---------   ---------
Income (loss) from operations ............      1,402        (277)     (6,916)        343      (3,578)      1,527
Total other income (expense) .............        304          49        (627)       (804)       (492)        207
                                             ---------   ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations
   before income taxes ...................      1,706        (228)     (7,543)       (461)     (4,070)      1,734
Income tax expense .......................         20          30          97         101         128          31
                                             ---------   ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations .      1,686        (258)     (7,640)       (562)     (4,198)      1,703
Discontinued operations:
   Loss from operations of
      discontinued segment ...............       (603)       (647)     (2,053)     (1,203)       (847)       (212)
   Gain (loss) on disposal of discontinued
      segment including provision for phase
      out period of $122 in 2000 .........         --          --          --         580         449        (487)
                                             ---------   ---------   ---------   ---------   ---------   ---------
Net income (loss) ........................   $  1,083    $   (905)   $ (9,693)   $ (1,185)   $ (4,596)   $  1,004
   Foreign currency translation adjustment   $    (89)   $    126    $   (260)   $    206    $   (325)   $   (505)
                                             ---------   ---------   ---------   ---------   ---------   ---------
Total comprehensive income (loss) ........   $    994    $   (779)   $ (9,953)   $   (979)   $ (4,921)   $    499
                                             =========   =========   =========   =========   =========   =========
Basic earnings (loss) per share from
   continuing operations .................   $   0.27    $  (0.05)   $  (0.76)   $  (0.05)   $  (0.26)   $   0.09
Diluted earnings (loss) per share from
   continuing operations .................   $   0.27    $  (0.05)   $  (0.76)   $  (0.05)   $  (0.26)   $   0.07
Basic earnings (loss) per share from
   discontinued operations ...............   $  (0.10)   $  (0.10)   $  (0.20)   $  (0.05)   $  (0.02)   $  (0.04)
Diluted earnings (loss) per share from
   discontinued operations ...............   $  (0.10)   $  (0.10)   $  (0.20)   $  (0.05)   $  (0.02)   $  (0.03)
Basic earnings (loss) per share ..........   $   0.17    $  (0.15)   $  (0.96)   $  (0.10)   $  (0.28)   $   0.05
Diluted earnings (loss) per share ........   $   0.17    $  (0.15)   $  (0.96)   $  (0.10)   $  (0.28)   $   0.04
Weighted average shares outstanding, basic      5,841       6,064      10,137      11,952      16,638      19,504
Weighted average shares outstanding,
    diluted ..............................      5,841       6,064      10,137      11,952      16,638      23,027

                                                        26
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                            SEPT. 30,                 DECEMBER 31,
                                            ---------   --------------------------------------------
                                              1996      1996      1997      1998      1999      2000
                                              ----      ----      ----      ----      ----      ----
BALANCE SHEET DATA:                                               (IN THOUSANDS)
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>
  Cash and cash equivalents ............   $   492   $   574   $ 1,571   $   450   $   480   $   756
  Working capital ......................     3,911     3,554     4,625     4,999     1,080     2,780
  Total assets .........................    12,870    12,316    20,129    20,352    16,489    19,484
  Long-term debt, net of current portion     1,755     2,019     2,012     1,175       143       282
  Stockholders' equity .................     5,486     4,753     6,011     5,482     3,801     5,807
  Convertible redeemable preferred stock        --        --         1     1,516       588       259
</TABLE>

         No cash dividends on our common stock were declared during any of the
periods presented above. Shares outstanding and earnings (loss) per share have
been restated to give effect to the recapitalization of XET Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XET Corporation on March 26, 1997.

         The historical financial data above for periods prior to the merger is
that of XET Corporation. In conjunction with the reverse acquisition accounting
treatment, XET Corporation changed its fiscal year end from September 30 to
December 31 to adopt the fiscal year end of MicroTel International, Inc. The
three-month period ended December 31, 1996 represents the "transition" period
between XET Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.

         In October 2000, the Company decided to discontinue its 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 consolidated financial statements and notes to financial statements
included elsewhere in this Annual Report on Form 10-K. This report and our
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:

         --       the projected growth in the telecommunications and electronic
                  components markets;
         --       our business strategy for expanding our presence in these
                  markets;
         --       anticipated trends in our financial condition and results of
                  operations; and
         --       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.

                                       27

<PAGE>

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

OVERVIEW

         We previously organized our operations in three business segments:

         --       Instrumentation and Test Equipment;
         --       Components and Subsystem Assemblies; and
         --       Circuits.

         In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.

         Effective August 1, 2000, we acquired the assets and business
operations of T-Com, a telecommunications test instruments manufacturer located
in Sunnyvale, California. T-Com produced central office equipment, which is
equipment that is typically employed in switching centers and network operating
centers.

         In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of our wholly-owned subsidiary, XET
Corporation. We intend to retain our Monrovia, California circuit board
manufacturing facility as a captive supplier of circuit boards to XET
Corporation's Digitran Division in our electronic components segment.

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

         Telecommunications

         --       Telecommunications Test Instruments (analog and digital test
                  instruments used in the installation, maintenance, management
                  and optimization of public and private communication networks)

         --       Transmission and Network Access Products (range of products
                  for accessing public and private networks for the transmission
                  of data, voice and video)

         Electronic Components (digital switches and electronic power supplies)

         Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 2000 were to customers in the telecommunications
industry, we also have significant sales to industrial, aerospace and military
customers.

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

                                       28

<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                    ------------------------
                                                                1998          1999          2000
                                                                ----          ----          ----
<S>                                                            <C>           <C>           <C>
Net sales.................................................     100.0%        100.0%        100.0%
Cost of sales.............................................      57.7          65.9          55.4
                                                               -------       -------       -------
Gross profit..............................................      42.3          34.1          44.6
Selling, general and administrative expenses..............      33.9          40.8          35.0
Engineering and product development expenses..............       7.3           7.1           4.2
                                                               -------       -------       -------
Operating income (loss)...................................       1.1         (13.8)          5.4
Interest expense..........................................      (2.2)         (1.6)         (1.5)
Other income (expense)....................................      (0.4)         (0.3)          2.3
                                                               -------       -------       -------
Income (loss) from continuing operations
  before income taxes.....................................      (1.5)        (15.7)          6.2
Income taxes..............................................       0.4           0.5           0.1
                                                               -------       -------       -------
Income (loss) from continuing operations..................      (1.9)        (16.2)          6.1
Loss from discontinued operations.........................      (4.0)         (3.2)         (0.8)
Gain (loss) on disposal of discontinued segment...........       1.9           1.7          (1.7)
                                                               -------       -------       -------
Net income (loss).........................................      (3.9)%       (17.7)%         3.6%
                                                               =======       =======       =======
</TABLE>

     YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
     1999

         CONTINUING OPERATIONS

         NET SALES. Net sales for the year ended December 31, 2000 increased by
$2,137,000 (8.2%) to $28,050,000 as compared to $25,913,000 for the year ended
December 31, 1999.

         Net sales of our telecommunications products and services during 2000
declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment
sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to
$4,983,000 for 1999. This increase in sales of test equipment was primarily due
to the positive market acceptance of our CXR HALCYON 704 series product line
which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this
increase was substantially attributable to additional test equipment sales as a
result of our acquisition of the business of T-Com in August 2000. This increase
in net sales of test equipment was offset by a reduction in sales of
transmission and networking equipment that are produced at our French
subsidiary, CXR S. A., of $2,931,000 (37.8%) from $10,683,000 during 1999 to
$7,752,000 for 2000. The decline in the net sales of these products was
primarily due to the conversion of sales amounts from French Francs to the U.S.
Dollars. The average U.S. Dollar value of the French Franc has declined
approximately 15% from 1999 to 2000. In addition, budget delays and reductions
within the French public sector also contributed to the reduction of
transmission equipment sales.

         Net sales of electronic components for 2000 increased by $2,145,000
(20.9%) to $12,392,000 as compared to $10,247,000 for 1999. This increase was
primarily due to an increase in digital switch sales of XET Corporation's
Digitran Division of $2,905,000 (63%) for 2000 to $7,508,000 from $4,603,000 for
1999. Contributing to this increase was a large order for switches placed by BAE
Systems of Canada, which accounted for $1,656,000 of net sales in 2000. Sales
under our contract with BAE Systems Canada, Inc. ended during the first quarter
of 2001. This increase was offset by the termination of our subsystem assembly
business that accounted for $670,000 of sales in 1999.

                                       29

<PAGE>

         GROSS PROFIT. Gross profit as a percentage of net sales increased to
44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit
increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to
$8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for
inventory obsolescence of $893,000 and $1,144,000, respectively. Provisions for
inventory obsolescence are recorded as necessary to reduce obsolete inventory to
estimated net realizable value or to specifically reserve for obsolete inventory
that we intend to dispose of. Upon disposal of obsolete inventory, the inventory
is written off and the allowance for inventory obsolescence is reduced.

         Gross profit for our telecommunications segment increased in dollar
terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for
1999 and increased as a percentage of related net sales from 33.4% in 1999 to
41.5% in 2000. This increase in gross profit was primarily due to a larger
portion of telecommunications segment sales consisting of higher margin test
equipment in 2000 which included the new CXR HALCYON 704 series test equipment
and our T-Com test equipment. These products, each of which contributed a
greater proportion of sales to this segment in 2000 than in 1999, generate a
higher gross profit margin than the older model test equipment and generally
contribute a higher margin than the transmission products.

         Gross profit of our electronic components segment increased in total
dollar terms by $2,382,000 (65.6%) to $6,013,000 for 2000 from $3,631,000 in
1999 and increased as a percentage of related net sales from 35.2% in 1999 to
48.5% in 2000. The increase in gross profit margin in 2000 as compared to 1999
was primarily due to improved profit margins in connection with sales made by
XET Corporation which resulted from manufacturing efficiencies, reduced overhead
in connection with the move from the Ontario facility to our Rancho Cucamonga
facility, higher production volumes and a larger percentage of higher margin
night vision switches. These increases were slightly offset by a decline in
profit margin of sales of our U. K. subsidiary due to lower sales volumes.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as
compared to $10,584,000 for 1999 and decreased as a percentage of net sales from
40.8% in 1999 to 35.0% in 2000. This decrease is attributable to a reduction in
selling expenses of $291,000 and reduction in general and administrative
expenses of $466,000. The decrease in general and administrative expenses was
primarily due to continued cost cutting efforts and due to certain expenses
incurred in 1999 that were not incurred in 2000. These expenses include a
$452,000 expense related to the establishment of a reserve for a note
receivable, a $522,000 charge related to our investor relations efforts and a
$193,000 charge related to a contingent stock agreement. Alternatively, there
were general and administrative expenses incurred in 2000 that were not incurred
in 1999 including approximately $200,000 of legal and accounting fees related to
the filing of a registration statement and other filings with the Securities and
Exchange Commission.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The
majority of this reduction is due to eliminating CXR Telcom's engineering
function in Fremont, California for test instruments and concentrating our
engineering efforts in only one location, our St. Charles, Illinois facility,
and the transfer of transmission and network access product engineering to CXR
S. A. in France with no additional staffing added there.

                                       30

<PAGE>

         OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$424,000 for 2000 as compared to $411,000 for 1999. Other income was $631,000
for 2000 as compared to an expense of $81,000 for 1999. Other income in 2000
included $197,000 of gain on the sale of common stock of Wi-LAN, Inc., $137,000
reduction in a warranty reserve, $90,000 for reductions in accruals for
settlements related to leased equipment and gain on foreign currency exchange of
$94,000.

         INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes and U.S. alternative minimum tax as we are in
a loss carryforward position for federal income tax purposes. At December 31,
2000 we had total net deferred income tax assets of approximately $16,321,000.
These potential income tax benefits, a significant portion of which relates to
net operating loss carryforwards, have been subjected to a 100% valuation
allowance since realization of these assets is not more likely than not in light
of our recurring losses from operations.

         DISCONTINUED OPERATIONS

         As a result of our decision in October 2000 to discontinue our last
remaining material circuits business, which operated as the XCEL Etch Tek
Division of our XET Corporation subsidiary, our circuits segment has been
accounted for as discontinued operations. We reported a net loss from
discontinued operations of $699,000 for 2000 as compared to a net loss of
$398,000 for 1999. The 2000 net loss included a loss of $487,000 from the
disposal of our discontinued operations, including $122,000 for phase out period
as compared to a gain of $449,000 for 1999 relating to the sale of HyComp, Inc.,
a subsidiary in our circuits segment and the separate sale of its corporate
shell.

         Net sales for our circuits business for 2000 decreased by $131,000
(5.5%) to $2,257,000 as compared to $2,388,000 for 1999 primarily due to the
sale of our circuits segment facility in November 2000, which resulted in 10 1/2
months of circuit segment sales during 2000.

         Selling, general and administrative expenses related to our
discontinued operations declined by $288,000 (43.4%) to $375,000 for 2000 as
compared to $663,000 for 1999 primarily due to the sale of HyComp, Inc. in 1999
and cost reductions of Etch-Tek.

     YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
     1998

         CONTINUING OPERATIONS

         NET SALES. Net sales for the year ended December 31, 1999 decreased by
$4,187,000 (13.9%) to $25,913,000 as compared to $30,100,000 for the year ended
December 31, 1998.

         Net sales of our telecommunications products and services decreased by
$1,866,000 (10.6%) to $15,666,000 for 1999, as compared to $17,532,000 for 1998.
This decrease was primarily due to reduced sales of our older CXR 5200 series of
telecommunications test sets which we were in the process of replacing with our
new CXR HALCYON 700 series of equipment because the older models were not
computer compatible and were larger and heavier than the newer models. Sales of
our older models, which totaled $15,000 during 1999, declined at a faster rate
than the increase in sales of our new models, which sales totaled $1,940,000
during 1999. The decrease in net sales attributable to the decline in sales of
our older model test equipment was partially offset by a $937,000 increase in
U.S. sales of our transmission products. An increase in sales by CXR, S.A. was
not fully recognized by us as a result of a 18.4% decline in the value of the
French Franc in relation to the U.S. dollar. The net sales of CXR, S.A. in its
functional currency of French Francs were 16.9% greater in 1999 than in 1998.
However, because of the decline in the value of the French Franc in relation to
the U.S. dollar, CXR, S.A. net sales in U.S. dollars were 15% less in 1999 than
in 1998.

                                       31

<PAGE>

         Net sales of electronic components decreased by $2,321,000 (18.5%) to
$10,247,000 for 1999 as compared to $12,568,000 for 1998 primarily due to the
discontinuance of our XCEL-Lite products, which represented no sales in 1999 as
compared to sales of $576,000 in 1998, the discontinuance of low margin
subsystem assembly business, which represented sales of $607,000 in 1999 as
compared to $1,069,000 in 1998, a $1,199,000 decline in sales of our digital
switches. We believe that the reduction in digital switch sales in 1999 as
compared to 1998 was at least partially due to a preannounced price increase
effective in early 1999 that caused some customers to purchase switches in 1998
rather than in 1999 in order to avoid the 1999 price increase.

         GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 34.1% for 1999 as compared to 42.3% for 1998. In dollar terms, total gross
profit decreased by $3,900,000 (30.6%) to $8,847,000 for 1999 as compared to
$12,747,000 for 1998. For the years ended December 31, 1999 and 1998, cost of
sales included provisions for inventory obsolescence of $1,144,000 and $879,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that we intend to dispose of. Upon disposal of
obsolete inventory, the inventory is written off and the allowance for inventory
obsolescence is reduced.

         Gross profit for our telecommunications segment decreased in dollar
terms by $2,836,000 (35.2%) to $5,216,000 for 1999 as compared to $8,052,000 for
1998 and decreased as a percentage of related net sales from 45.9% in 1998 to
33.3% in 1999 due largely to a 48% reduction in sales of our older test
equipment that had a higher margin than early initial production runs of our
newer products and due to a 77% increase in sales of our lower margin
transmission products. Our gross profit in this segment was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, because of our cash flow constraints, we were unable to pay
many of our suppliers in a timely fashion. As a result, we were forced to use
higher cost suppliers for some of our parts. However, margins on the new test
instruments are expected to meet or exceed the margins of older products as
production lot sizes increase and other efficiencies are achieved as the new
products mature. As of April 2000, all lower margin transmission products had
been transferred from California to France, where those products are more
efficiently produced, thus achieving a higher margin on the same products now
being exported from France for resale in the U.S.

         Gross profit for our electronic components segment decreased in total
dollar terms by $1,064,000 (22.7%) to $3,631,000 for 1999 as compared to
$4,695,000 for 1998 and decreased as a percentage of related net sales from
37.3% in 1998 to 34.1% in 1999 primarily due to additional costs incurred in
connection with the move from the Ontario facility to our Rancho Cucamonga
facility.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $382,000 (3.7%) to $10,584,000 for 1999 as
compared to $10,202,000 for 1998. Our general and administrative expenses
increased by $400,000 (7.0%) to $6,094,000 for 1999 as compared to $5,694,000
for 1998 primarily due to the non-cash expense of $522,000 in shares of our
common stock and warrants to purchase our common stock to our investor relations
firms in connection with our plan to increase our visibility within the
investment community. Offsetting increases in general and administrative
expenses were reductions in expenses due to the transfer of the administrative
functions of CXR Telcom to our corporate office.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses, which consist primarily of research and product
development activities of our telecommunications segment, decreased by $361,000
(16.4%) to $1,841,000 in 1999 as compared to $2,202,000 for 1998. This reduction
was primarily due to elimination of the CXR engineering function in Fremont,
California in May 1999, which reduced engineering expenses by $294,000. The
engineering staff for our United States-based test equipment products is now

                                       32

<PAGE>

housed only in our St. Charles, Illinois facility. We believe that engineering
and product development are important to our future profitability. All
engineering for our transmission products has been consolidated in France at our
CXR, S.A. facility.

         OTHER INCOME AND EXPENSE. Interest expense was $411,000 in 1999 as
compared to interest expense of $675,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.

         INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes. At December 31, 1999, we had total net deferred
income tax assets of approximately $18,335,000. These potential income tax
benefits, a significant portion of which relates to net operating loss
carryforwards, have been subjected to a 100% valuation allowance since
realization of these assets is not more likely than not in light of our
recurring losses from operations.

         DISCONTINUED OPERATIONS

         As a result of our decision to discontinue our last remaining material
circuits operation in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $398,000 for 1999 as compared to a net loss of $623,000 for 1998.

         Net sales for our circuits business for 1999 decreased by $4,773,000
(66.7%) to $2,388,000 as compared to $7,161,000 for 1998 primarily due to the
sale of HyComp, Inc. on March 31, 1999 and the sale of XCEL Arnold Circuits,
Inc. on March 31, 1998, which accounted for $3,880,000 of the reduction, as well
as a lack of working capital to acquire materials necessary to support customer
delivery requirements in the remaining XCEL Etch Tek Division because available
working capital was dedicated to higher margin components and telecommunications
products.

         Gross profit for our circuits business decreased in total dollar terms
by $848,000 (131.9%) to gross loss of $(205,000) in 1999 as compared to gross
profit of $643,000 in 1998 and decreased as a percentage of related net sales
from 9.0% in 1998 to 8.6% in 1999 primarily due to the sale of HyComp, Inc. in
1999, which accounted for $1,292,000 of the reduction, and the booking of a
reserve in the amount of $250,000 to cover potential warranty claims associated
with products sold by HyComp, Inc. prior to its sale.

LIQUIDITY AND CAPITAL RESOURCES

         During the year ended December 31, 2000, we funded our operations
primarily through revenue generated from our operations and through our prior
line of credit with Congress Financial Corporation, or Congress Financial, and
through our new line of credit with Wells Fargo Business Credit, Inc.

         During the latter part of 1999, we embarked on a cost reduction program
in an effort to improve our cash flow position and profitability. This program
included a significant reduction in personnel, the downsizing and relocation of
our corporate headquarters and the sale of investments we had in other
companies. As described below, these cost measures, together with our line of
credit, have had a positive impact on MicroTel.

         As of December 31, 2000 we had working capital of $2,780,000 and an
accumulated deficit of $18,775,000. As of that date, we had $756,000 in cash and
cash equivalents and $7,440,000 of accounts receivable.

                                       33

<PAGE>

         Cash used in our operating activities totaled $201,000 for 2000 as
compared to cash provided by operating activities of $729,000 for 1999. This
decrease in cash provided by operations during 2000 resulted primarily from
payments of $1,515,000 to reduce accounts payable and accrued expenses. In
addition, $1,468,000 was used to increase inventory, primarily at our U.K.
location, in order to service our backlog of orders for power supplies. These
cash outflows were partially offset by net income of $1,004,000 realized in 2000
as compared to net loss of $4,596,000 in 1999.

         Cash provided by our investing activities totaled $909,000 for 2000 as
compared to cash provided by our investing activities of $756,000 for 1999.
Included in the 2000 results is $520,000 from the sale of shares of common stock
we held in Digital Transmission Systems, Inc., or DTS, and $918,000 from the
sale of shares of common stock we held in Wi-Lan, Inc., which we obtained when
we sold our interest in DTS to Wi-Lan, Inc. Partially offsetting this investing
cash flow was the acquisition of Belix, Inc. which used net cash of $592,000 and
the acquisition of the assets of T-Com which used $82,000 in cash.

         Cash provided by financing activities totaled $73,000 for 2000 as
compared to cash used in financing activities of $1,130,000 for 1999. The
primary reason for the cash provided by financing activities in 2000 was the
increased borrowings of XCEL Power Systems, Ltd., our U.K.-based power supply
producer to provide working capital to service its growing backlog.

         On June 23, 2000, our credit facility with Congress Financial expired
while we were out of compliance with the adjusted net worth covenant of this
facility. Congress Financial extended this facility through August 14, 2000. On
August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with
MicroTel acting as guarantor, obtained a credit facility from Wells Fargo
Business Credit, Inc. This facility provides for a revolving loan of up to
$3,000,000 secured by our inventory and accounts receivable and a term loan in
the amount of $687,000 secured by our machinery and equipment. As a condition of
extending this credit facility to our subsidiaries, Wells Fargo Business Credit,
Inc. required our President and Chief Executive Officer, Carmine Oliva, to
personally guaranty a portion of our indebtedness under the facility. On January
26, 2001, Mr. Oliva was released from this guaranty. The annual interest rate on
both portions of the credit facility is the prime rate plus 2%. The facility
contains a performance-based interest reduction feature. Based upon our 2000
financial performance, we will obtain a reduction in the interest rate to the
prime rate plus 1% upon completion of the audit of our financial statements for
the year ended December 31, 2000. The terms of the credit facility provide for a
reduction in the interest rate to the prime rate plus 1.5% if the consolidated
net income of XET Corporation and CXR Telcom exceeds $250,000 for the year ended
December 31, 2000 or the prime rate plus 1% if the consolidated net income of
XET Corporation and CXR Telcom exceeds $500,000 for the year ended December 31,
2000. The balance outstanding under this credit facility was $1,798,000 on
December 31, 2000. There was $1,202,000 of additional borrowings available as of
December 31, 2000. The credit facility expires on August 16, 2003. Our foreign
subsidiaries have obtained credit facilities with Lloyds Bank in England, Banc
National du Paris, Societe General and Banque Hervet in France and Johan Tokyo
Credit Bank in Japan. The balances outstanding under our U.K. and France credit
facilities were $1,377,000 and $486,000, respectively, on December 31, 2000.

         We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our credit facility with Wells Fargo Business Credit, Inc., 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 sooner than
we anticipate. Failure to raise necessary capital could restrict our growth,
limit our development of new products or hinder our ability to compete.

                                       34

<PAGE>

EFFECTS OF INFLATION

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

EURO CONVERSION

         Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 49% of our total net sales
for the year ended December 31, 2000. Net sales from the French subsidiary
participating in the Euro conversion were 33% of our net sales for the year
ended December 31, 2000. We continue to review the impact of the Euro conversion
on our operations.

         In 1998, our European operations took steps to ensure their capability
of entering into Euro transactions as of January 1, 1999. No material changes to
information technology and other systems were necessary to accommodate these
transactions because these systems already were capable of using multiple
currencies.

         While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate risk as nominal.

                                       35

<PAGE>

SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following table sets forth selected quarterly financial data for
each of the last eight fiscal quarters. This quarterly information is unaudited,
has been prepared on the same basis as our annual financial statements, and, in
our opinion, reflects all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the information for periods
presented. Operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
  AND COMPREHENSIVE INCOME DATA                                            QUARTER ENDED
                                 ---------------------------------------------------------------------------------------------------
                                  MAR 31,     JUNE 30,     SEPT 30,      DEC 31,      MAR 31,     JUNE 30,     SEPT 30,     DEC. 31,
                                   1999         1999         1999         1999         2000         2000         2000         2000
                                 --------     --------     --------     --------     --------     --------     --------     --------
                                                                       (IN THOUSANDS)
<S>                              <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Net sales ..................     $ 6,677      $ 6,319      $ 6,448      $ 6,469      $ 5,860      $ 6,828      $ 6,871      $ 8,491
Cost of sales ..............       4,127        3,938        4,203        4,798        3,534        4,032        3,080        4,883
                                 --------     --------     --------     --------     --------     --------     --------     --------
Gross profit ...............       2,550        2,381        2,245        1,671        2,326        2,796        3,791        3,608
Selling, general and
  administrative expenses ..       3,408        2,687        2,385        2,104        2,147        2,248        2,431        3,001
Engineering and product
  development expenses .....         526          477          459          379          243          253          277          394
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from
  operations ...............      (1,384)        (783)        (599)        (812)         (64)         295        1,083          213
Other income (expenses),
  net ......................         379          164         (150)        (885)          --           10           51          146
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from
  continuing operations
  before income taxes ......      (1,005)        (619)        (749)      (1,697)         (64)         305        1,134          359
Income tax expense .........           8            5           12          103            7            4            2           18
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from
  continuing operations ....      (1,013)        (624)        (761)      (1,800)         (71)         301        1,132          341
Discontinued operations:
   Income (loss) from
     operations of
     discontinued segment ..        (293)        (290)        (273)           9          (56)         (95)         (68)           7
   Gain (loss) on disposal
     of discontinued segment         331           --           --          118           --           --         (634)         147
                                 --------     --------     --------     --------     --------     --------     --------     --------
Net income (loss) ..........     $  (975)     $  (914)     $(1,034)     $(1,673)     $  (127)     $   206      $   430      $   495
Other comprehensive
     gain (loss),  net .....        (263)        (161)         244         (145)         296         (436)        (295)         (70)
                                 --------     --------     --------     --------     --------     --------     --------     --------
Total comprehensive gain
  (loss) ...................     $(1,238)     $(1,075)     $  (790)     $(1,818)     $   169      $  (230)     $   135      $   425
                                 ========     ========     ========     ========     ========     ========     ========     ========
Basic earnings (loss) per
  share from continuing
  operations................       (0.07)       (0.04)       (0.05)       (0.10)       (0.01)        0.02         0.06         0.02
Diluted earnings (loss) per
  share from continuing
  operations................       (0.07)       (0.04)       (0.05)       (0.10)       (0.01)        0.02         0.05         0.01
Basic earnings (loss) per
  share from discontinued
  operations ...............       (0.00)       (0.02)       (0.01)        0.01        (0.00)       (0.01)       (0.04)        0.01
Diluted earnings (loss) per
  share from discontinued
  operations ...............       (0.00)       (0.02)       (0.01)        0.01        (0.00)       (0.01)       (0.03)        0.01
Basic earnings (loss) per
  share ....................       (0.07)       (0.06)       (0.06)       (0.09)       (0.01)        0.01         0.02         0.03
Diluted earnings (loss) per
  shares ...................       (0.07)       (0.06)       (0.06)       (0.09)       (0.01)        0.01         0.02         0.02

                                                                              36
</TABLE>

<PAGE>

The following table sets forth a portion of the above unaudited information as a
percentage of net sales.

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
  AND COMPREHENSIVE INCOME DATA                                            QUARTER ENDED
                                 ---------------------------------------------------------------------------------------------------
                                  MAR 31,     JUNE 30,     SEPT 30,      DEC 31,      MAR 31,     JUNE 30,     SEPT 30,     DEC. 31,
                                   1999         1999         1999         1999         2000         2000         2000         2000
                                 --------     --------     --------     --------     --------     --------     --------     --------
                                                                       (IN THOUSANDS)
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Net sales...................         100%         100%         100%         100%         100%         100%         100%         100%
Cost of sales...............          62           62           65           74           60           59           45           58
                                 --------     --------     --------     --------     --------     --------     --------     --------
Gross profit................          38           38           35           26           40           41           55           42
Selling, general and
  administrative expenses...          51           43           37           33           37           33           35           35
Engineering and product
  development expenses......           8            7            7            6            4            4            4            5
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from operations        (21)         (12)          (9)         (13)          (1)           4           16            2
Other income (expenses),  net          6            2           (3)         (13)          --           --            1            2
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from continuing
  operations before income
  taxes.....................         (15)         (10)         (12)         (26)          (1)           4           17            4
Income tax expense..........          --           --           --            2           --           --           --           --
                                 --------     --------     --------     --------     --------     --------     --------     --------
Income (loss) from continuing
  operations................         (15)         (10)         (12)         (28)          (1)           4           17            4
Discontinued operations:
   Loss from operations of
     discontinued segment......       (5)          (5)          (4)          --           (1)          (1)          (2)          --
   Gain (loss) on disposal of
     discontinued segment......        5           --           --            2           --           --           (9)           2
                                 --------     --------     --------     --------     --------     --------     --------     --------
Net income (loss)...........         (15)         (15)         (16)         (26)          (2)           3            6            6
Other comprehensive
   gain (loss),  net........          (4)          (2)           4           (2)           5           (6)          (4)          (1)
                                 --------     --------     --------     --------     --------     --------     --------     --------
Total comprehensive gain (loss)      (19)         (17)         (12)         (28)           3           (3)           2            5
                                 ========     ========     ========     ========     ========     ========     ========     ========
</TABLE>

         Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.

         Net sales from continuing operations for the quarter ended March 31,
1999 were slightly below net sales from continuing operations for the quarter
ended March 31, 1998. However the loss from continuing operations for the
quarter ended March 31, 1999 increased by $234,000 (22.2%) to $1,013,000 from
$828,000 in the quarter ended March 31, 1998. The primary reason for the
increase in the loss from continuing operations was $522,000 of expense related
to our investor relations efforts. A gain of $331,000 was recorded for the gain
on the sale of HyComp, Inc. in the first quarter of 1999 and included in
discontinued operations.

         Net sales from continuing operations for the quarter ended June 30,
1999 declined by $1,205,000 (16.0%) to $6,319,000 from $7,524,000 for the
quarter ended June 30, 1998. Gross margins declined slightly to 37.7% for the
quarter ended June 30, 1999 from 41.3% for the quarter ended June 30, 1998. The
decrease in net sales was due to declines in sales in both the
telecommunications segment and the electronic components segment.

         Net sales from continuing operations for the quarter ended September
30, 1999 declined $1,404,000 (17.9%) to $6,448,000 from $7,852,000 for the
quarter ended September 30, 1998. The primary reason for the reduction in net
sales was the reduced sales of our older CXR 5200 series telecommunications test
sets that we were in the process of replacing with our new CXR HALCYON 700

                                       37

<PAGE>

series of equipment because the older models were not computer compatible and
were larger and heavier than the new models. Sales of our older models, which
declined to $13,000 during the quarter ended September 30, 1999, declined at a
faster rate than the increase in sales of our new models, which sales totaled
$758,000 during the quarter ended September 30, 1999. A loss of $761,000 from
continuing operations was incurred in the third quarter of 1999.

         Net sales of continuing operations for the quarter ended December 31,
1999 declined by $1,540,000 (19.2%) to $6,469,000 from $8,009,000 in the fourth
quarter of 1998. The primary reason for the decline was lower sales for our
telecommunications segment, which lower sales mainly resulted from reduced sales
of our older CXR 5200 series telecommunications test sets that we were in the
process of replacing with our new CXR HALCYON 700 series of equipment. We wrote
down the carrying value of our Digital Transmission System, Inc. stock by
$419,000 to the value received in consideration for the sale of the stock in
January 2000. This amount was included in other expense and contributed to the
loss from continuing operations after tax of $1,800,000 for the quarter ended
December 31, 1999.

         Net sales from continuing operations for the quarter ended March 31,
2000 declined by $817,000 (12.2%) to $5,860,000 from $6,677,000 for the quarter
ended March 31, 1999. The primary cause of the sales reduction was the decline
in sales of our electronic components segment of $654,000 during the quarter
ended March 31, 2000. The majority of the decline in the electronic components
segment net sales resulted from short-term delays in production releases of some
contracts at our U. K. facility that manufactures power supplies. However, due
to a reduction in administrative expenses, we were able to limit our loss from
continuing operations to only $71,000 despite a considerable reduction in sales
in the first quarter of 2000 as compared to the first quarter of 1999.
Administrative expense in the quarter ended March 31, 1999 included $522,000 of
expenses related to our investor relations efforts.

         Net sales from continuing operations for the quarter ended June 30,
2000 increased by $509,000 (8.1%) to $6,828,000 from $6,319,000 for the quarter
ended June 30, 1999. This increase was primarily the result of the acquisition
of Belix Ltd., or Belix, a power supply manufacturer based in the U. K. The
Belix acquisition was effective March 31, 2000 and contributed $658,000 of
revenue in the second quarter of 2000. Income from continuing operations in the
quarter ended June 30, 2000 was $301,000 as compared to a loss from continuing
operations of $624,000 in the quarter ended June 30, 1999. The primary
contributor to the improved profit was an overall increase in gross margins in
both our telecommunications and electronic components segments resulting in a
gross margin of 41.0% for the quarter ended June 30, 2000 as compared to a gross
margin of 37.7% for the quarter ended June 30, 1999. Gross margins were improved
by moving our U. S. electronic components segment manufacturing operation to a
smaller facility and improving the efficiency of manufacturing the new CXR
HALCYON test sets in our telecommunications segment.

         Net sales from continuing operations for the quarter ended September
30, 2000 increased by $423,000 (6.6%) to $6,871,000 from $6,448,000 for the
quarter ended September 30, 1999. Our electronic components segment provided an
increase of $858,000 primarily due to a large order for digital switches from
BAE Systems, Canada which accounted for $504,000 of this increase. The increase
in sales of our electronic component segment was offset by a $435,000 decrease
in sales of our telecommunications segment mainly due to lower sales reported by
our facility in France which resulted from late approvals of the capital budgets
of some of its customers. Gross margins improved to 55% in the third quarter of
2000 from 34.8% in the third quarter of 1999. Contributing to the gross profit
increase was the high gross profit generated by the assets of T-Com that were
newly acquired for our telecommunications segment. In addition, efficiencies due
to the relocation of our Digitran Division of XET Corporation improved overall
margins in our electronic components segment. These improvements in operating
performance contributed to income from continuing operations of $1,132,000 for
the quarter ended September 30, 2000 as compared to a loss from continuing
operations of $761,000 for the quarter ended September 30, 1999. The $1,132,000
income for the quarter ended September 30, 2000 includes $197,000 from the sale
of Wi-LAN, Inc. stock and $237,000 income contributed by T-Com, which was
acquired as of August 2000.

         During the quarter ended September 30, 2000 we sold XCEL Etch Tek, the
last of our former circuits segment operations, and we reported the $634,000
loss on the sale of XCEL Etch Tek and the $68,000 operating losses of XCEL Etch
Tek as losses from discontinued operations.

         Net sales from continuing operations for the three month period ended
December 31, 2000 increased $2,022,000 (31.3%) to $8,491,000 as compared to
$6,469,000 for the quarter ended December 31, 1999. The primary reasons for this
increase were $717,000 of sales due to the acquisition of T-Com and a $1,097,000
increase in digital switch sales. Gross profit, as a percentage of net sales,
increased from 25.8% for the quarter ended December 31, 1999 to 42.5% for the

                                       38

<PAGE>

quarter ended December 31, 2000 primarily due to higher volumes, reduced
overhead in connection with the move from the Ontario facility to the Rancho
Cucamonga facility and a larger percentage of higher margin night vision
switches. Gross margins declined to 42% in the fourth quarter of 2000 from 55%
in the third quarter of 2000. This reduction in gross margins was primarily due
to lower margins for our U.S.-based telecommunications equipment resulting from
our use of more costly contract manufactured circuit boards rather than circuit
boards that we previously assembled in-house. In addition to increased circuit
board costs, the cost of lost demo inventory and obsolete inventory contributed
to reduced gross margins. Also, the reduction in sales of U.S.
telecommunications test equipment from $2,086,000 during the third quarter to
$1,746,000 during the fourth quarter adversely affected gross margins due to
overhead expenses being applied to less units. Costs associated with the
integration of the T-Com acquisition and associated manufacturing consolidation
temporarily reduced efficiency and also was a factor in reducing gross margins
during the fourth quarter. Operating expenses increased to $3,001,000 during the
quarter ended December 31, 2000 as compared to $2,104,000 for the quarter ended
December 31, 2000 primarily due to higher legal and accounting fees and higher
expenses associated with the T-Com acquisition.

RISK FACTORS

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.

         We incurred significant net operating losses in each of the years ended
December 31, 1999 and 1998 and incurred a net operating profit in the year ended
December 31, 2000. We realized a net loss of approximately $4.6 million for the
twelve months ended December 31, 1999, as compared to incurring a net loss of
approximately $1.2 million for the twelve months ended December 31, 1998. For
the twelve months ended December 31, 2000, we recorded net income of $1.0
million. Our accumulated deficit and accumulated other comprehensive loss
through December 31, 2000 were approximately $18.8 million and $.7 million,
respectively, and as of that date we had a total stockholders' equity of
approximately $5.8 million. Although we recently reported profitable operations,
there is no assurance that we will continue to maintain profitable operations in
the future. If we are unable to do so, there may be a material adverse effect on
our cash flows, which could cause us to violate covenants under our credit
facility and could impede our ability to raise capital through debt or equity
financing to the extent we may need it for our continued operations or for
planned expansion. Consequently, future losses may have a material adverse
effect on our business, prospects, financial condition, results of operations
and cash flows.

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 have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 52.8% of our net sales for the year ended December
31, 2000. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. 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.

                                       39

<PAGE>

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
TELECOMMUNICATIONS 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
telecommunications and electronic components 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
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 cause us to reduce our
competitiveness, revenues, profit margins or market share.

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

         During the year ended December 31, 2000, the sale of telecommunications
equipment and related services accounted for approximately 56% of our total
sales and the sale of electronic components accounted for approximately 44% of
our total sales. In many cases we have long-term contracts with our
telecommunications and electronic components 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 telecommunications 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 telecommunications and electronic
components 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.

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 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 assurance
that our suppliers will continue to meet our requirements. 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 have a
material adverse effect on our results of operations because our products

                                       40

<PAGE>

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 have a
material adverse effect on 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,
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.

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

         Our business strategy includes growth through acquisitions 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 opportunities and
integrating acquired products and businesses requires a significant amount of
management time and skill. Acquisitions 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 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 complete strategic acquisitions due to our inability to identify
appropriate targets or to manage the difficulties or costs involved in the
acquisitions, our long-term competitive positioning could suffer.

WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND 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, and our Executive Vice President,
Graham Jefferies. 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 operations. Consequently, the
loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management
could have a material adverse effect on us. Although we have entered into
employment agreements with several key employees, we have not entered into any
employment agreement with any of our executive officers other than with Mr.
Oliva and Mr. Jefferies. 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.

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.

                                       41

<PAGE>

         For example, changes affecting the telecommunications industry,
including consolidations and restructuring of United States and foreign
telephone companies, can 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 to the
extent we have difficulty collecting monies due from our customers who are in
the process of reorganizing, 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 a significant 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.

         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 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 telecommunications 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
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.

BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER
RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY
IMPACT OUR FINANCIAL CONDITION.

         During 1998 and 1999 we modified the terms of some of our outstanding
warrants and the terms of our Series A Preferred Stock. These transactions may
have been subject to the federal tender offer rules which would have required us
to make filings with the Securities and Exchange Commission and to conduct our
activities in a manner prescribed by the tender offer rules. We did not make any
of these filings nor did we comply with the other requirements of the tender
offer rules. Although we believe that our activities surrounding the
modifications to our warrants and Series A Preferred Stock are not subject to
the federal tender offer rules, the Securities and Exchange Commission, as well
as those security holders who participated in the modification transactions, may
disagree with us. If that were to happen, we may be subject to fines by the
Securities and Exchange Commission and may be required by the Securities and
Exchange Commission and/or the security holders to rescind the transactions. The
dollar amount of any fines and the costs associated with rescission, including
the related legal and accounting costs, are difficult for us to quantify, yet
they could be significant. If they are significant, our financial condition
would be adversely impacted.


                                       42

<PAGE>

IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT
LIABILITIES.

         We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used in our
circuit board manufacturing processes. Any failure to comply with present and
future regulations could subject us to future liabilities or the suspension of
production. These regulations could also require us to acquire costly equipment
or to incur other significant expenses to comply with environmental regulations.
We may also from time to time be subject to lawsuits with respect to
environmental matters. The extent of our liability under any suit is not
determinable and may have a material adverse affect on us.

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 telecommunications 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 telecommunications 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.

THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS.

         We have substantial net operating loss, or NOL, carryforwards for
federal and state tax purposes. Because of our ownership changes resulting from
a merger in 1997, our use of these NOL carryforwards to offset future taxable
income will be limited. To the extent we are unable to fully use these NOL
carryforwards to offset future taxable income, we will be subject to income
taxes on future taxable income, which will negatively impact our results of
operations and cash flows.

OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES OFFERED BY THIS PROSPECTUS.

         The market prices of securities of technology-based companies,
including electronics hardware companies, currently are highly volatile. The
market price of our common stock has fluctuated significantly in the past. The
market price of our common stock may continue to exhibit significant
fluctuations in response to the following factors, many of which are beyond our
control:

         --       variations in our quarterly operating results;
         --       changes in market valuations of similar companies and stock
                  market price and volume fluctuations generally;
         --       economic conditions specific to the electronics hardware
                  industry;
         --       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;
         --       regulatory developments;
         --       additions or departures of key personnel; and
         --       future sales of our common stock or other securities.

                                       43

<PAGE>

         The price at which you purchase shares of common stock offered by this
prospectus 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.

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
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.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE
AVAILABLE TO US ON ACCEPTABLE TERMS, OR AT ALL. IF WE OBTAIN FINANCING THROUGH
THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY
RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY
REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY
TECHNOLOGIES.

         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. If we raise additional funds by issuing equity securities, further dilution
to the 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.

                                       44

<PAGE>

SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD
ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.

         As of May 15, 2001, we had outstanding 20,570,415 shares of common
stock, of which 20,352,915 shares were unrestricted or were eligible for resale
without registration under Rule 144 of the Securities Act of 1933 and 217,500
shares were in the process of being registered for resale. As of May 15, 2001,
we also had outstanding options, warrants and preferred stock that were
exercisable for or convertible into 6,618,930 shares of common stock. Of these,
1,648,924 shares of common stock underlying options were registered for resale,
1,505,430 shares of common stock underlying warrants were in the process of
being registered for resale, and 2,763,250 shares of common stock underlying
preferred stock and 250,000 shares of common stock underlying warrants were
entitled to be registered for resale. Sales of a substantial number of shares of
our common stock in the public market, or the perception that sales could occur,
could adversely affect the market price for our common stock. Any adverse effect
on the market price for our common stock could make it difficult for us to sell
equity securities at a time and at a price that we deem appropriate.

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.

         Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap
Market. We were unable to maintain the minimum bid price of $1.00 per share and
our stock was delisted from that market. Since May 13, 1999, our common stock
has been traded under the symbol "MCTL" on the NASD's 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 25 are currently outstanding. In addition, 150,000
shares have been designated as Series B Preferred Stock, all of which are
currently outstanding. 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.

THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE
OF OUR STOCK.

         Section 203 of the General Corporation Law of Delaware prohibits us
from engaging in business combinations with interested stockholders, as defined
by statute. These provisions may have the effect of delaying or preventing a
change in control of MicroTel without action by our stockholders, even if a
change in control would be beneficial to our stockholders. Consequently, these
provisions could adversely affect the price of our common stock.

                                       45

<PAGE>

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

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

         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. Debt obligations
with fixed interest rates are not included as substantially all of such debt is
due in 2001. Accordingly, such debt does not expose us to significant interest
rate risk. All dollars are in thousands. The symbol "P" represents the prime
rate. The symbol "B" represents lender's base rate.

<TABLE>
<CAPTION>
                                                                                                     FAIR
                                                                                                    VALUE
    LIABILITIES      2001      2002      2003      2004      2005      THEREAFTER     TOTAL         12/31/00
    -----------      ----      ----      ----      ----      ----      ----------     -----         --------
<S>                  <C>        <C>       <C>        <C>       <C>                      <C>             <C>
Line of Credit     $1,798                                                             $1,798          $1,798
(domestic)

Average Interest   P+ 2%
Rate

Line of Credit     $1,377                                                             $1,377          $1,377
(Foreign)

Average Interest   B+ 2.5%
Rate

Term Loan          $137       $137      $83        $8        $5                         $370            $370

Average Interest   P+ 2%      P+ 2%     P+ 2%      P+ 2%     P+ 2%
Rate
</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.

         Reference also is made to the supplementary data included in Item 7 of
this report under the heading "Selected Quarterly Results of Operations."

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

         None.

                                       46

<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 23, 2001 are as follows:

<TABLE>
<CAPTION>
        NAME                               AGE                         TITLES
        ----                               ---                         ------

<S>                                        <C>            <C>
Carmine T. Oliva                           58             Chairman of the Board, President,
                                                             Chief Executive Officer and Director

Graham Jefferies                           43             Executive Vice President and Chief
                                                             Operating Officer of our Telecommu-
                                                             nications Group and Managing Director of
                                                             various subsidiaries

Randolph D. Foote                          52             Senior Vice President and Chief Financial
                                                                         Officer

Robert B. Runyon (1)(2)                    75             Secretary and Director

Laurence P. Finnegan, Jr. (1)(3)           63             Director
</TABLE>

-----------
(1)      Member of the executive compensation and management development
         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 is Chairman of the Board of XCEL Corporation Ltd since 1985, Chairman
and Chief Executive Officer of CXR Telcom Corporation since March 1997 and
Chairman of CXR S.A. since March 1997. 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 from The Ohio State
University in 1966.

         GRAHAM JEFFERIES was appointed Executive Vice President and Chief
Operating Officer of our worldwide 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 as a director of CXR, S.A. since
March 1997, as Managing Director of Belix Power Conversions Ltd. since our
acquisition of Belix Power Conversions Ltd. 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 in 1978, and has
experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident
of the United Kingdom.

                                       47

<PAGE>

         RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief
Financial Officer on October 4, 1999. 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, S.A., 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 in 1973 and an M.B.A. degree in Tax/Business from Golden Gate University
in 1979.

         ROBERT B. RUNYON was elected as a Class III director and appointed as
our Secretary on March 26, 1997. He has been the owner and principal of Runyon
and Associates, a human resources and business advisory firm, since December
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 in 1950.

         LAURENCE P. FINNEGAN, JR. was elected as a Class II director on 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 (1970-74) as controller of
several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief
Financial Officer and Executive Vice President, 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 President of GA Pipe, Inc., a manufacturing company based in Langhorne,
Pennsylvania. Since September 1997, Mr. Finnegan has been Vice President Finance
and Chief Financial Officer of QuestOne Decision Sciences, an efficiency
consulting firm based in Pennsylvania. Mr. Finnegan earned a B.S. degree in
Accounting from St. Joseph's University in 1961.

         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
three directors, one of which is a Class II director whose term expires in 2001,
and two of which are Class III directors whose term expires in 2002. Officers
are appointed by, and serve at the discretion of, our board of directors.

                                       48

<PAGE>

COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES

         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 our fiscal year ended December 31, 2000 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 our 2000 fiscal year, all Section 16(a)
filing requirements applicable to our reporting persons were complied with.

ITEM 11. EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

         The following table sets forth information concerning compensation paid
to 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 the years ended December 31, 2000, 1999 and 1998:

<TABLE>
                                          SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                                  LONG-TERM
                                                                                 COMPENSATION
                                                                                    AWARD
                                                                                    -----
                                                     ANNUAL COMPENSATION         SECURITIES
                                                     -------------------         UNDERLYING       ALL OTHER
        NAME AND PRINCIPAL POSITION      YEAR       SALARY          BONUS          OPTIONS       COMPENSATION
        ---------------------------      ----       ------          -----          -------       ------------
<S>                                      <C>        <C>            <C>             <C>            <C>
    Carmine T. Oliva..................   2000       $207,395       $80,000             --         $4,821 (1)
      President and Chief Executive      1999       $198,872            --             --         $4,821 (1)
      Officer                            1998       $198,872            --             --         $2,411 (1)

    Graham Jefferies..................   2000       $128,775       $35,000             --         $6,869 (3)
      Executive Vice President and       1999       $114,192            --         60,000         $5,116 (3)
      Chief Operating Officer of         1998       $ 98,918            --         30,000         $5,567 (3)
      Telecommunications Group (2)


    Randolph D. Foote.................   2000       $103,754       $20,000             --             --
      Senior Vice President, Chief       1999       $ 23,267            --         50,000             --
      Financial Officer (4)              1998             --            --             --             --
</TABLE>

---------------
(1)      Represents the dollar value of insurance premiums we paid with respect
         to term life insurance for the benefit of Mr. Oliva's spouse.
(2)      Mr. Jefferies was appointed Executive Vice President and Chief
         Operating Officer of our worldwide Telecommunications Group on October
         21, 1999. 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 contributions to Mr. Jefferies' retirement plan.
(4)      Randolph D. Foote was appointed Senior Vice President and Chief
         Financial Officer on October 4, 1999.

                                       49

<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

         During the year ended December 31, 2000, we did not grant any stock
options or stock appreciation rights to any of the named executive officers.

                   OPTION EXERCISES AND FISCAL YEAR-END VALUES

         The following table provides information regarding option exercises in
the year ended December 31, 2000 by the named executive officers and the value
of unexercised options held by the named executive officers as of December 31,
2000.

<TABLE>
<CAPTION>
                                                                       NUMBER OF
                                                        SECURITIES UNDERLYING            VALUE ($) OF UNEXERCISED
                           SHARES                       UNEXERCISED OPTIONS AT           IN-THE-MONEY OPTIONS AT
                          ACQUIRED                         DECEMBER 31, 2000                DECEMBER 31, 2000(1)
                             ON           VALUE            -----------------                --------------------
       NAME               EXERCISE      REALIZED       EXERCISABLE    UNEXERCISABLE     EXERCISABLE   UNEXERCISABLE
       ----               --------      --------       -----------    -------------     -----------   -------------
<S>                          <C>           <C>           <C>               <C>              <C>              <C>
Carmine T. Oliva.....        --            --            130,633           --                  --            --
Randolph D. Foote....        --            --             50,000           --               4,845            --
Graham Jefferies.....        --            --            126,287           --               5,814            --
</TABLE>

--------------
(1)      Based on the last reported sale price of our common stock of $.2969 per
         share on December 29, 2000 (the last trading day during fiscal 2000) as
         reported on the OTB Bulletin Board, less the exercise price of the
         options.

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

         CARMINE T. OLIVA

         Under an employment agreement dated January 1, 1996, Carmine T. Oliva
was employed as Chairman, President and Chief Executive Officer of XET
Corporation for a term of five years at an annual salary of $250,000. In July
1996, Mr. Oliva voluntarily agreed to abate a portion of his annual salary in
connection with XET Corporation's salary abatement program then in effect. On
May 6, 1997, our board of directors voted to assume the obligations of XET
Corporation under this agreement in light of the appointment of Mr. Oliva to the
positions of Chairman of the Board, President and Chief Executive Officer of
MicroTel on March 26, 1997.

         On October 15, 1997, we entered into a replacement agreement with Mr.
Oliva on substantially the same terms and conditions as the prior agreement. The
replacement agreement was subject to automatic renewal for three successive
two-year terms beginning on October 15, 2002, unless, during the required notice
periods (which run from August 15 to October 15 of the 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 that Mr. Oliva's
salary was to continue at the abated amount of $198,865 per annum until we have
reported two consecutive profitable quarters during the term of the agreement or
any renewals thereof, at which time his salary was to increase to its
pre-abatement level of $250,000 per annum. Based on our unaudited quarterly
financial statements, this increase to $250,000 occurred effective as of
November 1, 2000.

         As of January 1, 2001, we entered into a new employment agreement with
Mr. Oliva. 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.

                                       50

<PAGE>

         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.

         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:

         --       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;

         --       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;

         --       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;

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

         --       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

         --       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

                                       51

<PAGE>

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.

         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:

         --       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;

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

         --       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.

         GRAHAM JEFFERIES

         On May 1, 1998, we entered into an employment agreement with Mr.
Jefferies for a term of two years at an initial annual salary of 67,000 British
pounds (approximately $106,500 at the then current exchange rates) that is
subject to automatic renewal for two successive one-year terms beginning on May
1, 2000. Mr. Jefferies was to act as Managing Director of XCEL Corporation, Ltd.
and 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. 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.

         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 through the expiration of the current renewal 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. Jefferies is
terminated without cause within two years following a change of control, then:

                                       52

<PAGE>

         --       Mr. Jefferies will be entitled 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;

         --       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;

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

         --       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 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.

BOARD COMMITTEES

         The board of directors currently has an audit committee, an executive
compensation and management development committee and a nominating committee.

         The audit committee makes recommendations to our board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors, reviews
our financial statements for each interim period, and reviews and evaluates our
internal audit and control functions. From January 1, 1999 through June 25,
1999, this committee consisted of David Barrett, a former director of MicroTel,
and Laurence Finnegan. Since June 26, 1999, this committee has consisted of
Laurence Finnegan.

         The executive compensation and management development 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. From January 1, 1999 through June 25,
1999, this committee consisted of David Barrett, a former director of MicroTel,
and Robert B. Runyon. 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 2000, the nominating committee has consisted of Robert B. Runyon.

COMPENSATION OF DIRECTORS

         During 2000, each non-employee director was entitled to receive $1,000
per quarter as compensation for their services. Beginning January 1, 2001, each
non-employee director is entitled to receive $12,000 per year 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.

                                       53

<PAGE>

         Mr. Runyon acts as a consultant to MicroTel in the areas of strategy
development business and organization planning, human resources recruiting and
development and administrative systems. For 2000, Mr. Runyon became entitled to
receive approximately $9,744 in consulting fees and reimbursement of expenses.
During 2000, we also paid premiums of $2,823 for life insurance on Mr. Runyon
for the benefit of his spouse, $30 for life insurance on Mr. Runyon's spouse for
the benefit of Mr. Runyon, and $3,570 for health insurance.

         On July 25, 2000, Mr. Runyon and Mr. Finnegan each received an option
to purchase 100,000 shares of common stock at $0.50 per share under our 1997
Plan, which options vest in two equal semi-annual installments beginning on
January 25, 2001 and expires on July 25, 2010. On February 1, 2001, Mr. Oliva
received an option to purchase 100,000 shares of common stock at $0.50 per share
under our 1997 Plan, which option vests in two equal semi-annual installments on
July 31, 2001 and January 31, 2002 and expires on January 31, 2011.

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.

STOCK OPTION PLANS

         We currently have four stock option plans: the 1993 Stock Option Plan,
the Employee Stock and Stock Option Plan, the 1997 Stock Incentive Plan and the
2000 Stock Option Plan. These plans are administered by our executive
compensation and management development committee, which currently consists of
Robert Runyon and Laurence Finnegan, our two non-employee directors.

         The 1993 Stock Option Plan authorizes the issuance of incentive stock
options, commonly known as ISOs, and non-qualified stock options, commonly known
as NQOs, to our employees and independent contractors for the purchase of up to
300,000 shares of our common stock. The 1993 Stock Option Plan terminates on
August 31, 2003. Our board does not intend to issue any additional options under
the 1993 Stock Option Plan in the future.

         The Employee Stock and Stock Option Plan authorizes the issuance of
NQOs and restricted and unrestricted stock grants to our employees (including
officers and directors who are employees) and consultants for up to an aggregate
of 520,000 shares of common stock. The Employee Stock and Stock Option Plan
terminates on July 1, 2004. Our board does not intend to issue any additional
options or make any additional stock grants under the Employee Stock and Stock
Option Plan.

         The 1997 Stock Incentive Plan authorizes the issuance of ISOs, stock
appreciation rights or stock awards to our employees and directors for up to an
aggregate of 1,600,000 shares of common stock, except that ISOs may not be
granted to non-employee directors. Our board of directors' adoption of the 1997
Stock Incentive Plan was ratified by our stockholders at our 1998 annual meeting
of stockholders. The 1997 Stock Incentive Plan terminates on June 15, 2007. As
of March 23, 2001, options to purchase up to 1,523,924 shares of common stock
were outstanding under the 1997 Stock Incentive Plan.

         Our 2000 Stock Option Plan was adopted by our board of directors in
November 2000 and approved by our stockholders on January 16, 2001. The 2000
Stock Option Plan authorizes the issuance of ISOs and NQOs to our employees,
officers, directors and consultants and to employees of companies that do
business with us for the purchase of up to 2,000,000 shares of common stock. As
of March 23, 2001, we had approximately 223 employees, officers and directors
eligible to receive options under the 2000 Stock Option Plan, and no options had
been issued under this plan. The following is a description of some of the key
terms of the 2000 Stock Option Plan.

                                       54

<PAGE>

         SHARES SUBJECT TO THE 2000 STOCK OPTION PLAN

         A total of 2,000,000 shares of our common stock are authorized for
issuance under the 2000 Stock Option Plan. Any shares of common stock which are
subject to an award but are not used because the terms and conditions of the
award are not met, or any shares which are used by participants to pay all or
part of the purchase price of any option, may again be used for awards under the
2000 Stock Option Plan.

         ADMINISTRATION

         It is the intent of the 2000 Stock Option Plan that it be administered
in a manner such that option grants and exercises would be "exempt" under Rule
16b-3 of the Securities Exchange Act of 1934, or the Exchange Act. The executive
compensation and management development committee is empowered to select those
eligible persons to whom options shall be granted under the 2000 Stock Option
Plan; to determine the time or times at which each option shall be granted,
whether options will be ISOs or NQOs and the number of shares to be subject to
each option; and to fix the time and manner in which each option may be
exercised, including the exercise price and option period, and other terms and
conditions of options, all subject to the terms and conditions of the 2000 Stock
Option Plan. The committee has sole discretion to interpret and administer the
2000 Stock Option Plan, and its decisions regarding the 2000 Stock Option Plan
are final, except that our board of directors can act in place of the committee
as the administrator of the 2000 Stock Option Plan at any time or from time to
time, in its discretion.

         OPTION TERMS

         ISOs granted under the 2000 Stock Option Plan must have an exercise
price of not less than 100% of the fair market value of a share of common stock
on the date the ISO is granted and must be exercised, if at all, within ten
years from the date of grant. In the case of an ISO granted to an optionee who
owns more than 10% of the total voting securities of MicroTel on the date of
grant, the exercise price may be not less than 110% of fair market value on the
date of grant, and the option period may not exceed five years. NQOs granted
under the 2000 Stock Option Plan must have an exercise price of not less than
85% of the fair market value of a share of common stock on the date the NQO is
granted.

         Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than ten years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.

         AMENDMENT AND TERMINATION

         The 2000 Stock Option Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time and from time to time by
our board of directors. However, our board of directors may not materially
impair any outstanding options without the express consent of the optionee or
materially increase the number of shares subject to the 2000 Stock Option Plan,
materially increase the benefits to optionees under the 2000 Stock Option Plan,
materially modify the requirements as to eligibility to participate in the 2000
Stock Option Plan or alter the method of determining the option exercise price
without stockholder approval. No option may be granted under the 2000 Stock
Option Plan after November 14, 2010.

                                       55

<PAGE>

         FEDERAL INCOME TAX CONSEQUENCES

         NQOS
         ----

         Holders of NQOs do not realize income as a result of a grant of the
option, but normally realize compensation income upon exercise of an NQO to the
extent that the fair market value of the shares of common stock on the date of
exercise of the NQO exceeds the exercise price paid. We will be required to
withhold taxes on ordinary income realized by an optionee upon the exercise of a
NQO.

         In the case of an optionee subject to the "short-swing" profit
recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes
income only upon the lapse of the six-month period under Section 16(b), unless
the optionee elects to recognize income immediately upon exercise of his or her
option.

         ISOS
         ----

         Holders of ISOs will not be considered to have received taxable income
upon either the grant of the option or its exercise. Upon the sale or other
taxable disposition of the shares, long-term capital gain will normally be
recognized on the full amount of the difference between the amount realized and
the option exercise price paid if no disposition of the shares has taken place
within either two years from the date of grant of the option or one year from
the date of transfer of the shares to the optionee upon exercise. If the shares
are sold or otherwise disposed of before the end of the one-year or two-year
periods, the holder of the ISO must include the gain realized as ordinary income
to the extent of the lesser of the fair market value of the option stock minus
the option price, or the amount realized minus the option price. Any gain in
excess of these amounts, presumably, will be treated as capital gain. We will be
entitled to a tax deduction in regard to an ISO only to the extent the optionee
has ordinary income upon the sale or other disposition of the option shares.

         Upon the exercise of an ISO, the amount by which the fair market value
of the purchased shares at the time of exercise exceeds the option price will be
an "item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year or two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.

         POSSIBLE ANTI-TAKEOVER EFFECTS

         Although not intended as an anti-takeover measure by our board of
directors, one of the possible effects of the 2000 Stock Option Plan could be to
place additional shares, and to increase the percentage of the total number of
shares outstanding, in the hands of the directors and officers of MicroTel.
Those persons may be viewed as part of, or friendly to, incumbent management and
may, therefore, under some circumstances be expected to make investment and
voting decisions in response to a hostile takeover attempt that may serve to
discourage or render more difficult the accomplishment of the attempt.

         In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of our assets, or
other attempted changes in the control of MicroTel. In the opinion of our board
of directors, this acceleration provision merely ensures that optionees under
the 2000 Stock Option Plan will be able to exercise their options as intended by
the board of directors and stockholders prior to any extraordinary corporate
transaction which might serve to limit or restrict that right. Our board of
directors is, however, presently unaware of any threat of hostile takeover
involving MicroTel.

                                       56

<PAGE>

Report of the Compensation Committee
------------------------------------

         This report is provided by the Executive Compensation and Management
Development Committee of the Board of Directors to assist shareholders in
understanding the Company's objectives, policies and procedures in establishing
its executive compensation structure and system. The Committee is responsible
for (a) reviewing and approving base salaries, bonuses and incentive awards for
all executive officers, (b) reviewing and establishing the base salary, bonuses
and incentive awards for the Chief Executive Officer, and (c) reviewing,
approving and recommending to the Board of Directors the content, terms and
conditions of all employee compensation and benefit plans, or changes thereto.

         The compensation philosophy and policy of the Company is based upon
four central objectives:

         --       To provide an executive compensation structure and system
                  which is both competitive in the outside industrial
                  marketplace and also internally equitable based upon the
                  weight and level of responsibilities in the respective
                  executive positions.

         --       To attract, retain and motivate qualified executives within
                  this structure, and reward them for outstanding
                  performance-to-objectives and business results through
                  financial and other appropriate management incentives.

         --       To align the Company's financial results and the compensation
                  paid to the Company's executive officers with the enhancement
                  of shareholder value.

         --       To structure the Company's compensation policy so that
                  executive officers' compensation is dependent, in one part, on
                  the achievement of its current year business plan objectives,
                  and in another part, on the long term increase in company net
                  worth and the resultant improvement in shareholder value, and
                  to maintain an appropriate balance between short and long
                  range performance objectives, over time.

         The Company's compensation programs consist of base salary, an annual
incentive bonus, and the award of stock options and other equity-based
incentives. The base salary is targeted to recognize each executive's unique
value and historical contributions to the success of the Company in light of the
industry salary norms for the equivalent position in the relevant market. The
Compensation and Management Development Committee reviews the compensation of
the Chief Executive Officer, and with the Chief Executive Officer, the base
compensation of all executive officers and other key employees on an annual
basis to assure that a competitive position is maintained.

         The annual incentive bonus is based upon actual performance compared to
pre-established quantitative and qualitative performance objectives, derived
from the Company's business plan and operating budgets, which can include
Company, operating subsidiary/division and individual components.

         To further align the financial interests of the executive with those of
the Company and its shareholders, the long range executive incentive program is
primarily equity based, and provides the opportunity for the executive to earn
stock options and thereby benefit, along with all shareholders, from
performance-driven advancement of share value in the marketplace.

         Within the controlling corporate policy direction of the Compensation
Committee and the Board of Directors, the equity incentive program (1997 Stock
Incentive Plan) includes (a) the criteria for option awards, (b) the number of
shares and timing of option grants, (c) internal equity in terms of grantee
levels of responsibility and potential to impact Company performance, (d)
measured consistency within the competitive marketplaces, (e) relation to
financial results, (f) the mutuality of interest between grantee and
shareholders, and (g) the essential objectives, processes and controls.

                                       57

<PAGE>

         The Company also maintains certain other executive benefits that are
considered necessary in order to offer fully competitive opportunities to its
executives. These include, but are not limited to, 401(k) retirement savings
plans, profit sharing opportunities, car allowances, employment agreements, and
indemnification agreements.

         In 1997, all Company compensation policies, programs and procedures
were revised and updated to recognize the new and changed conditions resulting
from the merger of privately held XET Corporation and publicly traded MicroTel
International, Inc., which was effective March 26, 1997, and to position the new
MicroTel entity for its future growth and development. The Compensation
Committee will continue to monitor and evaluate the executive compensation
system and its application throughout the organization to assure that it
continues to reflect the Company's compensation philosophy and objectives.

         The base salary of Carmine T. Oliva, Chairman and Chief Executive
Officer, is targeted to fairly recognize his unique leadership skills and
management responsibilities compared to similarly positioned executives in the
industry and general marketplaces. The criteria for measurement includes data
available from objective, professionally conducted market studies, integrated
with additional competitive intelligence secured from a range of industry and
general market sources.

         The Committee has determined that no increase in base salary for Mr.
Oliva would be considered until the Company's cash flow can be significantly
strengthened and maintained. However, Mr. Oliva, along with a limited number of
other senior executives, has been awarded a modest discretionary bonus, payable
in installments in 2001, in recognition for their work in achieving a
substantial improvement in Company profitability for 2000.

         In order to assure strength and continuity in the office of the Chief
Executive, Mr. Oliva's employment contract has been renegotiated, with the new
agreement becoming effective on January 1, 2001. The agreement is based upon a
five-year commitment, with three successive two-year automatic renewals,
predicated upon a mutual agreement between the Company and Mr. Oliva at those
times.

                                           Respectfully submitted,


                                           Executive Compensation and Management
                                           Development Committee
                                           MicroTel International, Inc.
                                           Robert B. Runyon, Chairman

                                       58

<PAGE>

PERFORMANCE GRAPH

         Set forth below is a line graph comparing the cumulative total
stockholder return on our common stock, based on its market price with the
cumulative total return on companies on the Nasdaq Stock Market (U.S.) and the
Nasdaq Telecom Index, assuming reinvestment of dividends for the period
beginning December 31, 1994 through our fiscal year ended December 31, 2000.
This graph assumes that the value of the investment in the Company's common
stock and each of the comparison groups was $100 on December 31, 1995.


                        [PERFORMANCE GRAPH APPEARS HERE]

<TABLE>
                       EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

                                         CUMULATIVE TOTAL RETURN
<CAPTION>
                                  12/95        12/96       12/97         12/98       12/99         12/00
                                  -----        -----       -----         -----       -----         -----
<S>                             <C>         <C>          <C>          <C>         <C>           <C>
MicroTel International, Inc.    $ 100.00    $  24.00     $  24.00     $  10.50    $   7.01      $   4.80
Nasdaq Stock Market (U.S.)        100.00      123.04       150.69       212.51      394.92        237.62
Nasdaq Telecommunications         100.00      102.25       149.26       247.02      438.28        188.38
</TABLE>

                                       59

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         As of May 15, 2001, a total of 20,570,415 shares of our common stock
were outstanding. The following table sets forth information as of May 15, 2001
regarding the beneficial ownership of our common stock by:

         --       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;
         --       each of our directors;
         --       each named executive officer in the Summary Compensation Table
                  contained elsewhere in this report; and
         --       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 shareholder possesses sole voting and investment power
with respect to all of the shares of common stock owned by that shareholder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options or warrants held by that
person that are currently exercisable or are exercisable 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.

                                       60

<PAGE>

<TABLE>
<CAPTION>
                                                                   AMOUNT AND NATURE
               NAME AND ADDRESS                                      OF BENEFICIAL          PERCENT
            OF BENEFICIAL OWNER(1)              TITLE OF CLASS     OWNERSHIP OF CLASS       OF CLASS
            ----------------------              --------------     ------------------       --------
<S>                                                 <C>                <C>                   <C>
Orbit II Partners, L.P......................        Common             2,963,810 (2)         14.38%
Carmine T. Oliva............................        Common             1,448,688 (3)          6.93%
Fortune Fund Ltd. Seeker III................        Common             1,260,600 (4)          5.77%
Robert B. Runyon............................        Common               288,145 (5)          1.39%
Graham Jefferies............................        Common               129,563 (6)          *
Laurence P. Finnegan, Jr....................        Common                94,171              *
Randolph D. Foote...........................        Common                55,000 (7)          *
All executive officers and directors
   as a group (5 persons)...................        Common             2,015,567(8)           9.49%
</TABLE>

---------------
*        Less than 1.00%
(1)      Unless otherwise indicated, 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 and Finnegan are directors
         of MicroTel.
(2)      Includes 43,125 shares of common stock underlying warrants. Alan S.
         MacKenzie, Jr., David N. Marino and Joel S. Kraut are: the managing
         partners of Orbit II Partners, L.P., a broker-dealer and member of the
         American Stock Exchange; the managing members of MKM Partners, LLC, an
         NASD-registered broker-dealer and member of the Pacific Stock Exchange;
         and general partners of OTAF Business Partners, a general partnership
         that owns over 10% of the outstanding membership interests in Blackwood
         Securities, LLC, an NASD member. The address for Orbit II Partners,
         L.P. is 2 Rector Street, 16th Floor, New York, New York 10006.
(3)      Includes 81,889 shares of common stock held individually by Mr. Oliva's
         spouse, 130,633 shares of common stock underlying options, 163,750
         shares of common stock underlying warrants and 50,530 shares of common
         stock issuable upon conversion of Series A Preferred Stock.
(4)      Includes 250,000 shares of common stock underlying warrants and
         1,010,600 shares of common stock issuable upon conversion of Series A
         Preferred Stock. Patrick Siaretta, as fund manager, and Greg Fenlon, as
         fund administrator, each have voting power and investment power over
         the shares of common stock beneficially owned by Fortune Fund Ltd.
         Seeker III. The address for Mr. Siaretta is Au Republica Libano, 331,
         Sao Paulo, SP Brazil. The address for Mr. Fenlon is Kaya Flamboyan #9,
         Willenstad, Curacao, Netherlands Antilles.
(5)      Includes 108,060 shares of common stock underlying options.
(6)      Includes 126,287 shares of common stock underlying options.
(7)      Includes 50,000 shares of common stock underlying options.
(8)      Includes 163,750 shares of common stock underlying warrants, 464,980
         shares of common stock underlying options, 81,889 shares of common
         stock held individually by Mr. Oliva's wife and 50,530 shares of common
         stock issuable upon conversion of Series A Preferred Stock.

                                       61

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

XCEL ARNOLD CIRCUITS, INC.

         On April 9, 1998, our wholly-owned subsidiary XCEL Arnold Circuits,
Inc. sold substantially all of the assets used in its Arnold Circuits business
to Arnold Circuits, Inc., a company wholly-owned by Robert Bertrand. Mr.
Bertrand, as Trustee of The Bertrand Family Trust, was a beneficial owner of
more than five percent of our outstanding common stock as of December 31, 1998.
Mr. Bertrand had owned and operated the Arnold Circuits business until September
1995, when the assets of that business were acquired by XCEL Arnold Circuits,
Inc.

         The purchase price for our sale of the assets to Mr. Bertrand was
$2,000,000 plus the assumption of liabilities of the Arnold Circuits business.
The cash portion of the purchase price was paid by a cash payment of $1,350,000
and delivery of a promissory note in the amount of $650,000, which had a
maturity date of March 31, 2000 and an annual interest rate of 8.5%. The cash
proceeds were used to retire bank debt and certain other debt, including debt
owed to Mr. Bertrand and a related entity. The debt owed to Mr. Bertrand and a
related entity comprised two notes to Mr. Bertrand in the aggregate principal
amount of $225,000 and one note to BNZ Incorporated in the principal amount of
$150,000, each of which notes had an interest rate of 10% per year and had been
issued during the second half of 1997 when Mr. Bertrand and BNZ Incorporated
loaned us $375,000 in cash to assist us in financing production of orders from
Motorola, Inc., our then largest customer.

         As security for the note issued to XCEL Arnold Circuits, Inc. in the
sale of the Arnold Circuits business to Mr. Bertrand, XCEL Arnold Circuits, Inc.
received a second lien on substantially all of the assets of Arnold Circuits,
Inc. Mr. Bertrand and a related entity guaranteed payment of the promissory
note. Provisions of the transaction documents entitled XCEL Arnold Circuits,
Inc. to share in any subsequent gain on the sale of the Arnold Circuits
business while the note was outstanding.

         The purchase price for the Arnold Circuits business was arrived at
through negotiation between Messrs. Oliva and Bertrand and was approved by our
board of directors. Prior to reaching agreement with Mr. Bertrand, we
unsuccessfully attempted for six months to locate a buyer for the Arnold
Circuits business. Given the extent of the operating losses of the Arnold
Circuits business in 1997, we believe the terms of the transaction with Mr.
Bertrand were no less favorable to us than would have been obtained in an
arm's-length transaction with a third party, assuming an interested third party
had been found.

         Between September 1995 and April 1998, XCEL Arnold Circuits, Inc. had
engaged in inter-company transactions with us and our other subsidiaries. These
transactions resulted in an inter-company account balance of $350,000 being due
to XCEL Arnold Circuits, Inc. at the time we sold the Arnold Circuits business
to Mr. Bertrand. Consequently, we issued to Mr. Bertrand and an affiliated
entity two non-interest bearing promissory notes totaling $350,000 that were
payable on our completion of a financing transaction and, if no financing
transaction occurred by May 31, 1998, on demand. In July 1998, we made a payment
of $100,000 against the notes and no demand was made for the balance.

         During 1999, Arnold Circuits, Inc. defaulted under the terms of the
note receivable. We offset the balance of the notes payable by us against the
note receivable from Mr. Bertrand and then wrote-off the unpaid balance of
$452,000 because the business' losses continued at a high rate and Arnold
Circuits, Inc. was insolvent. In addition, after unsuccessfully attempting to
recover the amounts due under the guaranty of the note and in order to avoid a
potentially expensive lawsuit, we released Mr. Bertrand from his personal
guarantee of the $452,000 unpaid balance in exchange for a payment to us of
approximately $40,000 in cash. Also, warrants held by Mr. Bertrand to purchase
up to 250,000 shares of common stock at an exercise price of $2.125 per share
were automatically cancelled under the terms of the note receivable.

DANIEL DROR AND ELK INTERNATIONAL LITIGATION

         In December 1996, we entered into a settlement agreement with Daniel
Dror, our former Chairman of the Board, in connection with his separation from
our company. In December 1997, Mr. Dror defaulted on the repayment of the first
installment of a debt obligation which was an obligation set forth in the
agreement. Also in December 1997, Mr. Dror filed suit in the District Court for
Galveston County, Texas alleging that we breached an alleged oral modification
of the agreement. In January 1998, we answered the complaint denying the
allegation, and litigation began in Texas.

                                       62

<PAGE>

         In April 1998, we brought an action in California against Mr. Dror for
breach of the agreement and sought recovery of debt due us pursuant to the
agreement and recovery of all stock and warrants issued by us under to the
agreement to Mr. Dror and/or Elk International Corporation, Ltd., or Elk, a
company that was a ten percent stockholder of our company in 1997 and apparently
was a member of a control group with Mr. Dror. We obtained a judgment in the
amount of $211,000 against Mr. Dror in this litigation. In December 1997, Elk
brought an action in Texas against our current Chairman and an unrelated party
alleging that Elk received securities of our company in the merger between us
and XET Corporation and that misrepresentations relating to the financial and
operating condition of XCEL Arnold Circuits, Inc. had been made during the
merger discussions. In February 1999, Elk filed suit against us, the current
Chairman and counsel to us in connection with a stop transfer placed by us on
shares of common stock then held by Elk.

         On March 1, 1999, the parties entered into a settlement agreement that
terminated all of the above actions. Under the terms of the settlement
agreement, we cancelled 750,000 options to purchase our common stock at an
exercise price of $2.375 per share that formerly were held by Elk and issued to
Elk warrants to purchase 1,000,000 shares of our restricted common stock at an
exercise price of $1.375 per share, all of which warrants were exercised in
March 2000. Also, we issued 100,000 shares of restricted common stock to Elk and
25,000 shares each to two other parties to the settlement agreement. We also
agreed to pay legal expenses totaling $60,000, over a period of six months. The
aggregated fair value of the settlement was approximately $130,000 and is
reflected in our consolidated financial statements for the period ended December
31, 1998.

SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS

         We sold an aggregate of 200 shares of Series A Preferred Stock for
$10,000 per share to Fortune Fund Ltd. Seeker III, or Fortune Fund, Rana General
Holding, Ltd., or Rana, and Resonance, Ltd., or Resonance. Fortune Fund, Rana
and Resonance, or the Series A Original Holders, were institutional investors
who participated in a private offering that had closings on June 29, 1998 and
July 9, 1998. At the time of the closings, the shares of Series A Preferred
Stock were convertible into common stock at the option of the Series A Original
Holders at per share conversion prices of $10,000 divided by $0.9375 and $0.875,
respectively, which prices were equal to $10,000 divided by the lesser of $1.26
and 100% of the arithmetic average of the three lowest closing bid prices over
the respective previous 40 trading days. The 200 shares of Series A Preferred
Stock were accompanied by warrants to purchase up to an aggregate of 1,000,000
shares of common stock at an exercise price of $1.25 per share.

         Between June 29, 1998 and November 3, 1998, the prices at which shares
of our common stock were trading on the Nasdaq SmallCap Market generally had
declined. Specifically, the closing bid price of a share of common stock on June
29, 1998 was $0.90625, and the closing bid price of a share of common stock on
November 3, 1998 was $0.4375. Due to the decline in the prices at which shares
of our common stock were trading, the number of shares into which a share of
Series A Preferred Stock was convertible increased from 10,667 and 11,429 shares
at June 29, 1998 and July 9, 1998, respectively, to 24,615 shares at November 3,
1998. To avoid further significant dilution to our common stockholders that
could result from a continued decline in the trading prices of a share of our
common stock, we entered into an agreement with the Series A Original Holders on
November 3, 1998 that attempted to fix the conversion price of the Series A
Preferred Stock so that each share of Series A Preferred Stock would be
convertible into 20,000 shares of common stock.

                                       63

<PAGE>

         The November 3, 1998 agreement provided that we would revise the
certificate of designations relating to the Series A Preferred Stock to provide
that: (i) the conversion price would be fixed at $10,000 divided by $0.50 for so
long as our common stock continued to be traded on the Nasdaq SmallCap Market
and we did not conduct a reverse split of our outstanding common stock; and (ii)
we would not exercise our redemption rights for the outstanding shares of Series
A Preferred Stock for six months. The agreement also provided that the existing
restriction on each Series A Original Holder's right to convert more than 20% of
the aggregate number of shares of Series A Preferred Stock originally purchased
by such holder in any 30-day period would be eliminated. Also, the agreement
provided that we 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.

         We inadvertently failed to obtain the required approval of our 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 3, 1998 agreement. However, between November 18, 1998 and March 26,
1999, the Series A Original Holders converted shares of Series A Preferred Stock
into shares of common stock at the rate of 20,000 shares of common stock per
share of Series A Preferred Stock, as agreed to in the November 3, 1998
agreement. Use of the $10,000 divided by $0.50 conversion price in four of the
conversions resulted in the Series A Original Holders 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. We have determined, however, that the excess shares were in fact
validly issued under Delaware law.

         In May 1999, our common stock was delisted from the Nasdaq SmallCap
Market due to a failure to meet Nasdaq's minimum closing bid price listing
requirement, and our common stock began trading on the OTC Electronic Bulletin
Board. Based upon the terms of the November 3, 1998 agreement, the conversion
price of the Series A Preferred Stock reverted back to the floating conversion
price shown in the certificate of designation, 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.

         Following the delisting of our common stock from the Nasdaq SmallCap
Market, the trading prices of our common stock declined. We became concerned
that continued use of the floating conversion price for the Series A Preferred
Stock would cause substantial additional dilution to our common stockholders and
that resale of a large volume of shares received upon conversion at the floating
conversion price of the Series A Preferred Stock would result in further
declines in the trading prices of shares of our common stock.

         Fortune Fund had informally indicated to us its willingness to
establish a fixed conversion price and to hold its shares of Series A Preferred
Stock as a long-term investment. On December 15, 1999, we entered into an
agreement with Fortune Fund. Under the agreement, we and Fortune Fund agreed to
the establishment of a fixed conversion price of $10,000 divided by $0.20 for
the 20 shares of Series A Preferred Stock held by Fortune Fund. On December 15,
1999, the floating conversion price would have been $10,000 divided by $0.19
under the terms of the certificate of designation that was then in effect.

         Rana and Resonance had not indicated to us that they would be willing
to continue to hold their shares of Series A Preferred Stock or their shares of
common stock issued upon conversion of Series A Preferred Stock. Orbit II
Partners, L.P., or Orbit, an institutional investor that had acquired 4.9% of
our outstanding common stock, indicated to us that Orbit would be willing to
purchase 34.5 of the shares of Series A Preferred Stock held by Rana and
Resonance and hold any shares received upon conversion of those shares as a
long-term investment, provided that Carmine T. Oliva, Samuel J. Oliva and Samuel
G. Oliva would purchase and hold for investment the remaining five shares of
Series A Preferred Stock held by Rana and Resonance. Carmine T. Oliva is our
President, Chief Executive Officer and Chairman of the Board. Samuel J. Oliva
and Samuel G. Oliva are the brother and son, respectively, of Carmine T. Oliva.

                                       64

<PAGE>

         On December 23, 1999, we entered into agreements with Rana, Resonance,
Orbit and the Olivas. Under the December 23, 1999 agreements, Rana and Resonance
sold their respective remaining 12.5 and 27 shares of Series A Preferred Stock
and accompanying warrants to purchase an aggregate of 197,500 shares of common
stock to Orbit and the Olivas for an aggregate consideration of approximately
$400,000 in cash. The agreements also provided for the establishment of a fixed
conversion price of $10,000 divided by $0.1979, so that each share of Series A
Preferred Stock was to be convertible into 50,530 shares of common stock. On
December 23, 1999, each share of Series A Preferred Stock would have been
convertible into approximately 52,632 shares of common stock at a per share
conversion price of $10,000 divided by $0.19 if the December 23, 1999
modification to the conversion price had not occurred.

         In addition, the December 23, 1999 agreements provided that all of the
outstanding warrants that had been issued to Rana and Resonance, including the
Series A Warrants that were being transferred from Rana and Resonance to Orbit
and the Olivas, would be replaced with warrants that had a per share exercise
price that was reduced from $0.75 per share to $0.25 per share and an expiration
date that was extended from May 22, 2001 to December 22, 2002.

         On December 23, 1999, our board of directors resolved by unanimous
written consent that the warrant for the purchase of up to 250,000 shares of
common stock that had been issued to Fortune Fund upon its purchase from us of
shares of Series A Preferred Stock in the 1998 private placement would be
replaced with a warrant that had a per share exercise price that was reduced
from $0.75 per share to $0.25 per share and an expiration date that was extended
from May 22, 2001 to December 22, 2002. This replacement was intended to provide
Fortune Fund with warrants that had the same terms as the replacement warrants
received by Rana, Resonance, Orbit and the Olivas under the December 23, 1999
agreements.

         We 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 Preferred Stock at $10,000 divided by $0.1979.
However, because we inadvertently failed to obtain approval of our common
stockholders for the amendment to the certificate of designation, the amendment
was invalid under the Delaware General Corporation Law. However, on June 30,
2000, Orbit converted 34.5 shares of Series A Preferred Stock into 1,743,285
shares of common stock based upon the $10,000 divided by $0.1979 per share
conversion price that we, Orbit and the other present and former holders of
Series A Preferred Stock 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 Series A Preferred Stock under
the certificate of designation that was then in effect. We have determined,
however, that the excess shares were in fact validly issued under Delaware law.

         In November 2000, we realized that the modifications to the conversion
price of the Series A Preferred Stock were invalid because we 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. Our board of directors
distributed proxy materials requesting that holders of our common stock and
Series A Preferred Stock 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. Our common and Series A
Preferred stockholders approved the amendments at a special meeting that was
held on January 16, 2001. We filed the amendments with the Delaware Secretary of
State on January 22, 2001, so that after that date, each outstanding share of
Series A Preferred Stock was convertible into 50,530 shares of common stock.

                                       65

<PAGE>

WARRANT EXCHANGE OFFER

         Between February and April 2000, we made an offer to all 31 holders of
warrants to purchase shares of our common stock at exercise prices of $1.00 or
more under which these holders could elect to surrender their outstanding
warrants with exercise prices of $1.00 or more in exchange for the issuance to
them of warrants to purchase a number of shares equal to one-half of the number
of shares underlying the surrendered warrants at an exercise price of one-half
of the exercise price of the surrendered warrants. The primary reason for the
offer was to reduce the quantity of shares allocated to warrants so that we
would have sufficient authorized stock for our needs until an increase in our
authorized stock could be voted on by our stockholders. A total of 2,769,201
warrants with exercise prices ranging from $1.21 to $3.79 were surrendered by 18
holders in exchange for 1,384,602 warrants with exercise prices ranging from
$0.605 to $1.895. The majority of warrants exchanged were held by persons or
entities who were not employees or directors of MicroTel or its subsidiaries.
However, exchanges were made with the following related parties:

<TABLE>
<CAPTION>
                                        SHARES        EXERCISE         SHARES       EXERCISE
                                      UNDERLYING      PRICE OF       UNDERLYING     PRICE OF
                                       WARRANTS       WARRANTS        WARRANTS      WARRANTS
       WARRANT HOLDER                SURRENDERED     SURRENDERED      RECEIVED      RECEIVED
       --------------                -----------     -----------      --------      --------
<S>                                    <C>              <C>           <C>            <C>
CARMINE T. OLIVA, CHAIRMAN OF THE      250,000          $3.45         125,000        $1.73
  BOARD, PRESIDENT AND CHIEF           362,870          $3.44         181,435        $1.72
  EXECUTIVE OFFICER                      5,878          $1.21           2,939        $0.61
                                         3,096          $3.79           1,548        $1.90
                                        33,674          $3.79          16,837        $1.90
                                         6,659          $3.79           3,330        $1.90
                                        43,544          $2.58          21,772        $1.29
                                       108,861          $1.38          54,431        $0.69
                                        29,030          $1.89          14,515        $0.95
                                        21,772          $1.89          10,886        $0.95

CARMINE T. OLIVA AND GEORGEANN          11,103          $3.79           5,552        $1.90
  OLIVA, CHAIRMAN OF THE BOARD,          3,629          $1.89           1,815        $0.95
  PRESIDENT AND CHIEF EXECUTIVE
  OFFICER AND HIS SPOUSE

LAURENCE P. FINNEGAN,                   17,418          $2.58           8,709        $1.29
  DIRECTOR                               7,257          $1.89           3,629        $0.95
                                         5,443          $1.89           2,722        $1.89

ROBERT B. RUNYON,                        2,903          $2.58           1,452        $1.29
  DIRECTOR AND SECRETARY                55,400          $2.58          27,700        $1.29
                                         9,677          $2.58           4,839        $1.29
                                        14,515          $1.89           7,258        $0.95
                                         6,169          $1.89           3,085        $0.95
                                           483          $1.29             242        $1.29

SAMUEL J. OLIVA,                        14,515          $1.89           7,258        $0.95
  BROTHER OF CARMINE T. OLIVA           30,481          $1.89          15,241        $0.95
                                         3,919          $1.21           1,960        $0.61
                                         5,008          $1.89           2,504        $0.95
                                        11,103          $3.79           5,552        $1.90
                                         3,629          $1.89           1,815        $0.95


                                            66

<PAGE>

                                        SHARES        EXERCISE         SHARES       EXERCISE
                                      UNDERLYING      PRICE OF       UNDERLYING     PRICE OF
                                       WARRANTS       WARRANTS        WARRANTS      WARRANTS
       WARRANT HOLDER                SURRENDERED     SURRENDERED      RECEIVED      RECEIVED
       --------------                -----------     -----------      --------      --------

ROSE OLIVA,                              4,354          $1.89           2,177        $0.95
  MOTHER OF CARMINE T. OLIVA

RONALD & BETTY JANE OLIVA,              11,102          $3.79           5,551        $1.90
  BROTHER AND SISTER-IN-LAW OF           3,628          $1.89           1,814        $0.95
  CARMINE T OLIVA

DAVID BARRETT,                          14,515          $2.58           7,258        $1.29
  FORMER DIRECTOR                       13,789          $1.89           6,895        $0.95
                                         5,443          $1.89           2,722        $0.95
</TABLE>

         The exchange did not result in a modification of the expiration dates
or any other terms of the warrants other than the numbers of shares and exercise
prices. All of the warrants received by related parties in exchange for the
surrendered warrants have expired except for the first warrant listed for
Carmine T. Oliva, which warrant expires on October 14, 2002.

OTHER TRANSACTIONS

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

         In June 2000, we issued 5,000 shares of common stock to Carmine T.
Oliva, 10,000 shares of common stock to Samuel J. Oliva and 10,000 shares of
common stock to Samuel G. Oliva in connection with their exercise of warrants
with an exercise price of $0.25 per share.

         In August 2000, Carmine T. Oliva and his spouse, Georgeann, provided a
limited personal guarantee and a waiver of spouse equity rights in order to
assist us in obtaining our credit facility with Wells Fargo Business Credit,
Inc. Our board of directors believed it was advantageous for us to obtain a new
credit line from a bank-related lending institution rather than from an
independent asset lender such as our previous lender, Congress Financial
Corporation. However, Wells Fargo Business Credit, Inc. was unwilling to provide
us with the credit line unless Mr. Oliva provided the guarantee and Mrs. Oliva
provided the waiver. In recognition of Mr. and Mrs. Oliva's agreement to risk
their personal net worth to provide the guarantee and waiver despite significant
risk based upon our prior history of losses, the executive compensation and
management development committee of the board of directors has, to date, awarded
and paid Mr. Oliva special bonuses totalling an aggregate of $35,000. On January
26, 2001, Wells Fargo Business Credit, Inc. released the guarantee.

                                       67

<PAGE>

                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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 and attached following the
Index to Exhibits beginning at page 66 of this report.

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

         On December 6, 2000, we filed Amendment No. 1 to our Current Report on
Form 8-K for September 22, 2000 relating to our acquisition of substantially all
of the assets of T-Com, LLC. The Amendment No. 1 to Form 8-K included "Item 2.
Acquisition or Disposition of Assets" and "Item 7. Financial Statements and
Exhibits."

         On December 12, 2000, we filed a Current Report on Form 8-K relating to
the sale of our XCEL Etch Tek Division. The Form 8-K included "Item 5. Other
Events" and "Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits."

                                       68

<PAGE>

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


                                                                            Page
                                                                           ----
Financial Statements
--------------------

Report of Independent Certified Public Accountants.......................   F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999.............   F-3

Consolidated Statements of Operations and Comprehensive Income for
   the years ended December 31, 2000, 1999 and 1998 .....................   F-4

Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 2000, 1999 and 1998 .....................................   F-5

Consolidated Statements of Cash Flows for the years ended
   December 31, 2000, 1999 and 1998......................................   F-7

Notes to Consolidated Financial Statements...............................   F-9

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

Consolidated Schedule II Valuation and Qualifying Accounts for
   the years ended December 31, 2000, 1999, and 1998.....................  F-42


                                       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, 2000 and 1999, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000. We have also audited the information for each of the years in
the three-year period ended December 31, 2000 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 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.

         As discussed in Note 2 to the financial statements, the Company
restated the consolidated statements of operations for the years ended December
31, 1999 and 1998 to reflect the reclassification of certain items from
discontinued operations to continuing operations.

         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


Orange County, California
March 3, 2001



                                       F-2

<PAGE>

<TABLE>
                      MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                               CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 2000 AND 1999
                   (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

                                                                       2000        1999
                                                                       ----        ----
<S>                                                                <C>         <C>
ASSETS (NOTES 8 AND 9)
Current assets:
   Cash and cash equivalents                                       $    756    $    480
   Accounts receivable, net of allowance for doubtful accounts
     of $111 and $191, respectively                                   7,440       6,168
   Notes Receivable (Notes 4 and 7)                                     130          --
   Inventories (Note 5)                                               6,298       4,047
   Prepaid and other current assets                                     750         427
   Net assets of discontinued operations (Note 16)                       --       1,133
                                                                   ---------------------
Total current assets                                                 15,374      12,255
Property, plant and equipment, net (Note 6)                             809         765
Goodwill, net of accumulated amortization of $715 and $433,
   respectively (Notes 3 and 4)                                       2,737       1,507
Investment in affiliates (Notes 4 and 7)                                 --       1,240
Other assets                                                            564         722
                                                                   ---------------------
                                                                   $ 19,484    $ 16,489
                                                                   =====================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable (Note 8)                                          $  3,661    $  2,107
   Current portion of long-term debt (Note 9)                           614       1,388
   Accounts payable                                                   5,222       4,695
   Accrued expenses                                                   3,082       2,985
   Net liabilities of discontinued operations (Note 16)                  15          --
                                                                   ---------------------
Total current liabilities                                            12,594      11,175
Long-term debt, less current portion (Note 9)                           282         143
Other liabilities                                                       542         782
                                                                   ---------------------
Total liabilities                                                    13,418      12,100
Convertible redeemable preferred stock, $10,000 unit value
   Authorized 200 shares; issued and outstanding 25 shares in 2000 and 59.5
   shares in 1999 (aggregate liquidation
   preference of $250 and $595, respectively) (Note 10)                 259         588
Subsequent events (Notes 11 and 14):
Commitments and contingencies (Notes 11 and 14) Stockholders' equity (Notes 3,
4, 10, 11 and 14):
  Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred
    Stock, $0.01 par value,
      issued and outstanding 150,000 and 0 shares,
      respectively (aggregate liquidation preference of
      $960 and $0, respectively)                                        938          --
  Common stock, $.0033 par value. Authorized 50,000,000 shares;
    issued and outstanding 20,570,000 and 18,152,000 shares              68          60
  Additional paid-in capital                                         24,307      23,726
  Accumulated deficit                                               (18,775)    (19,759)
  Accumulated other comprehensive loss                                 (731)       (226)
                                                                   ---------------------
Total stockholders' equity                                            5,807       3,801
                                                                   ---------------------
                                                                   $ 19,484    $ 16,489
                                                                   =====================

              See accompanying notes to consolidated financial statements.

                                          F-3
</TABLE>

<PAGE>

<TABLE>
                        MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                        YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                          (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>

                                                             2000        1999        1998
                                                             ----        ----        ----
                                                                      (Restated)  (Restated)
<S>             <C>                                      <C>         <C>         <C>
Net sales (Note 15)                                      $ 28,050    $ 25,913    $ 30,100
Cost of sales                                              15,529      17,066      17,353
                                                         ---------------------------------
Gross profit                                               12,521       8,847      12,747
Operating expenses:
   Selling, general and administrative                      9,827      10,584      10,202
   Engineering and product development                      1,167       1,841       2,202
                                                         ---------------------------------
Income (loss) from operations                               1,527      (3,578)        343
Other income (expense):
   Interest expense                                          (424)       (411)       (675)
   Gain (loss) on sale of subsidiary/investment,
     net (Notes 4 and 7)                                      197         (90)         --
   Other, net (Note 4)                                        434           9        (129)
                                                         ---------------------------------
Income (loss) from continuing operations before             1,734      (4,070)       (461)
   income taxes
Income taxes (Note 12)                                         31         128         101
                                                         ---------------------------------
Income (loss) from continuing operations                    1,703      (4,198)       (562)
                                                         ---------------------------------
Discontinued operations (Note 16):
   Loss from discontinued operations                         (212)       (847)     (1,203)
   Gain (loss) on disposal of discontinued operations,
     including provision for phase out period of $122
     in 2000                                                 (487)        449         580
                                                         ---------------------------------
                                                             (699)       (398)       (623)
                                                         ---------------------------------
Net income (loss)                                        $  1,004    $ (4,596)   $ (1,185)
                                                         ---------------------------------

Other comprehensive income (loss):
   Foreign currency translation adjustment                   (505)       (325)        206
                                                         ---------------------------------
Total comprehensive income (loss)                        $    499    $ (4,921)   $   (979)
                                                         =================================

Basic earnings (loss) per share from continuing
   operations                                            $    .09    $   (.26)   $   (.05)
                                                         =================================
Diluted earnings (loss) per share from continuing
   operations                                            $    .07    $   (.26)   $   (.05)
                                                         =================================
Basic loss per share from discontinued operations        $   (.04)   $   (.02)   $   (.05)
                                                         =================================
Diluted loss per share from discontinued operations      $   (.03)   $   (.02)   $   (.05)
                                                         =================================
Basic earnings (loss) per share (Note 13)                $    .05    $   (.28)   $   (.10)
                                                         =================================
Diluted earnings (loss) per share (Note 13)              $    .04    $   (.28)   $   (.10)
                                                         =================================

                See accompanying notes to consolidated financial statements.

                                            F-4
</TABLE>

<PAGE>

<TABLE>
                                            MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                                           (IN THOUSANDS)
<CAPTION>

                                                    Series B                                                  Accumulated
                                                   Convertible                                                   Other
                                                 Preferred Stock    Common Stock     Additional               Comprehensive
                                                 --------------   ----------------    Paid-in    Accumulated     Income
                                                 Shares  Amount   Shares    Amount    Capital      Deficit       (Loss)      Total
                                                 ------  ------   ------    ------    -------      -------       ------      -----
<S>                                              <C>      <C>    <C>       <C>        <C>         <C>         <C>         <C>
Balance at December 31, 1997                     --       --     11,925    $     39   $ 19,960    $(13,877)   $   (107)   $  6,015
Stock issued upon conversion of redeemable
  preferred stock (Note 10)                      --       --        770           3        364          --          --         367
Repurchase of stock issued in connection
  with settlement of dispute (Note 11)           --       --        (80)         --       (168)         --          --        (168)
Stock issued under stock purchase plan           --       --          7          --          7          --          --           7
Warrants issued in connection with issuance
  of redeemable preferred stock (Note 10)        --       --         --          --        163          --          --         163
Warrants issued for services                     --       --         --          --         85          --          --          85
Repricing of warrants issued in connection
  with issuance of redeemable preferred
  stock (Note 10)                                --       --         --          --         52          --          --          52
Foreign currency translation adjustment          --       --         --          --         --          --         206         206
Accretion of redeemable preferred stock          --       --         --          --         --         (60)         --         (60)
Net loss                                         --       --         --          --         --      (1,185)         --      (1,185)
                                              -------------------------------------------------------------------------------------
Balance at December 31, 1998                     --       --     12,622          42     20,463     (15,122)         99       5,482
Stock issued upon conversion of redeemable
  preferred stock (Note 10)                      --       --      2,659           9        960          --          --         969
Stock issued in connection with
  acquisition (Note 4)                           --       --      1,000           3        997          --          --       1,000
Stock issued as compensation                     --       --      1,716           6      1,077          --          --       1,083
Stock and warrants issued in connection
  with settlement of dispute (Note 15)           --       --        150          --         73          --          --          73
Stock issued under stock purchase plan           --       --          5          --          2          --          --           2
Warrants issued for services                     --       --         --          --         63          --          --          63
Repricing of warrants issued in connection
  with issuance of redeemable preferred
  stock (Note 10)                                --       --         --          --         91          --          --          91
Foreign currency translation adjustment          --       --         --          --         --          --        (325)       (325)
Accretion of redeemable preferred stock          --       --         --          --         --         (41)         --         (41)
Net loss                                         --       --         --          --         --      (4,596)         --      (4,596)
                                              -------------------------------------------------------------------------------------
Balance at December 31, 1999                      0        0     18,152          60     23,726     (19,759)       (226)      3,801

                                    See accompanying notes to consolidated
financial statements.

                                                                             F-5
</TABLE>

<PAGE>

<TABLE>
                                            MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT'D)
                                            YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                                           (IN THOUSANDS)
<CAPTION>

                                                    Series B                                                  Accumulated
                                                   Convertible                                                   Other
                                                 Preferred Stock    Common Stock     Additional               Comprehensive
                                                ----------------  ----------------    Paid-in    Accumulated     Income
                                                 Shares  Amount   Shares    Amount    Capital      Deficit       (Loss)      Total
                                                 ------  ------   ------    ------    -------      -------       ------      -----
<S>                                              <C>     <C>       <C>       <C>       <C>        <C>         <C>         <C>
Stock issued upon conversion of redeemable
  preferred stock (Note 10)                       --         --     1,743          6        343         --          --         349
Warrant repricing offer (Note 11)                 --         --        --         --         65         --          --          65
Warrants issued for services                      --         --        --         --         25         --          --          25
Warrants issued with T-Com purchase (Note 4)      --         --        --         --         62         --          --          62
Exercise of employee options                      --         --        90         --         18         --          --          18
Warrants exercised                                --         --       584          2         67         --          --          69
Stock issued under stock purchase plan            --         --         1         --          1         --          --           1
Preferred Stock issued with T-Com
  purchase (Note 4)                              150     $  938        --         --         --         --          --         938
Foreign currency translation adjustment           --         --        --         --         --         --        (505)       (505)
Accretion of redeemable preferred stock           --         --        --         --         --        (20)         --         (20)
Net income                                        --         --        --         --         --      1,004          --       1,004
                                               ------------------------------------------------------------------------------------
Balance at December 31, 2000                     150     $  938    20,570    $    68   $ 24,307   $(18,775)   $   (731)   $  5,807
                                               =====================================================================================

                                    See accompanying notes to consolidated
financial statements.

                                                                             F-6
</TABLE>

<PAGE>

<TABLE>
                            MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                           (IN THOUSANDS)
<CAPTION>

                                                                       2000        1999       1998
                                                                       ----        ----       ----
<S>                                                                 <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                   $ 1,004     $(4,596)    $(1,185)
   Adjustments to reconcile net loss to cash provided by (used in) operating
     activities:
       Depreciation and amortization                                    431         241         247
       Amortization of intangible assets                                352         540         449
       Provision for doubtful accounts                                   47          42          80
       Provision for inventory obsolescence                             893       1,144         879
       Gain on sale of fixed assets                                     (43)         --          --
       Gain on sale of stock                                           (197)         --          --
       Write off of uncollectible note receivable                        --         452          --
       Reversal of previously estimated accruals                       (399)         --          --
       Provision for impairment of investment                            --         419          --
       Equity in earnings of unconsolidated investments                  --        (653)        (24)
       Loss on the sale of subsidiary/investment                         --          90          --
       Stock and warrants issued for services                            25       1,146          85
       Repricing of warrants                                             65          91          52
       Gain (loss) on disposal of discontinued operations               487        (449)       (580)
       Net change in operating assets of discontinued operations        401         167        (723)
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                               (428)        294      (1,453)
     Inventories                                                     (1,468)        791      (1,333)
     Prepaids and other assets                                          274         567        (106)
     Note receivable                                                   (130)        125          --
     Accounts payable                                                (1,120)        651        (260)
     Accrued expenses and other liabilities                            (395)       (333)       (368)
                                                                    --------------------------------
Cash provided by (used in) operating activities                        (201)        729      (4,240)
                                                                    --------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                      (158)       (121)       (169)
   Cash received on sale of subsidiary/investment                        --         118          --
   Cash received from sale of stock - (DTS)                             520          --          --
   Cash received from sale of stock - (Wi-Lan)                          918          --          --
   Cash received from sale of discontinued operations                   260         750       1,350
   Cash received from sale of fixed assets                               43          --          --
   Cash paid, net of cash acquired in acquisition/Belix                (592)         --          --
   Cash paid, net of cash acquired in acquisition/T-Com                 (82)         --          --
   Cash collected on notes receivable                                    --           9         451
                                                                    --------------------------------
Cash provided by investing activities                                   909         756       1,632
                                                                    --------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (repayments) of notes payable                       1,131        (970)        658
   Proceeds from long-term debt                                          --          --       1,542
   Repayments of long-term debt                                          --        (162)     (2,503)
   Repayment of notes payable                                        (1,146)         --          --
   Proceeds from sale of preferred stock                                 --          --       2,000
   Payment of preferred stock and debt issuance costs                    --          --        (423)
   Proceeds from sale of common stock                                    88           2           7
                                                                    --------------------------------
Cash provided by (used in) financing activities                          73      (1,130)      1,281
                                                                    --------------------------------
Effect of exchange rate changes on cash                                (505)       (325)        206
                                                                    --------------------------------
Net increase (decrease) in cash and cash equivalents                    276          30      (1,121)
Cash and cash equivalents at beginning of year                          480         450       1,571
                                                                    --------------------------------
Cash and cash equivalents at end of year                            $   756     $   480     $   450
                                                                    ================================

                    See accompanying notes to consolidated financial statements.

                                                F-7
</TABLE>

<PAGE>

<TABLE>
                             MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                              YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                             (IN THOUSANDS)
<CAPTION>

                                                               2000             1999            1998
                                                               ----             ----            ----
<S>                                                        <C>             <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid during the year for:
     Interest                                              $    372        $      443       $      652
                                                           ============================================
     Income taxes                                          $     13        $      124       $      138
                                                           ============================================

SUPPLEMENTAL DISCLOSURES OF NON-CASH
  INVESTING AND FINANCING ACTIVITIES:
   Note receivable received upon sale of subsidiary        $     --        $       --       $      650
                                                           ============================================
   Warrants issued in connection with issuance of
     preferred stock                                       $     --        $       --       $      163
                                                           ============================================
   Common stock issued upon conversion of redeemable
     preferred stock                                       $    349        $      969       $      367
                                                           ============================================
   Accretion of redeemable preferred stock                 $     20        $       41       $       60
                                                           ============================================
   Issuance of common stock and warrants in
     connection with settlement of dispute                 $     --        $       73       $       --
                                                           ============================================
   Repurchase of common stock issued in connection
     with settlement of dispute in exchange for Payable    $     --        $       --       $      168
                                                           ============================================
   Issuance of common stock in connection with
     acquisitions                                          $     --        $    1,000       $       --
                                                           ============================================
   Issuance of preferred stock in connection with
     acquisition                                           $    938        $       --       $       --
                                                           ============================================
   Issuance of warrants in connection with
     acquisition                                           $     62        $       --       $       --
                                                           ============================================

                      See accompanying notes to consolidated financial
statements.

                                                  F-8
</TABLE>

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

         MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET Corporation
(formerly, XIT Corporation) ("XET"). CXR Telcom Corporation and CXR, S.A.
(collectively "CXR") design, manufacture and market electronic telecommunication
test equipment and transmission and network access products. XET and its
subsidiaries design, manufacture and market digital switches and power supplies.
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:
Telecommunications and Electronic Components. In October 2000 the Company
decided to discontinue its circuits segment operation (see Note 15).
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.

BASIS OF PRESENTATION

         The consolidated financial statements have been prepared in accordance
with the generally accepted accounting principals of 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.

         The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 4) and its 50% investment in a real estate
partnership (Note 7) were accounted for using the equity method.

REVENUE RECOGNITION

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

AVAILABLE-FOR-SALE SECURITIES

         The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities which have readily
determinable fair values and all investments in debt securities. The Company did
not have any available-for-sale securities as of December 31, 2000 or 1999 but
has accounted for its investment in Wi-Lan (Note 4) as available-for-sale. Under
SFAS 115, marketable equity securities are classified as available for sale and
reported at fair value, with changes in the unrealized holding gain or loss
included as a component of accumulated other comprehensive income in
stockholders' equity.

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.

                                       F-9

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


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:

         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 AND GOODWILL

         The Company reviews the carrying amount of its long-lived assets and
intangible assets, including goodwill, 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.

SOFTWARE DEVELOPMENT COSTS

         Software development costs, including purchased technology, are
capitalized beginning when technological feasibility has been established or
when purchased from third parties and continues through the date of commercial
release. Amortization commences upon commercial release of the product and is
calculated using the greater of the straight-line method over three years or the
ratio of the products' current revenues divided by the anticipated total product
revenues. The carrying value of capitalized software development costs
aggregates $45,000 and $66,000 (net of accumulated amortization of $833,000 and
$763,000) at December 31, 2000 and 1999, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $70,000, $346,000 and $169,000 was charged to cost
of sales during 2000, 1999 and 1998, respectively.

         The Company reviews the carrying value of its capitalized software
development costs for possible impairment at the end of each fiscal quarter by
comparing the unamortized capitalized software development costs to the net
realizable value of that asset. The Company has not recorded any significant
impairment loss related to capitalized software costs during 2000, 1999 or 1998.

DEBT ISSUANCE COSTS

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

                                      F-10

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


PRODUCT WARRANTIES

         Estimated warranty costs are recognized at the time of the sale. The
Company's electronic components carry a one-year limited parts and labor
warranty and the Company's telecommunications products carry a two-year limited
parts and labor warranty. The Company's telecommunications 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 second quarter of 2000, the
Company settled certain warranty claims related to its former HyComp subsidiary,
which was sold in March 1999 (see Note 4), for less than the amount originally
accrued. Accordingly, the Company reversed warranty accruals totaling $137,000
which were not deemed to be necessary.

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 APB Opinion 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."

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 shareholders 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, 2000 and 1999, the fair value of all
financial instruments approximated carrying value.

                                      F-11

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         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.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles 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. During 2000,
the Company reversed approximately $172,000 of previously estimated accruals
related to sales commissions and other accrued expenses which were no longer
deemed necessary. Of this amount, $90,000 relates to over-accrued commissions,
$49,000 relates to over-accrued accounts payable and $33,000 relates to the
settlement of a sales tax assessment. Throughout 2000, the Company reviewed its
accrual for sales commissions and its accounts payable and contacted the
appropriate vendors to verify the amounts outstanding. As outstanding amounts
due were verified for amounts less than the amount recorded, the Company
reversed the excess accrual. In the fourth quarter of 2000, the Company settled
an outstanding disputed sales tax assessment and the assessment was canceled.
The Company reversed the accrual for the sales tax assessment in the amount of
approximately $33,000 in the fourth quarter. These amounts are included in
other, net in the accompanying 2000 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 results 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. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations. At December 31, 2000, one customer accounted for 10% of net
accounts receivable.

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.

                                      F-12

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


COMPREHENSIVE INCOME

         Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements.

REPORTABLE SEGMENTS

         Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires public business enterprises
to report certain information about operating segments in complete sets of
financial statements and in condensed financial statements of interim periods
issued to shareholders. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. All prior period
data presented has been restated to conform to the provisions of SFAS 131. The
Company has determined that it currently operates in two reportable segments:
Telecommunications and Components.

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior year financial
statements to be consistent with the 2000 presentation.

(2)      RESTATEMENT OF FINANCIAL STATEMENTS

ACCOUNTING FOR WRITE OFF OF NOTE RECEIVABLE

         In March 2001, it was determined that the write-off in 1999 of a note
receivable received in exchange for the sale of Arnold Circuits in 1998 should
have been accounted for as a selling, general and administrative expense in
continuing operations instead of included in discontinued operations.

         Accordingly, the accompanying consolidated statement of operations as
of and for the year ended December 31, 1999 have been restated to reflect an
increase in selling, general and administrative expenses in continuing
operations of $452,000 and a corresponding increase in gain on disposal of
discontinued operations.

ACCOUNTING FOR ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS

         In March 2001, it was determined that interest expense allocated to
discontinued operations should be included in continuing operations in
accordance with EITF 87-24.

         Accordingly, the accompanying consolidated statements of operations for
the years ended December 31, 1999 and 1998 have been restated to reflect an
increase in interest expense in continuing operations of $114,000 and $168,000,
respectively, with corresponding reductions in loss from operations of
discontinued operations.

                                      F-13

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


ACCOUNTING FOR ALLOCATION OF OTHER EXPENSES TO DISCONTINUED OPERATIONS

         In March 2001, it was determined that certain other expenses allocated
to discontinued operations should have been included in continuing operations.

         Accordingly, the accompanying consolidated statements of operations for
the years ended December 31, 1999 and 1998 have been restated to reflect an
increase in other expense in continuing operations of $185,000 and $7,000,
respectively, with corresponding reductions in loss from operations of
discontinued operations.

EFFECT

         The effect of the above changes was to increase net loss from
continuing operations by $751,000 and $161,000 for the years ended December 31,
1999 and 1998, respectively. Basic and diluted loss per share from continuing
operations increased by $0.05 and $0.02 per share for the years ended December
31, 1999 and 1998, respectively. Loss from discontinued operations decreased by
$299,000 and $161,000 for the years ended December 31, 1999 and 1998,
respectively and increased gain on disposal of discontinued operations from a
($3,000) loss to a $449,000 gain for the year ended December 31, 1999. Basic and
diluted loss per share from discontinued operations decreased by $0.05 and $0.02
per share for the years ended December 31, 1999 and 1998, respectively. The
above changes did not impact net loss or basic and diluted loss per share for
the years ended December 31, 1999 and 1998.

(3)      MERGER WITH XET CORPORATION

         On March 26, 1997, privately held XET merged with a wholly-owned, newly
formed subsidiary of the Company, with XET as the surviving subsidiary. Pursuant
to the transaction, the former stockholders of XET were issued approximately
6,119,000 shares of common stock of the Company, or approximately 66% of the
issued and outstanding common stock. In addition, holders of XET stock options
and warrants at the date of the merger collectively had the right to acquire an
additional 2,153,000 shares of common stock. Collectively, the former XET
stockholders owned, or had the right to acquire, approximately 65% of the common
stock of the Company on a fully-diluted basis as of the date of the transaction.

         The merger has been accounted for as a purchase of the Company by XET.
Accordingly, the purchase price, consisting of the value of the common stock
outstanding of the Company at the date of the merger of $5,011,000 plus the
direct costs of the acquisition of $730,000, and the acquired assets and
liabilities of MicroTel were recorded at their estimated fair values at the date
of the merger. The excess of $4,998,000 of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and thereafter was
amortized on a straight-line basis over 15 years.

         In September 1997, the Company wrote-down the goodwill associated with
the merger to $998,000. Thereafter, the remaining goodwill is being amortized on
a straight-line basis over ten years.

(4)      ACQUISITIONS AND DISPOSITIONS OF BUSINESSES

HYCOMP

         On July 6, 1994, the Company acquired 84.6% of the common shares
outstanding of HyComp, Inc. ("HyComp"), a public company, by means of an
exchange of the Company's common stock for HyComp common stock held by Metraplex

                                      F-14

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


Corporation and various other officers and directors of HyComp. HyComp is a
manufacturer of thin film hybrid circuits for industrial, medical and military
customers. In May 1996, the Company acquired additional common shares of HyComp,
which increased the Company's ownership percentage to 90.7%. Also in May 1996,
the Company acquired 96.1% of the preferred shares outstanding of HyComp. Each
of these transactions was an exchange of the Company's common stock for the
respective HyComp stock at recorded amounts that approximate fair value. As the
result of the exercise of certain HyComp stock options in 1997, the Company's
ownership of the common shares outstanding of HyComp was reduced to 88.5%.

         For financial reporting purposes, HyComp's assets, liabilities and
earnings were consolidated with those of the Company. Ownership interest in
HyComp, other than that of the Company's, is included in the accompanying
consolidated financial statements as minority interest.

         On March 31, 1999, the Company sold substantially all of the assets and
liabilities of its HyComp, Inc. subsidiary in exchange for $750,000 in cash and
a royalty on 1999 revenues generated from HyComp's existing customer base in
excess of a specified amount. The transaction resulted in a gain of $331,000.
(See Note 16.)

         In October 1999, the Company sold its interest in the outstanding
common and preferred stock of HyComp in exchange for $118,000. A gain in the
same amount was recorded in 1999 as HyComp, subsequent to the asset sale noted
above, was essentially a shell company with no significant assets or
liabilities. (See Note 16.)

XCEL ARNOLD CIRCUITS

         On January 9, 1998, the Company entered into a definitive agreement to
sell certain of the assets of its XCEL Arnold Circuits, Inc. subsidiary
("XACI"), a manufacturer of multi-layer bare printed circuit boards, to Arnold
Circuits, Inc., a company wholly owned by Robert Bertrand. Mr. Bertrand, the
Trustee of The Bertrand Family Trust, was a beneficial owner of more than five
percent (5%) of the Company's outstanding common stock as of December 31, 1998.
On April 9, 1998, the Company completed the sale and received $1,350,000 in cash
and a note receivable ("Note") aggregating $650,000, which was payable over
three years. As security for the Note, XCEL Arnold Circuits, Inc. was granted a
second lien on substantially all the assets of Arnold Circuits, Inc. As further
security for the Note, XACI was granted a security interest in 250,000 warrants
to purchase the Company's common stock, which were held by Mr. Bertrand. Payment
of the Note was guaranteed by Mr. Bertrand and a related entity. The sale
resulted in a gain of $580,000. (See Note 16.)

         During 1999, the buyer of XACI defaulted under the terms of the note
receivable. The Company offset the balance outstanding pursuant to a note
payable due to the buyer (Note 8) against the note receivable and then wrote-off
the net unpaid balance of $452,000 which is included in selling, general and
administrative expenses in the accompanying 1999 consolidated statement of
operations. The warrants provided as collateral were cancelled and the Company
attempted to recover the amount due under the guarantees executed by Mr.
Bertrand and a related party. In order to avoid a potentially expensive lawsuit,
the Company agreed to cancel the guarantee in exchange for a $40,000 payment
from Mr. Bertrand, of which $20,000 was paid in December 1999 and the remainder
in the first quarter of 2000. This amount has been included in selling, general
and administrative expenses in the accompanying 1999 consolidated statement of
operations.

                                      F-15

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


DIGITAL TRANSMISSION SYSTEMS

         On January 31, 1999, the Company exercised an option to purchase
1,738,159 shares or 41% of the outstanding common stock of Digital Transmission
Systems, Inc. ("DTS") from a private company in exchange for 1,000,000 shares of
common stock of the Company. The Company's shares exchanged were valued at
$1,000,000 based on the fair value of the common stock on the transaction date,
excluding $33,000 of transaction-related costs. This option was granted to the
Company on December 31, 1998 in exchange for warrants (with a fair value of
approximately $55,000) to purchase 152,381 shares of the Company's common stock
at $0.66 per share for five years. DTS was founded in 1990 and is a publicly
traded company with its headquarters near Atlanta, Georgia. It designs,
manufactures and markets wireless transmission products. DTS's primary customers
include domestic and international wireless service providers, telephone service
providers and private wireless network users. During 1999, the Company accounted
for its investment in DTS using the equity method of accounting and recognized
$626,000 of income from its 41% interest in DTS. This amount is included in the
net amount of other income in the accompanying 1999 statement of operations.
Summarized financial data for DTS is as follows:

                                        December 31, 1999     June 30, 1999
                                          (unaudited)           (audited)
                                          -----------          -----------
Current assets                            $1,472,000           $2,321,000
Noncurrent assets                          1,401,000            1,486,000
                                          -----------          -----------
   Total assets                           $2,873,000           $3,807,000
                                          ===========          ===========

Current liabilities                       $2,431,000           $4,108,000
Noncurrent liabilities                     2,127,000            2,127,000
                                          -----------          -----------
   Total liabilities                      $4,558,000           $6,235,000
                                          ===========          ===========

                                      For the year ended    For the year ended
                                       December 31, 1999      June 30, 1999
                                          (unaudited)           (audited)
                                          ------------        ------------
Net sales                                 $ 7,256,000         $ 7,538,000
                                          ============        ============
Net income                                $   213,000         $  (424,000)
                                          ============        ============

         On January 7, 2000, the Company sold all of its interest in the common
stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a
market value of $720,000 on the date of the transaction. Accordingly, as of
December 31, 1999, the Company wrote-down the carrying value of its investment
in the common stock of DTS to the value of the consideration received in January
2000. The write-down of $419,000 is included in other income (expense) in the
accompanying consolidated statement of operations for the year ended December
31, 1999. The Company was restricted from selling the Wi-LAN stock until July 7,
2000 due to Toronto exchange rules that restrict sales of stock obtained in an
acquisition related transaction. The 28,340 shares of Wi-LAN represents less
than 1% of the total outstanding shares of Wi-LAN common stock as of the date of
acquisition.

         On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $918,000. The sale resulted in a gain of approximately
$197,000 which is included in gain (loss) on sale of subsidiary/investment in
the accompanying consolidated statement of operations for the year ended
December 31, 2000.

                                      F-16

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


BELIX COMPANY, LTD.

         On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash and an earn-out for the former
stockholders based on sales, which totaled $252,000 at December 31, 2000. The
Company has incurred expenses of approximately $257,000 for severance and
relocation costs and has accrued an additional estimate of $49,000 for certain
severance and relocation costs related to Belix. The severance and relocation
affected various manufacturing, administrative and accounting personnel and was
substantially completed as of December 31, 2000. The Company also incurred
approximately $107,000 of legal and other expenses related to the acquisition.
The Company has included the expenses and accrual in the calculation of the cost
of the acquisition. Subsequent to the closing date, the purchase price was
reduced by $181,000 due to a shortfall in net assets per the purchase agreement.
Net assets acquired totaled $136,000, after such adjustment. The assets acquired
and liabilities assumed are as follows:

         Cash                                                   $   206,000
         Accounts receivable                                        669,000
         Inventory                                                  881,000
         Other assets                                               347,000
         Fixed assets                                               181,000
                                                                ------------
         Total assets acquired                                  $ 2,284,000
                                                                ============

         Accounts payable                                       $ 1,382,000
         Line of credit                                             419,000
         Notes payable                                              347,000
                                                                ------------
         Total liabilities assumed                              $ 2,148,000
                                                                ============

         Net assets acquired                                    $   136,000
         Accrual of severance and relocation costs                 (306,000)
         Accrual of legal and other costs                          (107,000)
         Goodwill                                                 1,138,000
                                                                ------------
         Adjusted purchase price                                $   861,000
                                                                ============

         Initial purchase price                                 $   790,000
         Reduction due to shortfall in net assets                  (181,000)
         Earn-out accrual                                           252,000
                                                                ------------
         Adjusted purchase price                                $   861,000
                                                                ============

         The acquisition of Belix has been accounted for as a purchase by the
Company and resulted in approximately $1.1 million of goodwill which is being
amortized on a straight-line basis over ten years. Belix is located in England,
U. K. and is in the business of manufacturing power supplies for various
applications. Belix has been integrated into the Company's existing power supply
producer, XCEL Power Systems, Ltd. Belix's assets consist mostly of accounts
receivable, inventories and fixed assets. All dollar amounts indicated in this
paragraph are derived from the conversion of British pounds into U. S. dollars

                                      F-17

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


at the conversion rate in effect at the time of the acquisition with the
exception of the earn out which converted at the conversion rate at December 31,
2000. The Belix acquisition was not material to the financial statements and
accordingly the pro forma effect of the transaction is not provided.

T-COM, LLC

         On September 22, 2000, the Company completed the acquisition, effective
as of August 1, 2000, of substantially all of the assets of T-Com, LLC, a
Delaware limited liability company ("T-Com"), and assumed certain liabilities of
T-Com. The liabilities assumed consisted mostly of accounts payable, accrued
payroll expenses and accrued commissions. The assets purchased are valued at
approximately $1,322,000, and the liabilities assumed are approximately
$687,000. The assets acquired and liabilities assumed are as follows:


         Accounts receivable                                 $  381,000
         Inventory                                              787,000
         Fixed assets                                           134,000
         Other assets                                            20,000
                                                             -----------
         Total assets acquired                               $1,322,000
                                                             ===========

         Bank overdraft                                      $   82,000
         Accounts payable                                       338,000
         Accrued compensation                                   122,000
         Other accrued expenses                                 145,000
                                                             -----------
         Total liabilities assumed                           $  687,000
                                                             ===========

         Net assets acquired                                 $  635,000
         Goodwill                                               365,000
                                                             -----------
         Purchase price                                      $1,000,000
                                                             ===========

         T-Com is a manufacturer of high performance digital transmission test
instruments used for the installation and maintenance of high speed telephone
line services for telephone central offices, competitive local exchange carriers
and private communications networks. The Company intends to use the acquired
assets for substantially the same purposes as such assets were used by T-Com.

         The Company paid to T-Com for the net assets consideration valued at
approximately $1,000,000, as itemized below:

                  150,000 shares of Series B Preferred Stock of the Company
         ("Series B Shares"). The Series B Shares become convertible into shares
         of common stock of the Company in three equal lots of 50,000 Series B
         Shares each at the end of six, twelve and eighteen months,
         respectively, following the acquisition closing date of September 22,
         2000. Each Series B Share will be convertible into ten common shares,
         and conversion rights will be cumulative, with all 150,000 Series B
         Shares being convertible into common stock after eighteen months. The
         Series B Shares have a liquidation preference of $6.40 per share. The
         Company may redeem outstanding and unconverted Series B Shares for cash

                                      F-18

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         at a price per share equal to $7.36 by giving 20 days' prior written
         notice to the holders of Series B Shares to be redeemed. If less than
         all of the Series B Shares are to be optionally redeemed, the
         particular Series B Shares to be redeemed shall be selected by lot or
         by such other equitable manner determined by the Company's board of
         directors. The Company may not, however, redeem Series B Shares if
         there is an insufficient number of authorized and reserved shares of
         common stock to permit conversion by the holders of the Series B Shares
         during the 20-day notice period, to the extent the Series B Shares are
         subject to a lock-up, or to the extent the Company receives a
         conversion notice for Series B Shares prior to the redemption date. If
         the Company fails to pay the redemption price after calling any Series
         B Shares for optional redemption, the Company will have no further
         option to redeem Series B Shares.

                  Warrants to purchase up to 250,000 shares of the Company's
         common stock at a fixed exercise price of $1.25 per share, which are
         exercisable for a period of twenty-four months following the
         acquisition closing date of September 22, 2000. The warrants contain a
         cashless exercise feature.

         The consideration described above is valued at approximately $938,000
for the Series B Shares based on a value of $0.6253 per common share, the market
value of the Company's common stock at the time the agreement in principal was
signed, multiplied by the 1,500,000 common shares into which the preferred
shares can be converted. The warrants have been valued at approximately $62,000
based on a calculation using the Black-Scholes pricing model with the following
assumptions: no dividend yield; expected volatility of 95%; a risk free rate of
6.3%; and an expected life of two years. The acquisition of T-Com has been
accounted for as a purchase by the Company and resulted in approximately
$365,000 of goodwill which is being amortized on a straight-line basis over ten
years.

         Unaudited pro forma results of operations for the years ended December
31, 2000 and 1999, as if T-Com and the Company had been combined as of the
beginning of the year, follow. The pro forma results include estimates and
assumptions which management believes are reasonable. However, pro forma results
do not include any anticipated cost savings or other effects of the planned
integration of T-Com and the Company, and are not necessarily indicative of the
results which would have occurred if the business combination had been in effect
on the dates indicated, or which may result in the future.

                                                              Pro forma Year
                                                            ended December 31
(thousands except per share data)                          2000          1999
-------------------------------------------------------------------------------

Net sales                                               $ 29,680      $ 29,152
Income (loss) from continuing operations                   1,255        (8,734)
Net income (loss)                                            556        (9,132)
Net income per common share
   Basic                                                    0.03         (0.55)
   Diluted                                                  0.02         (0.55)
-------------------------------------------------------------------------------

XCEL ETCH-TEK

         On November 15, 2000, the Company sold substantially all of the assets
of XCEL Etch-Tek ("Etch-Tek"), a wholly owned subsidiary of XET, to a former
employee in exchange for $260,000 in cash, a $50,000 note receivable and the
assumption of $75,000 of liabilities. The note receivable bears interest at 8%
per annum, with all principal and interest due in one year. The balance due

                                      F-19

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


under the note receivable was $50,000 at December 31, 2000 and is included in
notes receivable in the accompanying 2000 consolidated balance sheet. The
transaction resulted in a loss of $365,000 which is included in gain (loss) on
disposal of discontinued operations in the accompanying 2000 consolidated
statement of operations. (See Note 16.)

(5)      INVENTORIES

         Inventories are summarized as follows:

                                                         2000            1999
                                                         ----            ----
Raw materials..............................          $2,777,000      $1,619,000
Work-in-process............................           1,914,000       1,174,000
Finished goods.............................           1,607,000       1,254,000
                                                     -----------     -----------
                                                     $6,298,000      $4,047,000
                                                     ===========     ===========

         Included in the amounts above is an allowance for inventory
obsolescence of $1,169,000 and $1,381,000 at December 31, 2000 and 1999,
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.

(6)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

                                                      2000              1999
                                                      ----              ----
Land and buildings .........................      $   279,000       $   306,000
Machinery, equipment and fixtures ..........        3,223,000         2,803,000
Leasehold improvements .....................          451,000           444,000
                                                  ------------      ------------
                                                    3,953,000         3,553,000
Accumulated depreciation ...................       (3,144,000)       (2,788,000)
                                                  ------------      ------------
                                                  $   809,000       $   765,000
                                                  ============      ============

(7)      INVESTMENT IN PARTNERSHIP

         On December 19, 1996, the Company's XET subsidiary invested $100,000
and formed an equal partnership with P&S Development, a California general
partnership. The partnership, "Capital Source Partners, A Real Estate
Partnership," obtained ownership rights to a 93,000 square foot facility in,
Ontario, California. The Company occupied 63,000 square feet of this facility as
a corporate headquarters and as an administrative and factory facility for XET's
Digitran Division under a long-term lease from the partnership. Immediately
following the formation of the partnership, XET obtained a loan from a bank for
$750,000, and in turn, loaned such funds to the partnership under a note
receivable with the same terms and conditions. Such funds were utilized to
reduce the existing debt secured by the real estate. XET's original investment
in the partnership is adjusted for the income (loss) attributable to XET's
portion of the partnership's results of operations.

         In August 1999, the Company sold its interest in the partnership and
the note receivable to an unrelated party in exchange for $75,000. In connection
with this agreement, all associated liabilities were assumed by the purchaser
and all of the Company's unpaid rent in the amount of approximately $152,000 was

                                      F-20

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


forgiven. Additionally, the Company's obligation under the long-term lease was
terminated. In connection with the sale of its investment in partnership, the
Company recognized a loss of $90,000, which is included in gain (loss) on sale
of subsidiary/investment in the accompanying 1999 consolidated statement of
operations.

(8)      NOTES PAYABLE

         A summary of notes payable is as follows:

                                                          2000           1999
                                                          ----           ----
Line of credit with a U.S. commercial lender .....    $1,798,000     $2,014,000
Line of credit with foreign banks ................     1,863,000         93,000
                                                      -----------    -----------
                                                      $3,661,000     $2,107,000
                                                      ===========    ===========

         On July 8, 1998, the Company entered into a $10.5 million credit
facility (the "Domestic Facility") with a commercial lender for a term of two
years which provided:

         (i)      a term loan of approximately $1.5 million;

         (ii)     a revolving line of credit of up to $8 million based upon
                  assets available from either existing or future-acquired
                  operations; and

         (iii)    a capital equipment expenditure credit line of up to $1
                  million.

         This credit facility replaced the existing credit facilities of the
Company's domestic operating companies that were paid in full at the closing.

         Borrowings for continuing operations under the revolving line of credit
provision of the Domestic Facility totaled $2,014,000 at December 31, 1999. The
credit line was collateralized by substantially all assets of the Company's
domestic subsidiaries, bore interest at the lender's prime rate (8.5% at
December 31, 1999) plus 1% and was payable on demand. No additional borrowings
were available under the line at December 31, 1999. No borrowings were
outstanding under the $1 million of the capital equipment expenditure credit
line at December 31, 1999. The line of credit expired on June 23, 2000, but was
extended to August 14, 2000.

         In July 1999, the Company entered into an amendment of the Domestic
Facility related to an additional advance of $350,000. Under the terms of the
Amendment, the additional advance was repaid prior to September 30, 1999. In
addition, such Amendment required the Company to paydown $350,000 of the
Domestic Facility's term loan upon the sale of the property owned by Capital
Source Partners. Such sale of property and a resulting paydown was not completed
(see Note 7). The Company obtained a waiver of such default as of December 31,
1999 and made the required $350,000 paydown upon the closing of the sale of the
DTS shares (see Note 4) in January 2000. The Domestic Facility agreement
required compliance with certain other covenants and conditions. The Company was
in compliance with all such covenants as of December 31, 1999, except for the
adjusted net worth covenant. The Domestic Facility also restricted payment of
any dividends. The Domestic Facility was replaced by a new credit facility on
August 16, 2000 (see below).

                                      F-21

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         On August 16, 2000, the Company obtained a credit facility from Wells
Fargo Business Credit, Inc. This facility provides 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.
The Company's President and CEO provided a limited personal guarantee on these
loans. As consideration for this guarantee, the President and CEO received a
guarantee fee, approved by the board of directors, in the amount of $35,000. On
January 26, 2001, Wells Fargo Business Credit Inc. released the guarantee. No
further amounts are due in connection with this guarantee. The annual interest
rate on both portions of the credit facility is the prime rate (9.5% at December
31, 2000) plus 2%. The facility contains a performance based interest reduction
feature. The terms of the agreement provide for a reduction in the interest rate
to the prime rate plus 1.5% if the consolidated net income of XET Corporation
and CXR Telcom exceeds $250,000 for the year ended December 31, 2000 or the
prime rate plus 1% if the consolidated net income of XET Corporation and CXR
Telcom exceeds $500,000 for the year ended December 31, 2000. The balance
outstanding under the revolving loan was $1,798,000 on December 31, 2000. There
was $1,202,000 of additional borrowings available as of December 31, 2000. The
credit facility expires on August 16, 2003. The Company's foreign subsidiaries
have obtained credit facilities with Lloyds Bank in England, Banc National de
Paris, Societe Generale and Banque Hervet in France and Johan Tokyo Credit Bank
in Japan.

         The Company's French subsidiary has four bank lines of credit with a
total of $486,000 and $0 outstanding at December 31, 2000 and 1999,
respectively. Borrowings under the related agreements bear interest at 7.3% to
10% at December 31, 2000 and are based on eligible accounts receivable.
Approximately $94,000 of borrowings were available under the lines of credit at
December 31, 2000.

         The Company's UK subsidiary has a bank line of credit with $1,377,000
and $93,000 outstanding at December 31, 2000 and 1999, respectively. Borrowings
under the related agreement bear interest at the bank's base rate (6% at
December 31, 2000) plus 2.5% and are based on eligible accounts receivable. No
additional borrowings were available under the line at December 31, 2000. The
Company's U.K. subsidiary is out of compliance with certain covenants at
December 31, 2000 and has received a waiver from its lender.

         The Company borrowed $250,000 from a third party on a short-term basis
on December 31, 1998. This loan bore interest at 10% and was repaid in 1999. In
addition, the Company had an outstanding note with a balance of $250,000 at
December 31, 1998 in connection with the sale of its XCEL Arnold Circuits, Inc.
subsidiary (Note 4). This loan bore no interest and was payable on demand.
During 1999, the balance of the outstanding note payable was offset against the
note receivable received in connection with the sale of XCEL Arnold Circuits
(Note 4). The note payable and note receivable related to XCEL Arnold Circuits
were entered into with an individual who beneficially owned approximately 5% of
the Company's common stock.

                                      F-22

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


(9)      LONG-TERM DEBT

         A summary of long-term debt follows:

                                                         2000            1999
                                                         ----            ----
Term notes payable to commercial lender (a)         $   370,000     $   955,000
Term notes payable to foreign banks (b)                  41,000         108,000
Capitalized lease obligations (c)                       129,000         201,000
Other promissory notes                                  356,000         267,000
                                                    ------------    ------------
                                                        896,000       1,531,000
Current portion                                        (614,000)     (1,388,000)
                                                    ------------    ------------
                                                    $   282,000     $   143,000
                                                    ============    ============
----------
         (a)      Two term notes payable to commercial lenders bearing interest
                  at the lender's prime rate (9.5% at December 31, 2000) plus
                  2%. The facility contains a performance-based interest
                  reduction feature. The terms of the agreement provide for a
                  reduction in the interest rate to the prime rate plus 1.5% if
                  the consolidated net income of XET Corporation and CXR Telcom
                  exceeds $250,000 for the year ended December 31, 2000 or the
                  prime rate plus 1% if the consolidated net income of XET
                  Corporation and CXR Telcom exceeds $500,000 for the year ended
                  December 31, 2000. The notes are collateralized by machinery
                  and equipment and are payable in total monthly principal
                  installments (aggregating $57,000 at December 31, 2000), plus
                  interest through final maturity date of September 1, 2005.

         (b)      The Company had agreements with several foreign banks which
                  include term borrowings which mature at various dates through
                  2001. Interest rates on the borrowings bear interest at rates
                  ranging from 2.0% to 2.8% and are payable in monthly
                  installments. Included in the other term notes is a $101,000
                  note, which is guaranteed by Tokyo Credit Guarantee
                  Corporation on behalf of the Company's Japanese subsidiary.
                  The term borrowings are collateralized by the assets of the
                  respective subsidiary.

         (c)      Capital lease agreements are calculated using interest rates
                  appropriate at the inception of the lease and range from 12%
                  to 22%. Lease liabilities are amortized over the lease term
                  using the effective interest method. The leases all contain
                  bargain purchase options and expire through 2002.

         Principal maturities related to long-term debt as of December 31, 2000
are as follows:

                     YEAR ENDING DECEMBER 31,                    AMOUNT
                     ------------------------                    ------
                               2001                             $614,000
                               2002                              187,000
                               2003                               82,000
                               2004                                8,000
                               2005                                5,000
                                                                ---------
                                                                        $896,000
                                                                =========

                                      F-23

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


(10)     REDEEMABLE PREFERRED STOCK

SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK

         In connection with the Arnold Circuits, Inc. acquisition in 1995, XCEL
Arnold Circuits, Inc. issued 1,000 shares each of Series A redeemable preferred
stock (Series A) and Series B redeemable preferred stock (Series B). In
preference to common shares of stock, each Series A and Series B share was
entitled to a cumulative cash dividend of $120 and $160 per year, respectively,
commencing in June 1996. The Series A and B shares had a liquidation preference
of and were subject to mandatory redemption by the Company on December 15, 1999
at a value of $30 and $40 per share, respectively, plus all accrued and unpaid
dividends, whether or not declared, to the date of redemption. The redeemable
preferred stock was recorded at fair value on the date of issuance using an
imputed market rate dividend of 9.5%. The excess of the redemption value over
the carrying value was being accreted by periodic charges to retained earnings
over the original life of the issue.

         The Series A and Series B redeemable preferred stock was retired as
part of the sale of the XCEL Arnold Circuits subsidiary in March 1998 (see Note
4).

         The following table reflects the Series A and Series B redeemable
preferred stock activity:

<TABLE>
<CAPTION>
                                                   Series A Redeemable       Series B Redeemable
                                                     Preferred Stock           Preferred Stock
                                                 -----------------------   -----------------------
                                                   Number                    Number
                                                 of Shares      Amount     of Shares      Amount
                                                 ----------   ----------   ----------   ----------
<S>                                                 <C>        <C>            <C>        <C>
Balance at December 31, 1997 .................       1,000      306,000        1,000      408,000
Accretion of preferred stock .................          --        7,000           --        7,000
Cancellation of stock upon sale of  subsidiary      (1,000)    (313,000)      (1,000)    (415,000)
                                                 ----------   ----------   ----------   ----------
Balance at December 31, 1998, 1999 and 2000 ..          --    $      --           --    $      --
                                                 ==========   ==========   ==========   ==========
</TABLE>

CONVERTIBLE REDEEMABLE PREFERRED STOCK

         In June 1998, the Company sold 50 shares of convertible preferred stock
(the "New Preferred Shares") at $10,000 per share to one institutional investor.
In July 1998, the Company sold an additional 150 New Preferred Shares at the
same per share price to two other institutional investors. Included with the
sale of such New Preferred Shares were a total of one million warrants to
purchase the Company's common stock exercisable at $1.25 per share and expiring
May 22, 2001. The Company has ascribed an estimated fair value to 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) aggregating $163,000 and accordingly has 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 New Preferred 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 New Preferred 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

                                      F-24

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


date of any such conversion. Also under the original certificate of designation,
no more than 20% of the aggregate number of New Preferred 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
New Preferred 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 New Preferred
Share. Any unconverted New Preferred Shares may be redeemed at the option of the
Company for cash at a per share price equal to $11,500 per New Preferred Share
and any New Preferred Shares which remain outstanding as of May 22, 2003 are
subject to mandatory redemption by the Company at the same per-share redemption
price. The excess of the redeemable value over the carrying value is being
accreted by periodic charges to retained earnings over the original life of the
issue.

         In November 1998, the holders of the New Preferred Shares agreed to
revise the certificate of designations relating to the New Preferred 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 New Preferred Shares for six months.
The agreement also provided that the existing restriction on the right of each
holder of the New Preferred Shares to convert more than 20% of the aggregate
number of shares of the New Preferred 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. In connection with the repricing of the warrants, the Company recognized
$52,000 of non-cash expense in 1998. This expense represents the excess of the
fair value of the warrants after repricing over the fair 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 58%; a risk
free interest rate of 5%; and an expected life of 2.7 years.

         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 New Preferred Shares converted shares of the
New Preferred Shares into shares of common stock at the rate of 20,000 shares of
common stock per share of the New Preferred 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
Electronic Bulletin Board (see Note 11). Based upon the terms of the November
1998 agreement, the conversion price of the New Preferred 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 New Preferred Shares and the prorated portion of warrants applicable
to the then outstanding New Preferred Shares. The purchasers of such New
Preferred 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 New Preferred 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 New Preferred Share, in exchange for a reduction in
the exercise price of the warrants to $.25 per share and an extension of the
expiration date of the warrants to December 2002. In the event a holder of the
New Preferred Shares had converted its New Preferred Shares to common stock
immediately before the December 1999 agreement, each New Preferred 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.

                                      F-25

<PAGE>


         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 New Preferred 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 New Preferred Shares converted 34.5
shares of the New Preferred 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 New Preferred 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
New Preferred 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 Preferred Stock 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 New Preferred 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 share of Series A Preferred Stock was convertible into 50,530 shares
of common stock.


                                      F-26


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



         The following table reflects the convertible redeemable preferred stock
activity:

                                                     Number
                                                    of Shares          Amount
                                                    ---------       ------------
Balance at December 31, 1997                            --          $         0
Preferred stock issued                                 200            1,837,000
Conversion to common stock                             (39)            (367,000)
Accretion of preferred stock                            --               46,000
Balance at December 31, 1998                           161          $ 1,516,000
                                                    ---------       ------------
Conversion to common stock                            (101.5)          (969,000)
Accretion of preferred stock                            --               41,000
                                                    ---------       ------------
Balance at December 31, 1999                            59.5            588,000
Conversion to common stock                             (34.5)          (349,000)
Accretion of preferred stock                            --               20,000
                                                    ---------       ------------
Balance at December 31, 2000                            25.0        $   259,000
                                                    =========       ============

(11)     STOCKHOLDERS' EQUITY

STOCK OPTIONS AND WARRANTS

         The Company has the ability to issue options to purchase its common
stock under the following arrangements:

         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 may be granted
                  or optioned under this plan. Terms of related grants under the
                  plan are at the discretion of the Board of Directors.
         o        Stock Option Plan adopted in 1993, providing for the granting
                  of up to 300,000 incentive 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.
         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 may 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 (see Note 3).

                                      F-27

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         o        The 2000 Stock Option Plan (the "2000 Plan"), was adopted by
                  the board of directors in November 2000 and approved by the
                  stockholders on January 16, 2001. Under the 2000 Plan, options
                  granted may be either qualified or nonqualified options.
                  Qualified 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, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                        Weighted
                                                        Average
                                         2000           Exercise           1999             1998
                                        Shares           Price            Shares           Shares
                                        ------           -----            ------           ------
<S>                                   <C>              <C>               <C>              <C>
Outstanding at beginning of year      1,602,000        $   1.46          2,069,000        2,021,000
Granted                                 235,000            0.50            430,000          200,000
Exercised                               (90,000)           0.20                 --               --
Canceled                               (293,000)           1.70           (897,000)        (152,000)
                                     ---------------------------------------------------------------
Outstanding at end of year            1,454,000        $   1.34          1,602,000        2,069,000
                                     ===============================================================
</TABLE>

         The following table summarizes information with respect to stock
options at December 31, 2000:

<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              2000            (Years)          Price          2000        Price
    -----------       -------------   ----------------   ----------   ------------   --------
<S>                      <C>                <C>             <C>         <C>            <C>
$.20 to $1.00              565,000          9.1             $0.32         340,000      $0.20
$1.01 to $2.00             761,000          4.5             $1.80         761,000      $1.80
$2.01 to $3.00              35,000          4.8             $2.79          35,000      $2.79
$3.01 to $4.00              93,000          4.0             $3.17          93,000      $3.17
                      -------------                                   ------------
$.20 to $4.00            1,454,000          6.3             $1.34       1,229,000      $1.49
                      =============                                   ============
</TABLE>

         Weighted average exercise prices for 2000 are calculated at prices
effective as of December 31, 2000. The fair value of options granted during 2000
was $113,000, at a weighted average value of $0.48 per share. The fair value of
options granted during the years ended December 31, 1999 and 1998 were $63,000
and $112,000, at weighted average prices of $0.15 and $0.56 per share,
respectively.

                                      F-28

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         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 2000, 1999 and 1998 has been estimated
based on a modified Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 101% in 2000, 85% in 1999 and 25% to
57% in 1998, based on historical results; risk-free interest rate of 5.1% to
6.0%; and average expected lives of approximately seven to ten years.

         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.

                                             2000          1999           1998
                                             ----          ----           ----
NET INCOME (LOSS)
       As reported                         $ 1,004       $ (4,596)     $ (1,185)
       Pro forma                           $   909       $ (4,628)     $ (1,297)

NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS
       As reported                         $   984       $ (4,637)     $ (1,245)
       Pro forma                           $   889       $ (4,669)     $ (1,357)

BASIC EARNINGS (LOSS) PER SHARE
       As reported                         $   .05       $   (.28)     $   (.10)
       Pro forma                           $   .05       $   (.28)     $   (.11)

DILUTED EARNINGS (LOSS) PER SHARE
       As Reported                         $   .04       $   (.28)     $   (.10)
       Pro forma                           $   .04       $   (.28)     $   (.11)

         Additional incremental compensation expense includes the excess of fair
values of options granted during the year over any compensation amounts recorded
for options whose exercise prices were less than market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification
date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. 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.

                                      F-29

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         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, December 31, 1997          2,740,000         $1.21 to 3.79         $  7,923,000
Warrants issued                                 2,802,000          0.66 to 1.25            2,838,000
Warrants cancelled                             (1,000,000)                 1.25           (1,250,000)
                                              -------------------------------------------------------
Balance outstanding, December 31, 1998          4,542,000          0.66 to 3.79            9,511,000
Warrants issued                                 2,865,000          0.25 to 1.38            2,199,000
Warrants expired/cancelled                     (1,925,000)         0.60 to 2.50           (2,015,000)
                                              -------------------------------------------------------
Balance outstanding at December 31, 1999        5,482,000          0.25 to 3.79            9,695,000
Warrants issued                                 1,784,000          0.61 to 1.90            2,023,000
Warrants expired/cancelled                     (4,317,000)         0.61 to 3.79           (9,602,000)
Warrants exercised                               (777,000)         0.25 to 0.69             (413,000)
                                              -------------------------------------------------------
Balance outstanding at December 31, 2000        2,172,000         $0.25 to 2.50         $  1,703,000
                                              =======================================================
</TABLE>

         During 2000, the Company issued warrants to purchase 150,000 shares of
common stock at an exercise price of $1.00 as compensation for various services
rendered. The estimated fair value of the warrants was $25,000 and was
calculated using a Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 95%; a risk-free rate of 6.8%; and
expected lives of 1.5 to 2 years. During 2000, 584,000 shares of common stock
were issued in connection with the exercise of 777,000 warrants (277,000
warrants at an exercise price of $0.25 and 500,000 warrants exercised cashless
into 306,000 shares).

         During 1999, the Company issued 1,716,000 shares of common stock as
compensation for various services rendered. The fair value of such expense
(based upon the market price of the common stock on the date of issuance) was
approximately $1,077,000. Of the shares issued, 555,641 shares valued at
$365,000 were issued to employees (non-officers) of the Company as a bonus.

         During 1998, the Company issued warrants to purchase 552,381 shares of
the Company's common stock at exercise prices ranging from $0.6563 to $1.26 per
share for various consulting services. The estimated fair values of the warrants
was calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield, expected volatility ranging from 24-59%; a
risk-free interest rate of 5%; and expected lives of 1.5 to 5 years.

         The Company has 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 2000, 1999, and 1998,
1,000, 5,000, and 7,000 shares, respectively, had been issued pursuant to the
plan with 26,000 shares reserved for future issuance.

         During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of $1.00 or more and ranging as high as $3.79
the opportunity to exchange their warrants with new warrants for one half the
number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of $1.00 or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the stockholders as
part of the year 2000 Annual Meeting of Stockholders.

                                      F-30

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. Expense of $65,000 was
recorded during year ended December 31, 2000, for the compensation expense for
the modification of the warrants. Based on the nature and timing of the original
grant of the warrants, the compensation expense was determined by various
methods. For warrants issued to employees and directors, compensation expense
was determined by the intrinsic value method and by treating the modified
warrants as variable from the date of modification in accordance with APB 25 and
FIN 44. For warrants issued to non-employees, compensation expense was
determined in accordance with FAS 123 by calculating the difference between the
fair value of the new warrant and the old warrant at the date of acceptance,
with the exception of warrants initially granted pre-FAS 123, in which case the
entire fair value of the new warrant was recorded as compensation expense. The
estimated fair values of the old and new warrants was calculated using a
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 93%; a risk-free interest rate of 6%; and expected lives
ranging from 0.1 to 5 years.

         As of December 31, 2000, the Company has 20,569,759 shares of common
stock outstanding and potentially 5,021,702 shares of common stock issuable
pursuant to the exercise of outstanding stock options and warrants and
conversion of convertible redeemable preferred stock. As of December 31, 2000,
in accordance with its certificate of incorporation, the Company was authorized
to issue 25,000,000 shares of common stock. On January 22, 2001, the Company's
authorized capital was increased to 50,000,000 shares of common 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 its common stock. The certificates of designation
related to the Company's Series A Preferred Stock and Series B Preferred Stock
provide that shares of those series of preferred stock are not entitled to
receive cash dividends. 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.

SETTLEMENT OF DISPUTE

         During 1997, the Company entered into an amendment to an agreement with
a former officer in settlement of a claim made by such officer for certain
amounts purportedly owed to him by the Company. In connection with the amended
agreement, the Company issued the former officer 80,000 shares of its common
stock valued at $190,000, the fair market value of the common stock on the date
of issuance. In November 1998, the Company entered into a further amended
agreement pursuant to which the former officer returned the 80,000 shares
previously issued in exchange for the Company's agreement to pay $168,000 over
the next two years. The Company cancelled the returned shares.

                                      F-31

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


NASDAQ DELISTING

         In May 1999, the listing of the Company's common stock on the Nasdaq
SmallCap Market ("Nasdaq") was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board.

(12)     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.

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

                                2000                1999                1998
                                ----                ----                ----
Domestic                    $ 2,658,000         $(3,556,000)        $  (467,000)
Foreign                        (924,000)           (514,000)              6,000
                            ----------------------------------------------------
Total                       $ 1,734,000         $(4,070,000)        $  (461,000)
                            ====================================================

         Income tax expense consists of the following:

                                     2000             1999              1998
                                     ----             ----              ----
Current:
Federal                           $ 20,000          $     --          $     --
State                                3,000            30,000             8,000
Foreign                              8,000            98,000            93,000
                                  ---------------------------------------------
                                  $ 31,000          $128,000          $101,000
                                  =============================================

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

                                          2000           1999           1998
                                          ----           ----           ----
Tax at U.S. federal statutory rate    $   590,000    $(1,384,000)   $  (157,000)
State taxes, net of federal income
  tax benefit                               3,000         30,000          8,000
Foreign income taxes                        8,000         98,000         93,000
Losses with no current benefit                 --      1,314,000         59,000
Permanent differences                      88,000         70,000         98,000
Utilization of net operating losses      (658,000)            --             --
                                      ------------------------------------------
                                      $    31,000    $   128,000    $   101,000
                                      ==========================================

                                      F-32

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         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:

                                                        2000             1999
                                                        ----             ----
Deferred tax assets:
  Allowance for doubtful accounts                 $     14,000    $     37,000
  Inventory reserves and uniform capitalization        312,000         254,000
  Other accrued liabilities                            387,000         140,000
  Deferred compensation                                241,000         326,000
  Research credit carryforwards                        256,000         256,000
  Alternative Minimum Tax credit carryforwards         154,000         134,000
  Net operating loss carryforwards                  14,957,000      17,436,000
                                                  -----------------------------

Total deferred tax assets                           16,321,000      18,583,000

Valuation allowance for deferred tax assets        (16,321,000)    (18,335,000)
                                                  -----------------------------
Net deferred tax assets                                     --         248,000
                                                  -----------------------------
Deferred tax liabilities:
     Depreciation                                           --        (166,000)
     Gain on sale of investment                             --         (82,000)
                                                  -----------------------------
Total deferred tax liabilities                              --        (248,000)
                                                  -----------------------------
Net deferred taxes                                $         --    $         --
                                                  =============================

         As of December 31, 2000, the Company has a federal net operating loss
carryforward of approximately $43,000,000 which expires at various dates between
2001 and 2019 and a state net operating loss carryforward of approximately
$3,000,000 which expires at various dates through 2004.

         As a result of the merger with XET (Note 3), 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 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, equal to the net deferred tax asset amount, is required.

                                      F-33

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


(13)     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>
                                                           2000          1999           1998
                                                           ----          ----           ----
<S>                                                    <C>           <C>            <C>
NUMERATOR:
Net income (loss)                                      $ 1,004,000   $(4,596,000)   $(1,185,000)
     Less: accretion of the excess of the redemption
     value over the carrying value of redeemable
     preferred stock                                        20,000        41,000         60,000
                                                       -----------------------------------------
Income (loss) attributable to common stockholders      $   984,000   $(4,637,000)   $(1,245,000)
                                                       =========================================
DENOMINATOR:
Weighted average number of common shares
   outstanding during the period                        19,504,000    16,638,000     11,952,000

Incremental shares from assumed conversions
   of warrants, options and preferred stock              3,523,000            --             --
                                                        -----------------------------------------
Adjusted weighted average shares                        23,027,000    16,638,000     11,952,000
                                                        =========================================
Basic earnings (loss) per share                         $     0.05   $      (.28)   $      (.10)
                                                        =========================================
Diluted earnings (loss) per share                       $     0.04   $      (.28)   $      (.10)
                                                        =========================================
</TABLE>

         The computation of diluted loss per share for 1999 and 1998 excludes
the effect of incremental common shares attributable to the exercise of
outstanding common stock options and warrants because their effect was
antidilutive due to losses incurred by the Company. See summary of outstanding
stock options and warrants in Note 11.

(14)     COMMITMENTS AND CONTINGENCIES

LEASES

         The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through 2005. 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 2000, 1999 and 1998, was $956,000, $1,454,000 and
$1,674,000, respectively.

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
               ------------------------                  ------
                         2001                          $   995,000
                         2002                              757,000
                         2003                              255,000
                         2004                              205,000
                                                       ------------
                                                       $ 2,212,000
                                                       ============

                                      F-34

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


LITIGATION

         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 affect on the Company's consolidated financial position, results of
operations or cash flows. During the fourth quarter of 2000, the Company settled
two outstanding lawsuits for approximately $90,000 less than the amount
previously accrued. Accordingly, the Company reversed a portion of the accruals
related to the lawsuits in the amount of $90,000 which were determined to no
longer be necessary. Currently, there are no legal proceedings pending.

         SCHEINFELD V. MICROTEL INTERNATIONAL, INC.

         In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary damages
in the amount of $300,000 allegedly sustained by the failure of the Company, its
stock transfer agent and its counsel to timely deliver and register 40,000
shares of common stock purchased by Mr. Scheinfeld. The Company was informed by
Mr. Scheinfeld that in order to settle his claims, the Company would have to
issue him unrestricted shares of common stock. Since, in the absence of
registrations, the Company could not issue unrestricted shares, the Company
answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint
upon the defendants. On June 30, 1997, the complaint was served, and the Company
has subsequently answered, denying the material allegations of the complaint.

         During the third quarter of 1999, the Company entered into a settlement
agreement with David Scheinfeld. The Company agreed to pay $75,000 payable in an
initial payment of $6,250 and eleven monthly payments of $6,250 thereafter
without interest. The unpaid amount due as of December 31, 1999, aggregating
$50,000, is presented in other promissory notes (Note 9) in the accompanying
1999 consolidated balance sheet. The balance was paid in full in 2000.

         DANIEL DROR & ELK INTERNATIONAL, INC. V. MICROTEL INTERNATIONAL, INC.

         In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved certain
mutual obligations. In December 1997, the former Chairman defaulted on the
repayment of the first installment of a debt obligation which was an obligation
set forth in the Agreement. Also in December 1997, the former Chairman of the
Company, filed suit in the District Court for Galveston County, Texas alleging
the Company had breached an alleged oral modification of the Agreement. In
January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.

         In April 1998, the Company brought an action in California against the
former Chairman for breach of the Agreement and sought recovery of all stock,
warrants and debt due the Company. The Company obtained a judgment against the
former Chairman in this litigation.

                                      F-35

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         In December 1997, Elk International Corporation Limited ("Elk"), a
stockholder of the Company, brought an action in Texas against the Company's
current Chairman and an unrelated party, alleging certain misrepresentations
during the merger discussions between XET and the Company. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.

         In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement calls for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000
(based on the closing market price of the common stock on the settlement date).
In addition, the Company issued 1,000,000 warrants to purchase the Company's
common stock at an exercise price of $1.37 per share for two years in exchange
for returning 750,000 options and returning 90,000 warrants all to purchase the
Company's common stock at an exercise price of $2.50 per share for 2.8 years.
The fair value of the warrants granted over the options and warrants returned on
the date of the settlement was approximately $17,000. The estimated fair values
of the old and new options or warrants were calculated using a Black-Scholes
pricing model with the following assumptions: no dividend yield, expected
volatility of 81%; a risk-free interest rate of 5%; and expected lives of 2.8
and 2 years, respectively. The Company accrued for this settlement in the
accompanying 1998 consolidated financial statements.

EMPLOYEE BENEFIT PLANS

         Through September 30, 1998, the Company sponsored several defined
contribution plans ("401(k) Plans") covering the majority of its U.S. domestic
employees. Effective October 1, 1998, these plans were terminated and a new plan
was instituted covering the same 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 $21,000, $31,000 and $22,000 to the 401(k) Plans for the
calendar years ended December 31, 2000, 1999 and 1998, respectively.

EXECUTIVE MANAGEMENT

         Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into a new employment agreement, providing for an
annual base salary of $250,000, with annual merit increases for an initial
period of five years with two renewal periods of two years and a severance
agreement of at least three years salary during the initial period.

(15)     SEGMENT AND MAJOR CUSTOMER INFORMATION

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

                                      F-36

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         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 (see Note 4). XCD is essentially a captive
supplier of printed circuit boards to the electronic components segment with
total sales to external customers of $173,000 and $167,000 for the years ended
December 31, 2000 and 1999, 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 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 electronics 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.

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

                                        2000            1999            1998
                                        ----            ----            ----
SALES TO EXTERNAL CUSTOMERS:
     Telecommunications            $ 15,658,000    $ 15,666,000    $ 17,532,000
     Electronic Components           12,392,000      10,247,000      12,568,000
                                   ---------------------------------------------
                                   $ 28,050,000    $ 25,913,000    $ 30,100,000
                                   =============================================
INTERSEGMENT SALES:
     Telecommunications            $         --    $         --    $     17,000
     Electronic Components                   --         279,000         635,000
                                   ---------------------------------------------
                                   $         --    $    279,000    $    652,000
                                   =============================================
INTEREST EXPENSE:
     Telecommunications            $    131,000    $    110,000    $     79,000
     Electronic Components              216,000          75,000         323,000
                                   ---------------------------------------------
                                   $    347,000    $    185,000    $    402,000
                                   =============================================
DEPRECIATION AND AMORTIZATION:
     Telecommunications            $    528,000    $    490,000    $    265,000
     Electronic Components              173,000         101,000         241,000
                                   ---------------------------------------------
                                   $    701,000    $    591,000    $    506,000
                                   =============================================
SEGMENT PROFITS (LOSSES):
     Telecommunications            $    344,000    $ (1,739,000)   $    363,000
     Electronic Components            3,365,000       1,168,000       2,498,000
                                   ---------------------------------------------
                                   $  3,709,000    $   (571,000)   $  2,861,000
                                   =============================================
SEGMENT ASSETS:
     Telecommunications            $  9,901,000    $  7,960,000    $ 10,234,000
     Electronic Components            8,876,000       5,327,000       7,321,000
                                   ---------------------------------------------
                                   $ 18,777,000    $ 13,287,000    $ 17,555,000
                                   =============================================

                                      F-37

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


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

<TABLE>
<CAPTION>
                                                           2000            1999            1998
                                                           ----            ----            ----
<S>                                                   <C>             <C>             <C>
Net Sales
     Total sales for reportable segments              $ 28,050,000    $ 26,192,000    $ 30,752,000
     Elimination of intersegment sales                          --        (279,000)       (652,000)
                                                      ---------------------------------------------
Total consolidated revenues                           $ 28,050,000    $ 25,913,000    $ 30,100,000
                                                      =============================================

Profit (loss) from continuing operations
----------------------------------------
   before income taxes
   -------------------
     Total profit (loss) for reportable segments      $  3,709,000    $   (571,000)   $  2,861,000
     Unallocated amounts:
         General corporate expenses                     (1,975,000)     (3,499,000)     (3,322,000)
                                                      ---------------------------------------------
Consolidated loss from continuing operations before
   income taxes                                       $  1,734,000    $ (4,070,000)   $   (461,000)
                                                      =============================================

Assets
------
     Total assets for reportable segments             $ 18,777,000    $ 13,287,000    $ 17,555,000
     Other assets                                          707,000       3,202,000       2,797,000
                                                      ---------------------------------------------
Total consolidated assets                             $ 19,484,000    $ 16,489,000    $ 20,352,000
                                                      =============================================

Interest Expense
----------------
     Interest expense for reportable segments         $    347,000    $    185,000    $    402,000
     Other interest expense                                 77,000         226,000         273,000
                                                      ---------------------------------------------
Total interest expense                                $    424,000    $    411,000    $    675,000
                                                      =============================================

Depreciation and Amortization
-----------------------------
     Depreciation and amortization expense
          for reportable segments                     $    701,000    $    591,000    $    506,000
     Other depreciation and amortization expense            82,000         190,000         190,000
                                                      ---------------------------------------------
Total depreciation and amortization                   $    783,000    $    781,000    $    696,000
                                                      =============================================
</TABLE>

                                                F-38

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


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

                                     2000             1999             1998
                                     ----             ----             ----
Net sales:
     United States               $13,246,000      $ 9,490,000      $12,804,000
     Japan                           941,000          658,000          706,000
     France                        9,118,000       10,958,000       11,118,000
     United Kingdom                4,745,000        4,807,000        5,472,000
                                 ----------------------------------------------
                                 $28,050,000      $25,913,000      $30,100,000
                                 ==============================================
Long-lived assets:
     United States               $   418,000      $   371,000      $   489,000
     Japan                            14,000           16,000           13,000
     France                          251,000          257,000          458,000
     United Kingdom                  237,000          190,000          133,000
                                 ----------------------------------------------
                                 $   920,000      $   834,000      $ 1,093,000
                                 ==============================================

         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.

         No one customer accounted for more than 10% of net sales during any of
the years presented.

(16)     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 XCEL Circuits Division ("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 (see Note 3). XCD is
essentially a captive supplier of printed circuit boards to the electronic
components segment with total sales to external customers of $173,000 and
$167,000 for the years ended December 31, 2000 and 1999, 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.

                                      F-39

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


         Summarized results of operations for the discontinued operations for
2000, 1999 and 1998 are as follows:

                                          2000           1999           1998
                                          ----           ----           ----
Net sales                             $ 2,257,000    $ 2,388,000    $ 7,161,000
                                      ==========================================
Operating loss                        $  (212,000)   $  (847,000)   $(1,203,000)
                                      ==========================================
Gain (loss) on sale of discontinued
  operations                          $  (487,000)   $   449,000    $   580,000
                                      ==========================================

         The net assets and liabilities relating to the circuits segment have
been included in net assets (liabilities) of discontinued operations in the
accompanying consolidated balance sheets and are summarized as follows:

                                                          2000          1999
                                                          ----          ----

Accounts receivable                                   $       --    $  351,000
Inventories                                                   --       135,000
Other current assets                                          --       152,000
Property, plant and equipment                                 --       627,000
                                                      -------------------------
Total assets                                          $       --    $1,265,000
                                                      =========================

Accounts payable and accrued expenses                     15,000        75,000
Long-term debt                                                --        57,000
                                                      -------------------------
Total liabilities                                         15,000       132,000
                                                      =========================

Net assets (liabilities) of discontinued operations   $  (15,000)   $1,133,000
                                                      =========================
(17)     NEW ACCOUNTING PRONOUNCEMENTS

         In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 was previously amended by SFAS No. 137, "Accounting For Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which deferred the effective date of SFAS No. 133 to fiscal
years commencing after June 15, 2000. The Company currently does not engage in,
nor does it expect to engage in, derivative or hedging activities and,
accordingly, the Company anticipates there will be no impact to its consolidated
financial statements.

         In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition policies
comply with SAB 101.

         In March 2000, the FASB issued Interpretation No. 44 ("FIN 44")
"Accounting for Certain Transactions Involving Stock Compensation", which
addresses certain accounting issues which arose under the previously established
accounting principles relating to stock-based compensation. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations, but may in the future due to repricing.

                                      F-40

<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


(18)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of the quarterly operations for the years
ended December 31, 2000 and 1999 (in thousands, except for per share data).

<TABLE>
<CAPTION>
                                    Previously                 Previously
                                     Reported     Restated      Reported      Restated
                                     Mar. 31      Mar. 31       June 30       June 30        Sept. 30       Dec. 31
                                     -------      -------       -------       -------        --------       -------
<S>                                 <C>         <C>             <C>          <C>            <C>            <C>
               2000
               ----
Net Sales                           $ 6,486     $    5,860      $ 7,512      $   6,828      $   6,871      $   8,491
Gross Profit                          2,373          2,326        2,814          2,796          3,791          3,608
Income (loss) from continuing
  operations                           (127)           (71)         206            301          1,132            341
Income (loss) from discontinued
  operations                              -            (56)           -            (95)          (702)           154
Net income (loss)                      (127)          (127)         206            206            430            495
Income (loss) available to
  common shareholder                   (150)          (130)         183            183            407            544
Earnings (loss) per share:
Continuing Operations
        Basic                         (0.01)         (0.01)        0.01           0.02           0.06           0.02
        Diluted                       (0.01)         (0.01)        0.01           0.02           0.05           0.01
Discontinued Operations
        Basic                             -          (0.00)           -          (0.01)         (0.04)          0.01
        Diluted                           -          (0.00)           -          (0.01)         (0.03)          0.01
Net Income (loss)
        Basic                         (0.01)         (0.01)        0.01           0.01           0.02           0.03
        Diluted                       (0.01)         (0.01)        0.01           0.01           0.02           0.02

               1999
               ----
Net Sales                           $ 7,510      $   6,677      $ 6,801      $   6,319      $   6,448      $   6,469
Gross Profit                          2,606          2,550        2,390          2,381          2,245          1,671
Loss from continuing
  operations                           (975)        (1,013)        (914)          (624)          (761)        (1,800)
Income (loss) from
  discontinued operations                 -             38            -           (290)          (273)           127
Net loss                               (975)          (975)        (914)          (914)        (1,034)        (1,673)
Loss available to common
  shareholder                        (1,031)        (1,031)        (903)          (903)        (1,058)        (1,645)
Net income (loss) per share:
Continuing Operations
        Basic                         (0.07)         (0.07)       (0.06)         (0.04)         (0.05)         (0.10)
        Diluted                       (0.07)         (0.07)       (0.06)         (0.04)         (0.05)         (0.10)
Discontinued Operations
       Basic                              -          (0.00)           -          (0.02)         (0.01)          0.01
        Diluted                           -          (0.00)           -          (0.02)         (0.01)          0.01
Net loss
        Basic                         (0.07)         (0.07)       (0.06)         (0.06)         (0.06)         (0.09)
        Diluted                       (0.07)         (0.07)       (0.06)         (0.06)         (0.06)         (0.09)
</TABLE>

         The 2000 and 1999 quarterly results of operations for the periods
presented above have been restated to reflect discontinued operations resulting
from the Company's decision to discontinue its Circuits segment in October 2000.
(See Note 16.)

                                      F-41

<PAGE>

<TABLE>
                                     MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                                      SCHEDULE II
                                           VALUATION AND QUALIFYING ACCOUNTS
                                      YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<CAPTION>

                                                                Additions     Transfers
                                                Balance at     Charged to         to         Deductions
                                               Beginning of     Costs and    Discontinued   Write-offs of   Balance at
Description                                        Year         Expenses      Operations      Accounts      End of Year
-----------                                     -----------    -----------    -----------   -----------     -----------
<S>                                             <C>            <C>            <C>           <C>             <C>
Allowance for doubtful accounts:
     Year ended December 31, 2000               $  191,000     $   47,000     $        -    $ (127,000)     $  111,000
     Year ended December 31, 1999                  258,000         36,000          6,000      (109,000)        191,000
     Year ended December 31, 1998                  241,000         97,000        (17,000)      (63,000)        258,000
                                                ===========    ===========    ===========   ===========     ===========

Allowance for inventory obsolescence:
     Year ended December 31, 2000                1,381,000        893,000              -    (1,105,000)      1,169,000
     Year ended December 31, 1999                1,760,000      1,145,000         (1,000)   (1,523,000)      1,381,000
     Year ended December 31, 1998                1,856,000        885,000         (6,000)     (975,000)      1,760,000
                                                ===========    ===========    ===========   ===========     ===========
</TABLE>

                                                         F-42

<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number         Description
------         -----------

2.1      Merger Agreement dated December 31, 1996 between XET Corporation, XET
         Acquisition, Inc. and the Registrant (1)

2.2      Share Exchange Agreement among CXR Telcom Corporation, the Registrant
         and Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson, Dated
         October 17, 1997 (2)

2.3      Indemnity Escrow Agreement among CXR Telcom Corporation, the
         Registrant, Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson
         and Gallagher, Briody & Butler, Dated October 17, 1997 (2)

2.4      Form of Contingent Stock Agreement among CXR Telcom Corporation, the
         Registrant, Critical Communications Incorporated, Mike B. Peterson,
         Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997 (2)

2.5      Form of Severance Agreement among CXR Telcom Corporation, Critical
         Communications Incorporated, Mike B. Peterson, Eric P. Bergstrom and
         Steve T. Robbins, Dated October 17, 1997 (2)

2.6      Asset Purchase Agreement dated January 9, 1998 among Arnold Circuits,
         Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XET
         Corporation and Mantalica & Treadwell (2)

2.7      Addendum No. 1 to Asset Purchase Agreement, among Arnold Circuits, Inc,
         BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XET
         Corporation and Mantalica & Treadwell, Dated March 31, 1998 (2)

2.8      Bill of Sale and Assignment and Assumption Agreement between XCEL
         Arnold Circuits, Inc. and Arnold Circuits, Inc., Dated March, 31 1998
         (2)

2.9      Guaranty of Robert Bertrand in favor of XCEL Arnold Circuits, Inc.,
         Dated March 31, 1998 (2)

2.10     Warrant to Purchase Common Stock of the Registrant issued to BNZ
         Incorporated (2)

2.11     Guaranty of BNZ Incorporated in favor of XCEL Arnold Circuits, Inc.,
         Dated March 31, 1998 (2)

2.12     Pledge and Escrow Agreement between BNZ Incorporated and XCEL Arnold
         Circuits, Inc., Dated March 31, 1998 (2)

2.13     Promissory Note between Arnold Circuits, Inc. and XCEL Arnold Circuits,
         Inc. Dated March 31, 1998 (2)

2.14     Promissory Note between XET Corporation and Arnold Circuits, Inc. Dated
         March 31, 1998 (2)

2.15     Security Agreement between Arnold Circuits, Inc and XCEL Arnold
         Circuits, Inc. Dated March 31, 1998 (2)

                                       69

<PAGE>

2.16     Joint Marketing and Supply Agreement between Arnold Circuits, Inc and
         XCEL Etch Tek, Dated March 31, 1998 (2)

2.17     Letter agreement dated October 19, 1998 between the Registrant and
         Digital Transmission Systems, Inc. (15)

2.18     Asset Purchase Agreement between HyComp, Inc. and HyComp Acquisition
         Corp., c/o SatCon Technology Corporation, dated March 31, 1999 (3)

2.19     Share Purchase Agreement dated December 29, 1999 between the Registrant
         and Wi-Lan Inc. (15)

2.20     Share Purchase Agreement dated April 17, 2000 between XCEL Power
         Systems Limited and the stockholders of The Belix Company Limited (4)

2.21     Asset Purchase Agreement effective September 1, 2000 by and among the
         Registrant, CXR Telcom Corporation and T-Com, LLC (5)

2.22     Bill of Sale and Assignment and Assumption Agreement dated as of
         September 22, 2000 between T-Com, LLC and CXR Telcom Corporation (5)

2.23     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 (5)

2.24     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 (6)

2.25     Asset Purchase Agreement dated as of July 31, 1995 by and among BNZ
         Incorporated, Robert Bertrand, and XCEL Arnold Circuits, Inc. (16)

3.1      Certificate of Incorporation of the Registrant, as filed with the
         Delaware Secretary of State on July 14, 1989 (15)

3.2      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on October
         12, 1989 (15)

3.3      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on October
         16, 1991 (15)

3.4      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on April 19,
         1994 (15)

3.5      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on March 6,
         1995 (15)

3.6      Certificate of Amendment of Certificate of Incorporation of the
         Registrant, as filed with the Delaware Secretary of State on August 28,
         1996 (15)

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 (15)

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 (15)

                                       70

<PAGE>

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 (15)

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 (7)

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 (15)

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 (5)

3.13     Bylaws of the Registrant (15)

3.14     Certificate of Amendment of Certificate of Incorporation of the
         Registrant as filed with the Delaware Secretary of State on January 22,
         2001 (16)

3.15     Certificate of Amendment of Certificate of Designation of the
         Registrant as filed with the Delaware Secretary of State on January 22,
         2001 (16)

10.1     1993 Stock Option Plan (15)(#)

10.2     Employee Stock and Stock Option Plan (9) (#)

10.3     1997 Stock Incentive Plan (10) (#)

10.4     2000 Stock Option Plan (11) (#)

10.5     Employment Agreement dated October 15, 1997 between the Registrant and
         Carmine T. Oliva (15)(#)

10.6     Employment Agreement dated May 1, 1998 between the Registrant and
         Graham Jefferies (15)(#)

10.7     Credit and Security Agreement dated as of August 16, 2000 by and among
         XET Corporation, CXR Telcom Corporation and Wells Fargo Business
         Credit, Inc. (5)

10.8     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. (5)

10.9     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. (5)

10.10    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.
         (5)

10.11    Guarantee dated August 16, 2000 made by Carmine T. Oliva in favor of
         Wells Fargo Business Credit, Inc. (5)

10.12    Waiver of Interest dated August 16, 2000 made by Georgeann Oliva in
         favor of Wells Fargo Business Credit, Inc. (5)

                                       71

<PAGE>

10.13    Guarantee dated August 16, 2000 made by the Registrant in favor of
         Wells Fargo Business Credit, Inc. (5)

10.14    Guarantor Security Agreement dated August 16, 2000 made by the
         Registrant in favor of Wells Fargo Business Credit, Inc. (5)

10.15    Loan and Security Agreement between Congress Financial Corporation
         (Western) and the Registrant, XET Corporation, CXR Telcom Corporation
         and HyComp, Inc. dated June 23, 1998 (8)

10.16    Security Agreement between Congress Financial Corporation (Western) and
         XET Corporation dated June 23, 1998 (8)

10.17    Lease agreement between the Registrant and Property Reserve Inc. dated
         September 16, 1999 (12)

10.18    Lease agreement between XET, Inc. and Rancho Cucamonga Development
         dated August 30, 1999 (12)

10.19    Lease Agreement between SCI Limited Partnership-I and CXR Telcom
         Corporation, Dated July 28, 1997 (13)

10.20    Lease agreement between XET Corporation and P&S Development (14)

10.21    General Partnership Agreement between XET Corporation and P&S
         Development (14)

10.22    Lease Agreement between XCEL Arnold Circuits, Inc. and RKR Associates
         (14)

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

10.24    Employment Agreement dated as of January 1, 2001 between the Registrant
         and Carmine T. Oliva (#) (16)

21.1     Subsidiaries of the Registrant (15)

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

----------
(#)      Management contract or compensatory plan, contract or arrangement
         required to be filed as an exhibit.
(1)      Incorporated by reference to the Registrant's current report on Form
         8-K for January 6, 1997 filed January 21, 1997 (File No. 1-10346)
(2)      Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 1997 (File No. 1-10346)
(3)      Incorporated by reference to the Registrant's interim report on Form
         10-Q for the three months ended March 31, 1999 (File No. 1-10346)
(4)      Incorporated by reference to the Registrant's quarterly report on Form
         10-Q for the quarter ended June 30, 2000 (File No. 1-10346)
(5)      Incorporated by reference to the Registrant's quarterly report on Form
         10-Q for the quarter ended September 30, 2000 (File No. 1-10346)
(6)      Incorporated by reference to the Registrant's current report on Form
         8-K for November 15, 2000 (File No. 1-10346)

                                       72

<PAGE>

(7)      Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 1999 (File No. 1-10346)
(8)      Incorporated by reference to the Registrant's interim report on Form
         10-Q for the six months ended June 30, 1998 (File No. 1-10346)
(9)      Incorporated by reference to the Registrant's registration statement on
         Form S-8 (Registration Statement No. 333-12567)
(10)     Incorporated by reference to the Registrant's definitive proxy
         statement for the annual meeting of stockholders to be held June 11,
         1998 (File No. 1-10346)
(11)     Incorporated by reference to the Registrant's definitive proxy
         statement for the special meeting of stockholders to be held January
         16, 2001 (File No. 1-10346)
(12)     Incorporated by reference to the Registrant's interim report on Form
         10-Q for the nine months ended September 30, 1999 (File No. 1-10346)
(13)     Incorporated by reference to the Registrant's registration statement on
         Form S-8 (Registration Statement No. 333-29925)
(14)     Incorporated by reference to the Registrant's annual report on Form
         10-K/A for the year ended December 31, 1996 (File No. 1-10346)
(15)     Incorporated by reference to Amendment No. 1 to Registrant's
         registration statement on Form S-1 (Registration Statement No.
         333-41580)
(16)     Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 2000 (File No. 1-10346)

                                       73

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) the Securities Act
of 1934, the Registrant has duly caused this Amended Report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 25th day of May,
2001.


                                          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 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.


SIGNATURE                              CAPACITY                       DATE
---------                              --------                       ----


/S/ Carmine T. Oliva           Chairman of the Board, President,    May 25, 2001
-----------------------------  Chief Executive Officer (Principal
Carmine T. Oliva               Executive Officer) and Director



/S/ Randolph D. Foote          Chief Financial Officer              May 25, 2001
-----------------------------  (Principal Accounting and
Randolph D. Foote              Financial Officer)



/S/ Laurence P. Finnegan, Jr.  Director                             May 25, 2001
-----------------------------
Laurence P. Finnegan, Jr.


/S/ Robert B. Runyon           Director                             May 25, 2001
-----------------------------
Robert B. Runyon

                                       74

<PAGE>

                         EXHIBITS FILED WITH THIS REPORT

Exhibit
Number   Description
------   -----------

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


                                       75





<PAGE>

                                                                    EXHIBIT 23.1


               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors

MicroTel International, Inc.



We hereby consent to the incorporation by reference in the Registration
Statements (Nos. 333-74281, 333-71035, 333-69571, 333-12567, 33-22518, 33-27454,
33-77926, 33-32271 and 33-32771) on Form S-8 of our report dated March 3, 2001,
relating to the consolidated financial statements and financial statement
schedule of MicroTel International, Inc. appearing in Amendment No. 2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.


                                                     /S/ BDO SEIDMAN, LLP


Orange County, California
May 25, 2001

                                       76