<PAGE>


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

                               AMENDMENT NO. 2 TO

                                    FORM 10-K

(Mark One)

    /X/  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

         For the fiscal year ended DECEMBER 31, 1999.

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

         For the transition period from ____________ to _____________.

                         Commission file number: 1-10346

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

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


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

Registrant's telephone number, including area code: (909) 297-2699

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.  / /

The aggregate market value of the voting stock held by nonaffiliates of the
registrant computed by reference to the price at which the stock was sold; or
the average bid and asked prices of such stock, was $4,803,360 at December 19,
2000.

The number of shares of the issuer's common stock, $.0033 par value, outstanding
as of December 19, 2000 was 20,569,759.

DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if
incorporated by reference, and the part of the Form 10-K (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933: NONE

<PAGE>

<TABLE>
<CAPTION>
                                     PART I

<S>                                                                                                <C>
ITEM 1.      DESCRIPTION OF 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.....................      45

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.............................      46

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

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................      61

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

                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.........................      67

SIGNATURES   ...............................................................................      68

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

EXHIBIT INDEX...............................................................................      69
</TABLE>




                                       2
<PAGE>

                                     PART I

ITEM 1.         DESCRIPTION OF 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 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, XIT Corporation. XIT 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 XIT Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of our company with and into XIT
Corporation. The merger involved an exchange by the former shareholders of XIT
Corporation of all of the outstanding shares of XIT Corporation for newly issued
shares of MicroTel International, Inc. representing a majority ownership
interest in MicroTel International, Inc. Because the merger resulted in a change
in control of MicroTel International, Inc., the merger was accounted for as a
reverse acquisition, and historical financial information of XIT Corporation is
used as the historical financial information of MicroTel International, Inc.

         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.

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

         Consequently, through our three direct wholly-owned operating
subsidiaries, XIT 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:


                                       3
<PAGE>

                  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 1999 were to customers in the telecommunications
industry, we also have significant sales to industrial, medical, 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 maintain our current
market-leading position as the supplier of choice for harsh environment switch
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;

                  --       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.


                                       4
<PAGE>

         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. Also, we believe that as multimedia companies and information
technology dependent companies emerge and expand, there will be an increased
demand for our turnkey solutions that include network design, installation and
maintenance.

      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, medical, 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,
medical and telecommunications segments. To support the myriad industrial,
commercial and government entities and agencies that rely on digital switches
and electronic power supplies, we believe that our electronic components must
offer high levels of reliability and in many cases must be tailored to the size,
appearance, functionality and pricing needs of each particular customer.

         The 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. In their 1999 annual forecast of the worldwide defense electronics
market, the Electronic Industry Association, or EIA, predicted an increase in
military electronics spending over the next ten years, while predicting a
decline in total defense spending over the same period. The EIA also predicted
in that same forecast that beginning in 1998, annual military spending on
electronics and information systems would increase by 13% year on year, over the
next ten years. The same report estimated that the United States military
market, which is a key market for our electronic components


                                       5
<PAGE>

business, represents an annual $51.5 billion of spending on electronics and
information systems. The market segments are clearly defined, and all are
experiencing high growth which is forecast to continue. This has lead to an
ever-increasing demand for our electronic components to be delivered in harsh
environments, necessitating custom solutions to meet both mechanical and
electrical constraints.

         The Digitran Division of our subsidiary XIT Corporation, which was
acquired by XIT 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. In addition, we provide customers with
turnkey solutions that include network design, installation and maintenance and
often incorporate our own networking products with products that we purchase
from third-party vendors. 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 industry knowledge and understanding of our customers'
environments, together with our hardware, software and firmware engineering
skills and 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 T-1 lines, which 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
power inputs. The design of many of our data transmission products enables them
to either interface or complement one another. The


                                       6
<PAGE>

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. 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
maintaining our market-leading position for our electronic switch and power
supply products 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. In
particular, we plan to extend the capabilities of our professional services and
customer support operations to provide higher levels of consultative services,
enhanced application engineering services and access to a wider array of
instrument, systems, software and services.


                                       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)

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 nine months
ended September 30, 2000 and 1999, the sale of telecommunications products,
equipment and related services accounted for approximately 50% and 53% of our
total revenues, respectively. These equipment and 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:

         --       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 megabytes
                           per second, or 44 Mbps, with 672 channels
                  --       Digital signal level 0, or DS0, which is 64 kilobytes
                           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


                                       9
<PAGE>

                  --       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 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.

         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



                                       10
<PAGE>
              PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

       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
                                             such as framing, line coding, 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

       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

                                       11
<PAGE>

      TRANSMISSION AND NETWORK ACCESS PRODUCTS

         Our subsidiaries, CXR Telcom Corporation and CXR, S.A., develop, market
and sell 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 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:

              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

                                       12
<PAGE>

              PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

       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:
                                            a. 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
                                            b. 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
                                            c. 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       These devices are the ISDN equivalent of a modem.
       ADAPTERS                     --       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

       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.


                                       13
<PAGE>

         NETWORKING SYSTEMS

         We also provide several lines of products used to build
telecommunication networks to provide efficient transmission of data, voice and
video for organizations with multiple physical locations. These products are all
purchased from third-party vendors under original equipment manufacturer or
distributorship agreements. These network products are sold to customers in a
turnkey solution that includes network design, installation and maintenance and
often incorporates our own products. These product lines are divided into three
main categories:

         --       multiplexers that are used to transport voice, data and video
                  over point-to-point lease lines or frame relay networks;

         --       ISDN routers, which are used to connect remote offices to
                  central corporate offices; and

         --       terminal servers and remote access servers, which are used to
                  connect local and remote users to the corporate LAN.

         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 nine month periods ended September 30,
2000 and 1999, this segment accounted for approximately 41% and 38%,
respectively, of our net sales.

      DIGITAL SWITCHES

         XIT Corporation's Digitran Division manufactures, assembles and sells
digital switch products serving aerospace, military, communications, medical,
industrial and commercial applications. 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.


                                       14
<PAGE>

         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;

         --       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 September 30, 2000 and 1999,
our backlog of firm, unshipped orders was approximately $11.4 million and $7.4
million, respectively. Our September 30, 2000 backlog is related approximately
80% 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 20% 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 21% of our electronic
components orders and 60% of our telecommunications orders within fiscal 2000.
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.


                                       15
<PAGE>

      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.

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. Some of the more prominent customers, among many others, to
whom we market our telecommunications test instruments and transmission and
network access products include the Federal Aviation Administration, all RBOCs
and some CLECs, domestically, and France Telecom and the French Post Office, in
Europe.

         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.

         We also sell our telecommunications test instruments and transmission
and network access products and services to industrial and military customers
such as the French Army. None of our telecommunications test instruments,
transmission or network access products customers represented more than ten
percent of our revenues during 1999.

      ELECTRONIC COMPONENTS

         We sell our components primarily to original equipment manufacturers in
the electronics industry, including manufacturers of aerospace and military
systems, communications equipment, medical devices, industrial instruments and
test equipment. Purchasers of our digital switches include BAE Systems,


                                       16
<PAGE>

Lockheed Martin Corporation, Raytheon Company, The Boeing Company, Litton
Industries Inc., Hewlett-Packard Company and Rockwell International Inc.
Purchasers of our electronic power supplies include BAE Systems, Sagem, Marconi,
Teldix, Alsthom, GEC and Ferranti. None of our electronic components customers
represented more than 10 percent of our total revenues during 1999 or the nine
months ended September 30, 2000.

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 center.

         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 do 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 XIT Corporation's
Digitran Division, based in Rancho Cucamonga, California, XCEL Corporation Ltd.,
a wholly-owned subsidiary of XIT 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 XIT 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. As of September 30, 2000, we employed in our electronic components
business approximately eight direct sales personnel.


                                       17
<PAGE>

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

         XCEL Japan Ltd. resells the switch and keypad products of the Digitran
Division and other third-party United States-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 and 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 and breadth of product offerings;
         --       adaptability to evolving technologies and standards;
         --       ability to address and adapt to individual customer
                  requirements;
         --       speed of new product introductions to market;
         --       depth and breadth of customer relationships;
         --       price and financing terms;
         --       research and design capabilities;
         --       strength of distribution channels;
         --       ability to attract and retain qualified management and
                  technical personnel;
         --       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. Many of our
competitors have greater sales, marketing, technological, research and financial
resources than we do. Although we believe we generally compete favorably with
respect to the above factors, existing or new competitors with significant
market presence and financial resources may reduce our market share.


                                       18
<PAGE>

      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;
         --       reliable delivery;
         --       depth and breadth of customer relationships;
         --       ability to attract and retain qualified management and
                  technical personnel; and
         --       compliance with government and industry standards.

         We have developed the necessary expertise and reputation for quality
and have made substantial investments in machinery and equipment tooling, and
this expertise and these investments act 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.

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 modem 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.


                                       19
<PAGE>

         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.

         Accordingly, for the years ended December 31, 1999, 1998 and 1997, our
engineering and product development costs were approximately $1.87 million,
$2.45 million and $2.05 million, respectively. The decline in these expenses in
1999 as compared to 1998 was primarily due to XIT Corporation's sale of
substantially all of the assets of HyComp, Inc. in April 1999, as the net 1999
expenses represent a slight increase exclusive of HyComp, Inc.

         Our product development costs in 1999, 1998 and 1997 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
such 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


                                       20
<PAGE>

patents in the fields of telecommunications and information technology involve
highly technical and subjective analyses. These kinds of proceedings are time
consuming and expensive to defend or resolve, result in substantial diversion of
management resources, cause product shipment delays or could force us to enter
into royalty or license agreements rather than dispute the merits of the
proceeding initiated against us.

GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the United States Federal Communications Commission, or
FCC, and Underwriters Laboratories as well as industry standards established by
Telcordia Technologies, Inc., formerly Bellcore, and the American National
Standards Institute. Internationally, our products must comply with standards
established by the European Committee for Electrotechnical Standardization, the
European Committee for Standardization, the European Telecommunications
Standards Institute, 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 September 30, 2000, we employed a total of 251 persons in our
various divisions and subsidiaries. Of these persons, approximately 37 were
engaged in administration, 36 were engaged in sales and marketing, 27 were
engaged in engineering and 151 were engaged in production operations. Of these
persons, 126 were employed in the United States, 72 were employed in England, 49
were employed in France and 4 were employed in Japan. 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 December 8, 2000, we leased or owned approximately 80,000 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,                 Administrative
(corporate headquarters)                         California

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

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

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 Concord, California
facility expires April 30, 2001, with options to renew until April 2016. 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, XIT 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 XIT
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


                                       22
<PAGE>

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 November 2004, and the lease on the
headquarters facility expires in October 2002. Concurrent with the relocation,
XIT 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
certain 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. The prices shown reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                                               PRICE RANGE
                                                                       ---------------------------
                                                                       LOW                HIGH
                                                                       ---                ----
<S>                                                                     <C>               <C>
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
</TABLE>

         As of November 20, 2000, we had 20,569,759 shares of common stock
outstanding held of record by approximately 3,576 stockholders, and the high and
low bid prices of our common stock on the OTC Bulletin Board were $.43 and $.40,
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. 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 June and July 1998, the Registrant sold 200 shares of Series A
Preferred Stock for $10,000 per share to three institutional investors. Each
share of Series A Preferred Stock is convertible at a conversion price 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 40 trading days immediately prior to
the date of conversion. The shares 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, which warrants were later modified in November 1998 and
December 1999 to provide for exercise prices of $0.75 per share and $0.25 per
share, respectively, and to extend their expiration dates from May 22, 2001 to
December 22, 2002.

         In December 1998, the Registrant issued warrants to purchase up to
152,381 shares of common stock at an exercise price of $0.66 per share to one
entity in exchange for an option to purchase from the entity an ownership
interest in Digital Transmission Systems, Inc. In January 1999, the Registrant
exercised its option by issuing 1,000,000 shares of common stock valued at
$1,000,000 in exchange for 41% of the outstanding common stock of Digital
Transmission Systems, Inc.

         Between January and November 1999, the Registrant issued an aggregate
of 2,659,011 shares of common stock to three investors in connection with their
conversions of an aggregate of 102 shares of Series A Preferred Stock.

         In January 1999, the Registrant issued 250,000 shares of common stock
valued at $225,675 to its then legal counsel in connection with legal services
rendered.

         In January 1999, the Registrant issued 200,000 shares of common stock
valued at $193,140 to an investor relations consultant in exchange for services
rendered.

         In March 1999, the Registrant issued an aggregate of 150,000 shares of
common stock valued at $72,510 to two individuals and one entity in connection
with the settlement of litigation.

         In March and April 1999, the Registrant issued an aggregate of 635,000
shares of common stock valued at $263,435 to two individuals for investor
relations consulting services rendered.

         In March 1999, the Registrant issued an aggregate of 75,000 shares of
common stock valued at $32,603 to three individuals for consulting services
rendered.

         In June 1999, the Registrant issued an aggregate of 555,641 shares of
common stock valued at $362,667 to two employees who were former principals of
Critical Communications Incorporated in connection with an earn out arrangement.


                                       25
<PAGE>

ITEM 6.         SELECTED FINANCIAL DATA.

         The following selected consolidated financial data is qualified in its
entirety by and 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 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 are derived from, and are qualified by reference
to, the consolidated audited financial statements included elsewhere in this
report.


<TABLE>
<CAPTION>
                                                                   THREE MONTHS
CONSOLIDATED STATEMENTS OF OPERATIONS AND                             ENDED
COMPREHENSIVE INCOME DATA:                    YEAR ENDED SEPT. 30,   DEC. 31,         YEAR ENDED DEC. 31,
                                              --------------------   --------     ---------------------------
                                                1995       1996        1996        1997        1998        1999
                                                ----       ----        ----        ----        ----        ----
                                                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                          <C>        <C>         <C>         <C>         <C>         <C>
Net sales ................................   $ 19,602   $ 31,249    $  7,886    $ 43,098    $ 37,261    $ 28,301
Cost of sales ............................     14,332     23,057       6,680      32,670      23,871      19,659
                                             --------   --------    --------    --------    --------    --------
Gross profit .............................      5,270      8,192       1,206      10,428      13,390       8,642
Selling, general and administrative
   expenses ..............................      4,870      6,379       1,816      11,361      11,826      10,795
Engineering and product development
   expenses ..............................        328        309          69       2,046       2,454       1,873
Write-down of goodwill ...................         --         --          --       5,693          --          --
                                             --------   --------    --------    --------    --------    --------
Income (loss) from operations ............         72      1,504        (679)     (8,672)       (890)     (4,026)
Other income (expense), net ..............        274       (399)       (196)       (924)       (194)       (442)
                                             --------   --------    --------    --------    --------    --------
Income (loss) before income taxes ........        346      1,105        (875)     (9,596)     (1,084)     (4,468)
Income tax (benefit) expense .............          9         22          30          97         101         128
                                             --------   --------    --------    --------    --------    --------
Net income (loss) ........................   $    337   $  1,083    $   (905)   $ (9,693)   $ (1,185)   $ (4,596)
                                             --------   --------    --------    --------    --------    --------
Other comprehensive gain (loss) ..........         10        (89)        126        (260)        206        (325)
                                             --------   --------    --------    --------    --------    --------
Total comprehensive income (loss) ........   $    347   $    994    $   (779)   $ (9,953)   $   (979)   $ (4,921)
                                             ========   ========    ========    ========    ========    ========
Basic earnings (loss) per share ..........   $    .07   $    .17    $   (.15)   $   (.96)   $   (.10)   $   (.28)
                                             ========   ========    ========    ========    ========    ========
Diluted earnings (loss) per share ........   $    .07   $    .17    $   (.15)   $   (.96)   $   (.10)   $   (.28)
                                             ========   ========    ========    ========    ========    ========
Weighted average shares outstanding, basic
and diluted ..............................      4,995      5,841       6,064      10,137      11,952      16,638
                                             ========   ========    ========    ========    ========    ========


                                              AS OF SEPTEMBER 30,                  AS OF DECEMBER 31,
                                              -------------------        ------------------------------------
                                                1995       1996        1996        1997        1998        1999
                                                ----       ----        ----        ----        ----        ----
CONSOLIDATED BALANCE SHEET DATA:                                                     (IN THOUSANDS)
Working capital ..........................   $  1,015   $  2,163    $  1,525    $  1,823    $  3,787    $    474
Total assets .............................     15,955     19,613      20,564      25,440      21,242      16,621
Total liabilities ........................     10,656     12,993      14,723      18,711      14,244      12,232
Total stockholders' equity ...............      4,464      5,845       5,047       6,015       5,482       3,801
Redeemable preferred stock ...............        835        775         794         714       1,516         588
</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 XIT Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XIT Corporation on March 26, 1997.

         The historical financial data above for periods prior to the merger is
that of XIT Corporation. In conjunction with the reverse acquisition accounting
treatment, XIT 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 XIT Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.


                                       26
<PAGE>

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

         This Annual Report on Form 10-K contains certain 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. 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;
         --       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,
and, in particular, in the "Risk Factors" section herein, that discuss our
business in greater detail and that also disclose various risks, uncertainties
and other factors that may affect our business, results of operations or
financial condition.

         Any of the factors described alone or in the "Risk Factors" section
could cause our financial results, including our net income (loss) or growth in
net income (loss) to differ materially from prior results.

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 and CXR, S.A., a company organized under the laws of France. These
two subsidiaries manufacture, assemble and distribute transmission and network
access products and telecommunications 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, XIT Corporation. XIT 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 XIT Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of our company with and into XIT
Corporation. The merger involved an exchange by the former shareholders of XIT
Corporation of all of the outstanding shares of XIT Corporation for newly issued
shares of MicroTel International, Inc. representing a majority ownership
interest in MicroTel International, Inc. Because the merger resulted in a change
in control of MicroTel International, Inc., the merger was accounted for as a
reverse acquisition, and historical financial information of XIT Corporation is
used as the historical financial information of MicroTel International, Inc.


                                       27
<PAGE>

         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.

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

         Consequently, through our three direct wholly-owned operating
subsidiaries, XIT 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 1999 were to customers in the telecommunications
industry, we also have significant sales to industrial, medical, 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, certain
statement of operations data expressed as a percentage of total net sales.

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                   ------------------------
                                                  1997      1998      1999
                                                  ----      ----      ----
<S>                                              <C>       <C>       <C>
Net sales ..................................     100.0%    100.0%    100.0%
Cost of sales ..............................      75.8      64.1      69.5
Gross profit ...............................      24.2      35.9      30.5
Selling, general and administrative expenses      26.4      31.7      38.1
Engineering and product development expenses       4.7       6.6       6.6
Goodwill write-off                                13.2        --        --
Operating income (loss) ....................     (20.1)     (2.4)    (14.2)
Interest expense ...........................      (2.1)     (1.8)     (1.5)
Other income (expense) .....................      (0.1)      1.3      (0.1)
Loss before income taxes ...................     (22.3)     (2.9)    (15.8)
Income taxes ...............................       0.2       0.3       0.4
Net loss                                         (22.5)     (3.2)    (16.2)
</TABLE>


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

         NET SALES. Net sales for the year ended December 31, 1999 decreased by
$8,960,000 (24.1%) to $28,301,000 as compared to $37,261,000 for the year ended
December 31, 1998. Our net sales for 1999 primarily consisted of
telecommunications products and services, including instrumentation and test
equipment; electronic components, including digital switches and keypads and
electronic power supplies; and, to a lesser extent, circuit board products.

         Net sales for our telecommunications segment 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 that we purchased from Critical
Communications Incorporated in October 1997 because the older models were not
computer compatible and were larger and heavier than the newer models. Sales of
our older models, which totaled $615,000 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. The increase in sales by CXR, S.A. was
not fully recognized by us as a result of a 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 1.5% less in 1999 than
in 1998.

         Net sales for our electronic components segment decreased by $2,332,000
(18.8%) to $10,080,000 for 1999 as compared to $12,412,000 for 1998 primarily
due to the discontinuance of our XCEL-Lite products, which represented no sales
in 1999 as compared to $576,000 in 1998 and discontinuance of our low margin
subsystem assembly business, which represented a total of a $404,000 sales in
1999 as compared to $696,000 in 1998.


                                       29
<PAGE>

         Net sales for our circuits business decreased by $4,762,000 (65.1%) for
1999 to $2,555,000 as compared to $7,317,000 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, and due to 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. Gross profit as a percentage of total net sales decreased
to 30.5% for 1999 as compared to 35.9% for 1998. In dollar terms, total gross
profit decreased by $4,748,000 (35.5%) to $8,642,000 for 1999 as compared to
$13,390,000 for 1998.

         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
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 $1,044,000 (22.5%) to $3,606,000 for 1999 as compared to
$4,650,000 for 1998 and decreased as a percentage of related net sales from
37.5% in 1998 to 35.8% in 1999 primarily due to additional costs incurred in
connection with the move from the Ontario facility to our Rancho Cucamonga
facility.

         Gross profit for our circuits business decreased in total dollar terms
by $868,000 (126.2%) to a negative gross profit of $180,000 in 1999 as compared
to gross profit of $688,000 for 1998 and decreased as a percentage of related
net sales from 9.4% in 1998 to a 3.4% in 1999 primarily due to the sale of
HyComp, Inc. in 1999, which contributed $1,042,000 to 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.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $1,031,000 (8.7%) to $10,795,000 for 1999
as compared to $11,826,000 for 1998. This decrease is largely attributable to a
$1,144,000 reduction in selling expenses, $475,000 of which was a result of the
divestitures of HyComp, Inc. due to its declining sales volume and potential
losses and technological changes in the industry and XCEL Arnold Circuits due to
its declining sales, losses and technological changes in the industry, and
$669,000 of which was a result of a reduction in sales volume, cost reductions
in our telecommunications segment and the elimination of product lines in our
electronic component segment that required substantial selling efforts. In
addition, our general and administrative expenses increased by $113,000 (1.8%)
to $6,542,000 for 1999 as compared to $6,429,000 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 company's visibility within the investment community
and due to advertising and other promotional costs. Offsetting such increases
in general and administrative expenses were reductions in expenses due to the
transfer of the administrative functions of


                                       30
<PAGE>

CXR Telcom to our corporate office and the reduction in such expenses as a
result of the divestitures of XCEL Arnold Circuits, Inc. and HyComp, Inc.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment, and these expenses decreased
by $581,000 (23.7%) to $1,873,000 in 1999 as compared to $2,454,000 for 1998.
This reduction occurred across all segments but was most notably due to the
completion of initial engineering for our new CXR HALCYON 700 series of
telecommunications test equipment. In addition, $219,000 of this reduction was
due to the divestiture of HyComp, Inc. on March 31, 1999. Also, in May 1999, we
eliminated the CXR engineering function in Fremont, California, which resulted
in a reduction of engineering expenses by $294,000. The remaining engineering
staff for our United States-based test equipment products is primarily housed
in our St. Charles, Illinois facility. We believe that engineering and product
development are important to our future profitability. All engineering for our
instrumentation 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 expenses of $675,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.
Other expenses, net of $390,000 in 1999 include a $452,000 write-off of a note
receivable related to the divestiture of XCEL Arnold Circuits, Inc. This expense
was offset with the net effect of the equity in earnings of an unconsolidated
subsidiary and the write-down of our investment in this subsidiary, which
subsidiary has since been sold.

         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. Such 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 such assets is not more likely than not in light of our recurring
losses from operations.

      YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

         NET SALES. Net sales for the year ended December 31, 1998 decreased by
$5,837,000 (13.5%) to $37,261,000 as compared to $43,098,000 for the year ended
December 31, 1997.

         Net Sales for our telecommunications segment increased by $2,478,000
(16.5%) to $17,532,000 for 1998 as compared to $15,054,000 for 1997 primarily
due to increased sales of our subsidiary CXR, S.A. This increase in CXR, S.A.'s
net sales was partially offset by a slight decline in sales of our CXR Telecom
business unit as a result of the earliest growth in sales of our new test
instruments not fully offsetting the decline in sales of our older model test
instruments.

         Net sales for our electronic components segment increased slightly by
$215,000 (1.8%) to $12,412,000 for 1998 as compared to $12,197,000 for 1997
primarily due to an increase in sales of digital switch products of $1,434,000.
This increase offset a $756,000 decline in sales of custom engineered subsystem
components, which sales have since been discontinued.

         Net sales for our circuits business decreased by $8,530,000 (53.8%) to
$7,317,000 for 1998 as compared to $15,847,000 for 1997 primarily due to the
sale of XCEL Arnold Circuits, Inc. on March 31, 1998 as well as a decrease in
sales for XIT Corporation's XCEL Etch Tek Division of approximately $1.0
million. This decrease in sales was due in large part to our inability to obtain
sufficient working capital to acquire the necessary raw materials and process
supplies to accept higher levels of "quick-turn" order commitments.


                                       31
<PAGE>

         GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 35.9% for 1998 as compared to 24.2% for 1997. In dollar terms, total gross
profit increased by $2,962,000 (28.4%) to $13,390,000 for 1998 as compared to
$10,428,000 for 1997.

         Gross profit for our telecommunications segment increased in dollar
terms by $1,733,000 (27.4%) to $8,052,000 for 1998 as compared to $6,319,000 for
1997 and increased as a percentage of related net sales from 42.0% in 1997 to
45.9% in 1998 primarily due to the fact that a larger portion of total sales in
this segment came from high margin products, including our new line of test
instruments at our CXR Telcom subsidiary. In addition, the sales mix at our CXR,
S.A. subsidiary shifted to higher margin, internally manufactured products.

         Gross profit for our electronic components segment increased in dollar
terms by $1,787,000 (62.4%) to $4,650,000 for 1998 as compared to $2,863,000 for
1997 and increased as a percentage of related net sales from 23.5% in 1997 to
37.5% in 1998 primarily due to a favorable shift in product mix to higher margin
digital switch products and custom power supply products.

         Gross profit for our circuits business decreased in dollar terms by
$558,000 (44.8%) to $688,000 for 1998 as compared to $1,246,000 for 1997 and
increased as a percentage of related net sales from 7.9% in 1997 to 9.4% in 1998
primarily due to higher costs of sales for our Etch-Tek division in 1998 as
compared to 1997 due to the underabsorption of fixed manufacturing costs related
to declining sales levels.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $465,000 (4.1%) to $11,826,000 for 1998 as
compared to $11,361,000 for 1997. This slight increase was primarily due to an
increase in selling expense, which includes sales and marketing expenses
associated with the inclusion of operations of CXR Telcom and CXR, S.A. for the
entire twelve months of 1998 as compared to nine months in 1997, which increase
was offset by lower commission expenses in 1998 as compared to 1997. In
addition, general and administrative expenses increased by $269,000 (4.4%) to
$6,429,000 for 1998 as compared to $6,160,000 for 1997 primarily due to the
inclusion of operations of CXR Telcom and CXR, S.A. for the entire twelve months
of 1998 as compared to only nine months in 1997 and due to increased legal fees.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment and increased by $408,000 (19.9%)
to $2,454,000 in 1998 as compared to $2,046,000 in 1997 primarily due to an
increase in our engineering staff associated with the introduction of new test
instruments.

         OTHER INCOME AND EXPENSE. Interest expense decreased $220,000 from
$895,000 for 1997 to $675,000 for 1998 primarily due to a decrease in average
borrowings during 1998. Fluctuations in other expense (income), net resulted
principally from differences in foreign currency exchange gains and losses
incurred during the respective periods. Other income in 1998 also included the
gain on the sale of XCEL Arnold Circuits, Inc. of $580,000.

         INCOME TAXES. Income taxes, while nominal in both respective periods,
consists primarily of foreign taxes as we are in a loss carryforward position
for federal income tax purposes. At December 31, 1998, we had total net deferred
income tax assets of approximately $16,591,000. These potential income tax
benefits, a significant portion of which relate to net operating loss
carryforwards, have been subjected to a 100% valuation allowance since
realization of such assets is not more likely than not in light of our recurring
losses from operations.


                                       32
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         During the year ended December 31, 1999, we funded our operations
primarily through proceeds from our prior line of credit with Congress Financial
Corporation or Congress Financial, and revenue generated from our operations.
During the nine months ended September 30, 2000, we continued to fund our
operations through revenue generated from our operations and through a 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 new line
of credit, have had a positive impact on our company.

         As of December 31, 1999 we had working capital of $474,000 and an
accumulated deficit of $19,759,000. As of that date, we had $481,000 in cash and
cash equivalents and $6,519,000 of accounts receivable. As of September 30, 2000
we had working capital of $2,717,000 and an accumulated deficit of $19,414,000.
As of that date, we had $694,000 in cash and cash equivalents and $5,804,000 of
accounts receivable.

         Cash used in our operating activities totaled $619,000 for the nine
months ended September 30, 2000 as compared to cash provided by operating
activities of $579,000 for the nine months ended September 30, 1999. This
decrease in cash provided by operations during the nine months ended September
30, 2000 resulted primarily from payments of $2,668,000 to reduce accounts
payable and accrued expenses. This decrease was partially offset by our vigorous
accounts receivable collection efforts which provided cash of $1,179,000 during
this period.

         Cash provided by our investing activities totaled $791,000 for the nine
months ended September 30, 2000 as compared to cash used in investing activities
of $121,000 for the nine months ended September 30, 1999. Included in the
current period's results is $520,000 from the sale in January 2000 of shares of
common stock we held in Digital Transmission Systems, Inc., which shares we
acquired in January 1999 in connection with our entry into the wireless
telecommunications business, and $918,000 from the sale of shares of common
stock we held in 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 $83,000 in cash.

         Cash provided by financing activities totaled $389,000 for the nine
months ended September 30, 2000 as compared to cash used of $685,000 for the
nine months ended September 30, 1999 primarily due to the reduction in notes
payable and long term debt.

         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, we 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. 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 current and
expected financial performance, we anticipate 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 balance outstanding under
this credit facility was $2,144,000 on September 30, 2000. There was $342,000 of
additional borrowings available as of September 30, 2000. The credit facility
expires on August 23, 2003. Our foreign


                                       33
<PAGE>

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.

         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.

         The consolidated financial statements included in this report have been
prepared assuming we will continue as a going concern. During the years ended
December 31, 1999, 1998 and 1997, we experienced significant operating losses.
Additionally, we were in default of our previously outstanding domestic credit
facility agreement because we were not in compliance with an adjusted net worth
covenant contained in that agreement. These factors raised substantial doubt
about our ability to continue as a going concern and led our independent
certified public accountants to modify their unqualified opinion to include an
explanatory paragraph related to our ability to continue as a going concern. The
consolidated financial statements included in this report do not include any
adjustments that might result from the outcome of this uncertainty. Although we
have reported income from continuing operations for the nine months ended
September 30, 2000 and we have replaced our previous domestic credit facility,
there can be no assurance that we will continue to be profitable or that we will
be able to generate necessary additional capital in the future.

IMPACT OF YEAR 2000

         To date, we have not experienced any material effects related to
computer operations and the arrival of the year 2000. Management does not expect
any disruptions due to the year 2000, because management believes all its
current systems are year 2000 compliant.

         At some of our domestic facilities, we installed accounting and
operations management computer applications that are year 2000 compliant and
operate on computer operating systems that are also year 2000 compliant. We did
not initiate these changes in application and operating software systems in
order to accommodate the year 2000 issue but rather to upgrade and enhance its
management information systems capability. As a part of our selection criteria,
we considered the impact of the year 2000 issue. We have not experienced year
2000 disruptions with our suppliers or customers, and management believes that
our suppliers and customers are year 2000 compliant with respect to their
systems that could affect us.

         Although no significant problems have materialized to date, we will
continue to monitor our systems throughout the year 2000.

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 36% of our total net sales
for the nine months ended September 30, 2000. Net sales from the French
subsidiary participating in the Euro conversion were 27% of our net sales for
the


                                       34
<PAGE>

nine months ended September 30, 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 such 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

         The following table sets forth certain quarterly financial data for the
quarters indicated. 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                                        QUARTER ENDED
  AND COMPREHENSIVE INCOME  DATA                                            ---------------
                                        MAR 31,     JUNE 30,    SEPT 30,    DEC 31,    MAR 31,    JUNE 30,    SEPT 30,      DEC 31,
                                         1998        1998        1998        1998       1999        1999        1999         1999
                                         ----        ----        ----        ----       ----        ----        ----         ----
                                                                             (IN THOUSANDS)
<S>                                    <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Net sales ..........................   $  9,742    $  8,971    $  9,112    $  9,436    $  7,510    $  6,801    $  6,952    $  7,038
Cost of sales ......................      7,506       5,555       5,554       5,256       4,904       4,411       4,729       5,615
                                       --------    --------    --------    --------    --------    --------    --------    --------
Gross profit .......................      2,236       3,416       3,558       4,180       2,606       2,390       2,223       1,423
Selling, general and administrative
  expenses .........................      3,119       2,796       2,759       3,152       3,716       2,890       2,488       1,701
Engineering and product development
  expenses .........................        571         574         640         669         558         477         459         379
                                       --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) from operations ......     (1,454)         46         159         359      (1,668)       (977)       (724)       (657)
Other income (expenses),  net ......        521        (242)       (220)       (253)        701          68        (298)       (913)
                                       --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) before income taxes ..       (933)       (196)        (61)        106        (967)       (909)     (1,022)     (1,570)
Income tax (benefit) expense .......         15          22           5          59           8           5          12         103
Net income (loss) ..................   $   (948)   $   (218)   $    (66)   $     47    $   (975)   $   (914)   $ (1,034)   $ (1,673)
                                       --------    --------    --------    --------    --------    --------    --------    --------
Other comprehensive gain (loss), net
                                            102         (54)       (118)        276        (263)       (161)        244        (145)
                                       --------    --------    --------    --------    --------    --------    --------    --------
Total comprehensive gain (loss)
                                       $   (846)   $   (272)   $   (184)   $    323    $ (1,238)   $ (1,075)   $   (790)   $ (1,818)
                                       ========    ========    ========    ========    ========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
  AND COMPREHENSIVE INCOME  DATA                                     AS A PERCENTAGE OF NET SALES
                                                                    ------------------------------
                                        MAR 31,     JUNE 30,    SEPT 30,    DEC 31,    MAR 31,    JUNE 30,    SEPT 30,      DEC 31,
                                         1998        1998        1998        1998       1999        1999        1999         1999
                                         ----        ----        ----        ----       ----        ----        ----         ----
                                                                           (IN THOUSANDS)
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Net sales ..........................       100%        100%        100%        100%        100%        100%        100%        100%
Cost of sales ......................        77%         62%         61%         56%         65%         65%         68%         80%
                                      --------    --------    --------    --------    --------    --------    --------    --------
Gross profit .......................        23%         38%         39%         44%         35%         35%         32%         20%
Selling, general and administrative
  expenses .........................        32%         31%         30%         33%         50%         42%         36%         24%
Engineering and product development
  expenses .........................         6%          6%          7%          7%          7%          7%          7%          5%
                                      --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) from operations ......       (15)%         1%          2%          4%        (22)%       (14)%       (11)%        (9)%
Other income (expenses),  net ......        (5)%        (3)%        (3)%        (3)%         9%          1%         (4)%       (13)%
                                      --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) before income taxes ..       (10)%        (2)%        (1)%         1%        (13)%       (13)%       (15)%       (22)%
Income tax (benefit) expense .......        --          --          --           1%         --          --          --          (2)%
Net income (loss) ..................       (10)%        (2)%        (1)%        --         (13)%       (13)%       (15)%       (24)%
                                      --------    --------    --------    --------    --------    --------    --------    --------
Other comprehensive gain (loss), net         1%         (1)         (1)%         3%         (4)%        (3)%         4%         (2)%
                                      --------    --------    --------    --------    --------    --------    --------    --------
Total comprehensive gain (loss) ....         9%         (3)%        (2%          3%        (17)%       (16)%       (11)%       (26)%
                                      ========    ========    ========    ========    ========    ========    ========    ========
</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.

         For the quarter ended March 31, 1998, we recorded in other income a
gain of $670,000 on the sale of our XCEL Arnold Circuits, Inc. subsidiary. Sales
in the quarter ended June 30, 1998 declined $771,000 (7.9%) to $8,971,000 as
compared to $9,742,000 for the quarter ended March 31, 1998. This reduction in
net sales for the quarter ended June 30, 1998 was primarily caused by the sale
of XCEL Arnold Circuits, Inc., which was partially offset by a $604,000 increase
in net sales of our electronic components segment during that quarter. The
divestiture of XCEL Arnold Circuits, Inc. and the increase in net sales of our
electronic components segment were primary factors in the reduction of our net
loss in the quarter ended June 30, 1998 to $218,000 from a net loss of $948,000
in the quarter ended March 31, 1998.

         During the quarter ended September 30, 1998, our net sales increased
slightly by $141,000 (2%) to $9,112,000 as compared to $8,971,000 for the
quarter ended June 30, 1998, and our net loss was reduced $152,000 (70%) to
$66,000 for the quarter ended September, 30, 1998 as compared to $218,000 for
the


                                       36
<PAGE>

quarter ended June 30, 1998. The improvement in our results of operations was
primarily due to an increase in sales of our higher margin electronic
components, which increase offset slightly lower sales in our telecommunications
and circuit segments.

         During the quarter ended December 31, 1998, our net sales and net
income again improved due to increased sales in our telecommunications segment.
Net sales increased by $324,000 (4%) to $9,436,000 for the quarter ended
December 31, 1998 as compared to $9,112,000 for the quarter ended September 30,
1998. We recorded net income of $47,000 in the quarter ended December 31, 1998
as compared to a net loss of $66,000 for the quarter ended September 30, 1998,
mainly due to higher net sales and an increase in gross margins from 39% for the
quarter ended September 30, 1998 to 44% for the quarter ended December 31, 1998.

         Net sales for the first quarter of 1999 were lower than net sales for
the first quarter of 1998 by $2,232,000 (23%) primarily because of a lower
volume of circuits segment sales. This lower volume of lower margin circuits
segment sales resulted in an increase in gross margins to 34.7% for the quarter
ended March 31, 1999 as compared to gross margins of 23.0% for the quarter ended
March 31, 1998. However, this lower volume of sales also contributed to a
$975,000 net loss in the first quarter of 1999. Another factor that contributed
to the net loss for the quarter ended March 31, 1999 was $522,000 of
administrative expense incurred when we hired a series of investor relations
consultants and incurred print and Internet media costs to assist in promoting
us in a positive light to the investment community with the hopes that
investors would support us, purchase our common stock and thereby maintain the
bid price at a level that would have enabled us to maintain the listing of our
common stock on the Nasdaq SmallCap Market.

         Net sales for the quarter ended June 30, 1999 decreased to $6,801,000,
which was a decrease of $709,000 (9%) from $7,510,000 for the quarter ended
March 31, 1999 and a decrease of $2,170,000 (24%) from $8,971,000 for the
quarter ended June 30, 1998. These decreases in net sales were primarily caused
by the sale of our HyComp, Inc. subsidiary which was part of our circuits
segment and sales declines in our telecommunications and electronic components
segments. The net loss of $914,000 for the quarter ended June 30, 1999 included
a net write-off of $440,000 for a note receivable obtained in partial
consideration for our sale of XCEL Arnold Circuits, Inc.

         The quarter ended September 30, 1999 produced net sales of $6,952,000,
which were $2,160,000 (24%) less than net sales of $9,112,000 for the quarter
ended September 30, 1998. The reduction in net sales was primarily due to the
sale of HyComp, Inc., lower circuits segment sales and 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 $12,658 during the
quarter ended September 30, 1999, declined at a faster rate than the increase in
sales of our new models, which sales totaled $757,746 during the quarter ended
September 30, 1999. A net loss of $1,034,000 was incurred in the third quarter
of 1999.

         Sales for the quarter ended December 31, 1999 were $7,038,000, which
was a decrease of $2,398,000 (25%) from $9,436,000 for the quarter ended
December 31, 1998. This reduction was mainly due to lower sales for our circuits
segment and our telecommunications test equipment in the quarter ended December
31, 1999 as compared to sales of these products for the quarter ended December
31, 1998. 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 of $1,673,000 for the fourth quarter of 1999.


                                       37
<PAGE>

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.

         Our consolidated financial statements have been prepared assuming we
will continue as a going concern. We incurred significant net operating losses
in each of the years ended December 31, 1999, 1998 and 1997. 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 and a net loss of approximately $9.7 for
the twelve months ended December 31, 1997. Additionally, we were in default of
our previously outstanding domestic credit facility agreement because we were
not in compliance with an adjusted net worth covenant contained in that
agreement. These factors raised substantial doubt about our ability to continue
as a going concern and led our independent certified public accountants to
modify their unqualified opinion to include an explanatory paragraph related to
our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

         For the nine-month period ended September 30, 2000, we reported net
income of approximately $0.4 million. Our accumulated deficit and accumulated
comprehensive loss through September 30, 2000 were approximately $19.4 million
and $0.7 million, respectively, and as of that date we had a total stockholders'
equity of approximately $5.3 million. We expect to realize net income during the
quarter and year ended December 31, 2000. However, there is no assurance that we
actually will realize net income for these periods or 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, if
needed, through debt or equity financing.

FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY WHICH 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.
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.

THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE. WE EXPECT THEM TO BECOME
MORE COMPETITIVE IN THE FUTURE, WHICH COULD RESULT IN SIGNIFICANT PRICE
COMPETITION, REDUCED REVENUES, LOWER PROFIT MARGINS OR LOSS OF MARKET SHARE.

         The telecommunications and electronic components markets are highly
competitive. These markets may experience pricing and margin pressure that could
adversely affect our business, financial condition and operating results. A
number of development stage companies and major domestic and international
companies offer products and services within the same markets that we target.
Some of our competitors and potential competitors have larger technical staffs,
more established and larger marketing


                                       38
<PAGE>

and sales organizations and significantly greater financial resources than us.
Our competitors may develop products and services that are superior to ours or
that achieve greater market acceptance. Our future success will depend
significantly upon our ability to increase our share of our target markets and
to sell additional products, product enhancements and services to our customers.
Competition may decrease:

         --       our market share;
         --       the prices we receive for our products and services;
         --       our revenues; and/or
         --       our profit margins.

Any of these decreases could adversely affect our business, financial condition
and operating results. As a result, we may not be able to compete successfully.

IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH THE RAPID CHANGES
INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES.

         The electronic components and telecommunications industries are
characterized by rapid technological advances, changes in customer requirements,
evolving industry standards and frequent new product and services introductions
and enhancements. New products and services based on new technologies or new
industry standards may quickly render existing products and services obsolete.
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 markets in
which we compete, encompass evolving customer requirements and achieve market
acceptance. Any failure on our part to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in developing or introducing new products and services, could result in a loss
of competitiveness, revenues, profit margins or market share. There is no
assurance that any new products, services or enhancements which we develop will
achieve market acceptance.

WE RELY ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF ANY
SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION.

         We derive a significant portion of our revenues from a relatively
limited number of customers. For the nine months ended September 30, 2000, our
ten largest customers accounted for approximately 36% of our revenues. We
anticipate that our ten largest customers will continue to account for a large
portion of our revenues for the foreseeable future. The loss of any one or more
of these major customers would likely have a material adverse effect on our
business, prospects, financial condition, results of operations and cash flows.

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

         During the nine months ended September 30, 2000, the sale of
telecommunications equipment and related services accounted for approximately
55% of our total sales. In many cases we have long-term contracts with our
telecommunications customers but do not receive long-term purchase orders or
commitments under such contracts. Rather, we receive purchase orders for only
such quantities of telecommunications equipment as are required from time to
time by our customers.

         During the nine months ended September 30, 2000, the sale of electronic
components accounted for approximately 45% of our total sales. In some cases we
have long-term contracts with our electronic


                                       39
<PAGE>

components customers. However, in most cases, we receive purchase orders for
only such quantities of electronic components as are required from time to time
by our customers.

         Accordingly, we are highly dependent on the successful sales of our
telecommunications products and electronic components. A significant reduction
in sales of these products resulting from changes in industry, including the
entry of new competitors into the market, from the introduction of new or
improved technology or an unanticipated shift in the needs of our customers, or
for other reasons, would have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.

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, certain components used in our
products are currently obtained from single or limited sources. Certain modem
chipsets used in our data communications products have been in short supply and
are frequently on allocation by semiconductor manufacturers. Similar to others
in the electronics industry, we recently have, from time to time, experienced
difficulty in obtaining certain components. We do not have guaranteed supply
arrangements with any of our suppliers, and there can be no assurance that these
suppliers will continue to meet our requirements. Shortages of components could
not only limit our production capacity but also could result in higher costs due
to the higher costs of components in short supply or the need to utilize higher
cost substitute components. An extended interruption in the supply of any of
these components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations.
While we believe that with respect to our single source components we could
obtain similar components from other sources, we could be required to alter
product designs to use alternative components. There can be no assurance that
severe shortages of components will not occur in the future that could increase
the cost or delay the shipment of our products and have a material adverse
effect on our financial condition and results of operations. Significant
increases in the prices of these components could also have a material adverse
effect on our results of operations because we may not be able to adjust product
pricing to reflect the increases in component costs.

OUR COMMITMENT OF SIGNIFICANT RESOURCES AND EXPANSION OF OUR ACTIVITIES ABROAD
COULD PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS
ACTIVITIES.

         Sales of our products and services to customers located outside the
United States accounted for approximately 52% of our net sales for the nine
months ended September 30, 2000. We expect to commit resources in the
foreseeable future to expand our operations abroad. Accordingly, we are subject
to a number of risks associated with international business activities that
could adversely affect our operations abroad and slow our growth. These risks
generally include, among others:

         --       foreign currency fluctuations;
         --       differing technological advances, preferences or requirements;
         --       difficulties in managing and staffing our foreign operations;
         --       increased collection risks;
         --       tariffs and other trade restrictions; and
         --       general economic conditions.

Any of these risks could adversely affect our business, financial condition and
operating results.



                                       40
<PAGE>

THERE ARE RISKS THAT OUR PRODUCTS MAY BE RETURNED BY OUR CUSTOMERS.

         We are exposed to the risk of product returns from our customers as a
result of returns due to defective products or product components. 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. While we believe that product returns should not be
material in future periods, it is expected that a relatively modest number of
returns will continue. However, there can be no assurance that significant
levels of product returns will not occur in the future, which may have a
material adverse effect on our operations.

IF WE ARE UNABLE TO SUCCESSFULLY CONSUMMATE ADDITIONAL ACQUISITIONS, OUR
LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.

         Our business strategy has included growth through acquisitions. We
consider acquisitions that improve our competitive capabilities in our
businesses 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.
Acquisition transactions are accompanied by a number of risks, including, among
other things:

         --       the difficulty of assimilating the operations, technology and
                  personnel of the acquired companies;
         --       the potential disruption of our ongoing business;
         --       expenses associated with the transactions;
         --       additional expenses associated with amortization of acquired
                  intangible assets;
         --       the difficulty of maintaining uniform standards, controls,
                  procedures and policies;
         --       the impairment of relationships with employees and customers
                  as a result of any integration of new management personnel;
                  and
         --       the potential unknown liabilities associated with acquired
                  businesses.

If we proceed with future acquisitions, our failure to adequately address these
issues could have a material adverse effect on our business, results of
operations and financial condition.

WE RELY HEAVILY ON OUR KEY EMPLOYEES, 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. 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 executive officer of our company
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.


                                       41
<PAGE>

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

           Our quarterly operating results have varied in the past and may
continue to fluctuate significantly in the future due to a number of factors,
many of which are beyond our control. If our operating results do not meet the
expectations of investors, our stock price may decline. Fluctuations in our
operating results may result from a number of factors, including the following:

         --       the number of purchasers of our electronics hardware products
                  and the volume of products purchased by those purchasers;
         --       the demand for our electronics hardware products worldwide;
         --       the prices that we are able to charge for our products and
                  services;
         --       costs related to possible acquisitions of new technologies and
                  businesses;
         --       changes affecting the telecommunications industry, including
                  consolidations and restructuring of United States and foreign
                  telephone companies;
         --       changes affecting the electronics industry, including the
                  contraction of military, commercial, governmental and
                  aerospace spending;
         --       the amount and timing of capital expenditures and other costs
                  relating to the expansion of our business; and
         --       general economic conditions.

         We believe that period-to-period comparisons of our operating results
will not necessarily be meaningful in predicting future performance.

OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.

         Our strategy envisions a period of rapid growth that may put a strain
on our administrative and operational resources. While we believe that we have
established a significant infrastructure to support growth, our ability to
effectively manage growth will require us to continue to expand the capabilities
of our operational and management systems and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other management
personnel. There can be no assurance that we will be able to do so. If we are
unable to successfully manage our growth, our business, prospects, financial
condition, results of operations and cash flows could be adversely affected.

BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY 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.


                                       42
<PAGE>

         We may receive infringement claims from third parties relating to our
products and technologies. In such event, we intend to investigate the validity
of any such claims and, if we believe the claims have merit, we intend to
respond through licensing or other appropriate actions. Certain of these claims
may relate to technology included in components purchased by us from third party
vendors for incorporation into our products. In such event, we would forward
these claims to the appropriate vendor. If we or our component manufacturers
were unable to license or otherwise provide any such necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against us, all of which could have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.

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 restrict our ability to expand our
facilities or could 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 such 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, the 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 such 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 OF OUR COMMON STOCK.

         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


                                       43
<PAGE>

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.

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

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 certain 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.

         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 such additional financing will be available to us on acceptable terms,
or at all. If additional funds are raised 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 our


                                       44
<PAGE>

marketing efforts or to obtain funds through arrangements with partners or
others that may require us to relinquish rights to certain of our technologies
or potential products, services or other assets. Accordingly, the inability to
obtain such financing could adversely affect our business, financial condition
and results of operations.

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 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 OUR COMPANY 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, 250 have been designated as
Series A Preferred, 200 of which were issued and 25 of which are currently
outstanding. In addition, 150,000 shares have been designated as Series B
Preferred Stock, 150,000 of which have been issued and 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, thereby delaying, deferring or preventing a change in control of our
company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and, as a result, the issuance
thereof 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 certain business combinations with interested stockholders, as
defined by statute. These provisions may have the effect of delaying or
preventing a change in control of our company without action by our
stockholders, even if a change in control would be beneficial to our
stockholders, and therefore could adversely affect the price of our common
stock.

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.


                                       45
<PAGE>

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.

                                    PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The names, ages and positions held by our directors and executive
officers as of December 1, 2000 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 Telecommunications 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 our company since March 26, 1997
and of our subsidiary, XIT Corporation, since he founded XIT 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 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 our company 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


                                       46
<PAGE>

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.

         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 XIT 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 President and Chief Executive Officer 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 XIT Corporation,
Mr. Runyon served XIT 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 XIT Corporation since 1985, Mr.
Finnegan was XIT 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


                                       47
<PAGE>

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.

         Section 16(a) of the Securities Exchange Act of 1934, and the
regulations thereunder, require the Registrant's directors, executive officers
and persons who own more than 10% of a registered class of the Registrant's
equity securities to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Registrant, and to furnish the Registrant with
copies of all Section 16(a) forms they file. To the Registrant's knowledge,
based solely on review of the copies of such reports furnished to the Registrant
and written representations that no other reports were required, during the year
ended December 31, 1999, all Section 16(a) filing requirements applicable to the
Registrant's officers, directors and greater than 10% beneficial owners were
complied with, except that Carmine T. Oliva filed a late Form 5 in June 2000
to reflect his December 1999 acquisition of one share of Series A Preferred
Stock and related warrants to purchase up to 5,000 shares of common stock.


                                       48
<PAGE>

ITEM 11.   EXECUTIVE COMPENSATION.

         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, 1999, 1998 and 1997:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                               LONG-TERM
                                                                          COMPENSATION AWARD
                                                  ANNUAL COMPENSATION     ------------------
                                                  -------------------         SECURITIES          ALL OTHER
            NAME AND PRINCIPAL POSITION           YEAR         SALARY      UNDERLYING OPTIONS   COMPENSATION (1)
            ---------------------------           ----         ------      ------------------   ---------------
<S>                                               <C>        <C>           <C>                  <C>
    Carmine T. Oliva........................      1999       $198,872             --                  --
      President and Chief Executive               1998       $198,872             --                  --
      Officer (2)                                 1997       $214,301             --                  --

    James P. Butler.........................      1999        $122,769            --                  --
      Former Chief Financial Officer (3)          1998        $125,000          40,000                --
                                                  1997         $44,377          75,000                --

    Graham Jefferies........................      1999        $114,192          60,000              $5,116
      Executive Vice President and Chief          1998         $98,918          30,000              $5,567
      Operating Officer of Telecommuni-           1997         $95,755            --                $6,527
      cations Group (4)

    Randolph D. Foote.......................      1999         $23,267          50,000                --
      Senior Vice President, Chief                1998              --            --                  --
      Financial Officer (5)                       1997              --            --                  --
</TABLE>

---------------
(1)   Consists of contributions to Mr. Jefferies' retirement plan.
(2)   Carmine T. Oliva became Chairman and Chief Executive Officer on March 26,
      1997, upon Jack Talan's resignation concurrent with the merger of MicroTel
      International, Inc. with XIT. Mr. Oliva's salary does not include payments
      of $45,333 in 1997 of voluntarily deferred salary from years prior to
      1997.
(3)   Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.
(4)   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.
(5)   Randolph D. Foote was appointed Senior Vice President and Chief Financial
      Officer on October 4, 1999, following receipt of notification of the
      resignation of our former Chief Financial Officer, James P. Butler.


                                       49
<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides information regarding option grants in the
year ended December 31, 1999 to the named executive officers. We did not grant
any stock appreciation rights in the year ended December 31, 1999.

<TABLE>
<CAPTION>
                                                               PERCENT OF
                                                                 TOTAL                                         POTENTIAL REALIZABLE
                                                                OPTIONS                                          VALUE AT ASSUMED
                                                               GRANTED TO                                         ANNUAL RATES OF
                                               NUMBER OF          ALL                                               STOCK PRICE
                                               SECURITIES      EMPLOYEES                                         APPRECIATION FOR
                                               UNDERLYING      IN FISCAL    EXERCISE PRICE                        OPTION TERM (2)
              NAME             GRANT DATE   OPTIONS GRANTED       YEAR       ($/SHARE)(1)    EXPIRATION DATE       5%($)  10%($)
              ----             ----------   ---------------       ----       ------------    ---------------       -------------
<S>                           <C>           <C>                <C>          <C>              <C>               <C>        <C>
Carmine T. Oliva.........         --              --              --              --               --               --      --
Randolph D. Foote........     11/15/1999         50,000          11.6%           0.20           11/15/2009         6,289  15,937
Graham Jefferies.........     11/15/1999         60,000          14.0%           0.20           11/15/2006         7,547  19,125
James P. Butler(3).......         --              --              --              --               --               --      --
</TABLE>
---------------
(1)   The option was granted at an exercise price equal to the closing price of
      a share of common stock on the grant date.
(2)   Pursuant to applicable regulations, these amounts represent certain
      assumed rates of appreciation only. Actual gain, if any, on stock option
      exercises are dependent on the future performance of the common stock and
      overall stock market conditions. The amounts reflected in this table may
      not necessarily be achieved.
(3)   Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.


                                       50
<PAGE>

                   OPTION EXERCISES AND FISCAL YEAR-END VALUES

           The following table provides information regarding option exercises
in the year ended December 31, 1999 by the named executive officers and the
value of unexercised options held by the named executive officers as of December
31, 1999.

<TABLE>
<CAPTION>
                                                                         NUMBER OF
                                                                   SECURITIES UNDERLYING           VALUE ($) OF UNEXERCISED
                                                                  UNEXERCISED OPTIONS AT            IN-THE-MONEY OPTIONS AT
                                                                     DECEMBER 31, 1999               DECEMBER 31, 1999(1)
                          SHARES ACQUIRED                            -----------------               --------------------
          NAME              ON EXERCISE     VALUE REALIZED      EXERCISABLE     UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
          ----              -----------     --------------      -----------     -------------    -----------      -------------
<S>                       <C>               <C>                 <C>             <C>              <C>              <C>
Carmine T. Oliva.....           --                --              130,633            --              --                --
Randolph D. Foote....           --                --               25,000          25,000           5,938             5,938
Graham Jefferies.....           --                --               96,287          30,000           7,125             7,125
James P. Butler(2)...           --                --              115,000            --              --                --
</TABLE>
--------------
(1)   The closing price of our common stock on December 31, 1999 on the OTC
      Bulletin Board was $.4375 per share.
(2)   Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.

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

      CARMINE T. OLIVA

         Pursuant to an employment agreement dated January 1, 1996, Carmine T.
Oliva was employed as Chairman, President and Chief Executive Officer of XIT
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 XIT Corporation's salary abatement program then in effect. On
May 6, 1997, our board of directors voted to assume the obligations of XIT
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 our
company 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 is subject to automatic renewal for three successive
two-year terms commencing 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 such
time as 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.

         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.

         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 such 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


                                       51
<PAGE>

agreement on October 15, 2002, Mr. Oliva will be entitled to be paid his annual
salary for two and one-half years following the termination. 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, 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 October 15, 2002, Mr. Oliva
                  will be entitled to be paid his annual salary and all other
                  amounts payable under the agreement for two and one-half years
                  following the termination, 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
                  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; 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 one year following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability; provided, however, that 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


                                       52
<PAGE>

         --       all personal property of Mr. Oliva has been returned to Mr.
                  Oliva's principal place of residence at our expense.

         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. 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.

         As a condition to his entry into the employment agreement, Mr. Oliva
received a warrant to purchase up to 250,000 shares of our common stock at an
exercise price of $3.45 per share, exercisable at any time prior to 5:00 p.m.
New York City time on October 14, 2002. In February 2000, Mr. Oliva exchanged
this warrant for a warrant to purchase up to 125,000 shares of common stock at
an exercise price of $1.725 per share in an exchange offer made to all holders
of warrants with exercise prices exceeding $1.00.

      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 commencing 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 such 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:

         --       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;


                                       53
<PAGE>

         --       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 our
company, 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 our
company, 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.
During 2000, the nominating committee has consisted of Robert B. Runyon.

COMPENSATION OF DIRECTORS

         Each non-employee director is entitled to receive $1,000 per quarter 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 and otherwise.

         Mr. Runyon acts as a consultant to our company in the areas of strategy
development business and organization planning, human resources recruiting and
development and administrative systems. During 1999, Mr. Runyon received
approximately $1,670 in consulting fees and expenses. Also, additional
consulting fees and expenses totaling $9,441 were accrued during 1999 but have
not yet been paid. During 1999, we also paid premiums of $2,793 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 $3,534 for health
insurance.


                                       54
<PAGE>

         On July 25, 2000, Mr. Runyon and Mr. Finnegan each received an option
to purchase 100,000 shares of common stock at $.50 per share under our 1997
Plan, which options vest in two equal semi-annual installments commencing on
January 25, 2001 and expires on July 25, 2010.

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 and non-qualified stock options 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
non-qualified stock options 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 incentive
stock options, 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 incentive stock options 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 November 14, 2000, options to
purchase up to 1,441,596 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 is subject to stockholder approval. We have submitted the 2000
Stock Option Plan for stockholder approval at a special meeting of stockholders
that is planned to be held on January 16, 2001. The 2000 Stock Option Plan
authorizes the issuance of incentive stock options and non-qualified options 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 November 14, 2000, we had approximately 253 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 description of the terms
of the 2000 Stock Option Plan is qualified in its entirety by reference to the
full text of the 2000 Stock Option Plan, a copy of which is an exhibit to the
registration statement of which this prospectus is a part.


                                       55
<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, as amended. 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 such option may be
exercised, including the exercise price and option period, and other terms and
conditions of such 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 our company on the date of
grant, such exercise price shall 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.


                                       56
<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 our company.
Such persons may be viewed as part of, or friendly to, incumbent management and
may, therefore, under certain 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 such 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 our company. In the opinion of our
board of directors, such an 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 such
extraordinary corporate transaction which might serve to limit or restrict such
right. Our board of directors is, however, presently unaware of any threat of
hostile takeover involving our company.


                                       57
<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


                                       58
<PAGE>

competitive marketplaces, (e) relation to financial results, (f) the mutuality
of interest between grantee and shareholders, and (g) the essential objectives,
processes and controls.

         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 XIT 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. Also, no bonus was paid to Mr. Oliva or to other executive
officers for 1999, as corporate financial performance fell short of objectives.

         However, to assure strength and continuity in the office of the Chief
Executive, Mr. Oliva's employment contract was renegotiated, and the new
agreement became effective in October, 1997. The agreement is based on 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


                                       59
<PAGE>

PERFORMANCE GRAPH

         Set forth below is a line graph comparing the cumulative total
stockholder return on the Company's 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 the Company's fiscal year ended December 31,
1999. 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, 1994.

           EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

                             CUMULATIVE TOTAL RETURN

<TABLE>
<CAPTION>
                                   12/94        12/95        12/96        12/97        12/98        12/99
                                   -----        -----        -----        -----        -----        -----
<S>                              <C>          <C>          <C>          <C>          <C>          <C>
MicroTel International, Inc.     $ 100.00     $ 181.82     $  43.64     $  43.64     $  19.09     $  12.74

Nasdaq Stock Market (U.S.)         100.00       141.33       173.89       213.07       300.25       542.43

Nasdaq Telecommunications          100.00       130.91       133.86       195.75       322.30       561.27
</TABLE>


                                       60
<PAGE>

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

         On November 20, 2000, a total of 20,569,759 shares of the Company's
common stock were issued and outstanding. The following table sets forth
information regarding beneficial ownership of the Company's common stock as of
November 20, 2000 by:

         --       each person who is known by the Company to beneficially own
                  more than five percent, in the aggregate, of the outstanding
                  shares of the Company's common stock;

         --       each of the Company's directors and each of the executive
                  officers named in the Summary Compensation Table; and

         --       all of the Company's 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, the Company believes each stockholder possesses sole voting and
investment power with respect to all of the shares of common stock owned by such
stockholder, subject to community property laws where applicable. In computing
the number of shares beneficially owned by a stockholder and the percentage
ownership of that stockholder, shares of common stock subject to options or
warrants held by that person that are currently exercisable or are exercisable
within 60 days after the date of the table are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person or group.


<TABLE>
<CAPTION>
                                                                         AMOUNT AND
                                                                         NATURE OF             PERCENT OF
  NAME OF BENEFICIAL OWNER            TITLE OF CLASS                BENEFICIAL OWNERSHIP      COMMON STOCK
  ------------------------            --------------                --------------------      ------------
<S>                                   <C>                           <C>                       <C>
Orbit II Partners, L.P.                Common                          2,838,810 (1)            13.77%
Carmine T. Oliva                       Common                          1,585,806 (2)             7.53
                                       Series A Preferred                      1                 4.00%
Robert B. Runyon                       Common                            238,155 (3)             1.15
Laurence P. Finnegan, Jr.              Common                             44,171 (4)             *
Graham Jefferies                       Common                            129,563 (5)             *
Randolph D. Foote                      Common                             55,000 (6)             *
James P. Butler (7)                    Common                                 --                --
All directors and executive            Common                          2,052,695 (8)             9.64%
  officers as a group (6 persons)      Series A Preferred                      1                 4.00%
</TABLE>
------------------------
     *    Less than 1.00%
     (1)  Includes 43,125 shares of common stock issuable upon exercise of
          warrants issued to Orbit II Partners, L.P. Alan S. MacKenzie, Jr.,
          David N. Marino and Joel S. Kraut are: the managing partners of Orbit
          II Partners, L.P., an NASD-registered 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 more than 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.
     (2)  Includes 81,889 shares of common stock held individually by Mr.
          Oliva's wife. Also includes 130,633 shares of common stock issuable
          upon exercise of options, 345,185 shares issuable upon exercise of
          warrants and 11,214 shares of common stock issuable upon conversion of
          Series A Preferred Stock. Mr. Oliva is a director and the Chairman of
          the Board, President and Chief


                                       61
<PAGE>

          Executive Officer of the Company. Mr. Oliva's address is c/o MicroTel
          International, Inc., 9485 Haven Avenue, Suite 100, Rancho Cucamonga,
          California 91730.
     (3)  Includes 58,060 shares issuable upon exercise of options. Mr. Runyon
          is a director and the Secretary of the Company.
     (4)  Mr. Finnegan is a director of the Company.
     (5)  Includes 126,287 shares of common stock issuable upon exercise of
          options. Mr. Jefferies is the Executive Vice President and Chief
          Operating Officer of our Telecommunications Group.
     (6)  Includes 50,000 shares of common stock issuable upon exercise of
          options. Mr. Foote is the Senior Vice President and Chief Financial
          Officer of the Company.
     (7)  Mr. Butler is the former Chief Financial Officer of the Company and is
          named as an executive officer in the Summary Compensation Table.
     (8)  Includes 364,980 shares of common stock issuable upon exercise of
          options, 345,185 shares of common stock issuable upon exercise of
          warrants and 11,214 shares of common stock issuable upon conversion of
          Series A Preferred Stock.

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS

         On December 23, 1999, Orbit II Partners, L.P., Samuel J. Oliva, Samuel
G. Oliva and Carmine T. Oliva, or the Series A Purchasers, purchased an
aggregate of 39.5 shares of Series A Preferred Stock and accompanying warrants
to purchase up to an aggregate of 197,500 shares of common stock from two of the
three original holders of shares of our Series A Preferred Stock, or the Series
A Sellers, for an aggregate consideration of approximately $400,000 in cash.
Orbit II Partners, L.P. is a Delaware limited partnership that as of November
20, 2000 beneficially owned more than five percent of our outstanding common
stock. 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.

         When issued to the three original holders, or the Series A Original
Holders, on June 29, 1998 and July 9, 1998 at a price of $10,000 per share, 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
$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.

         On November 3, 1998, the Series A Original Holders and our company
agreed to modify the conversion price of the Series A Preferred Stock to a fixed
factor so that for so long as our common stock continued to be listed on the
Nasdaq SmallCap Market, each share of Series A Preferred Stock was to be
convertible into 20,000 shares of common stock. The modified conversion price
was calculated by dividing $10,000 by $0.50 per share of Series A Preferred
Stock. The Series A Original Holders and our company also agreed on November 3,
1998 that the exercise price of the related warrants would be reduced from $1.25
per share to $0.75 per share. As of November 3, 1998, under the original
conversion price formula each share of Series A Preferred Stock would have been
convertible into approximately 24,615 shares of common stock at a per share
conversion price of $0.40625, and the closing price of a share of our common
stock on the Nasdaq SmallCap Market was $0.4375. We agreed to adjust the
conversion price of the Series A Preferred Stock and the exercise price of the
related warrants because the prices at which our common stock were trading had
been declining at least since the shares of Series A Preferred Stock were
issued, and we believed that setting a floor for the conversion price might help
to minimize future dilution to our common stockholders.

         Following the delisting of our common stock from the Nasdaq SmallCap
Market, the November 1998 modification to the conversion price of the Series A
Preferred Stock was discontinued on August 15,


                                       62
<PAGE>

1999, and the conversion price was again to be 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 40 trading days prior to conversion.

         As described above, on December 23, 1999, the Series A Purchasers
purchased an aggregate of 39.5 shares of Series A Preferred Stock and the
related warrants to purchase up to an aggregate of 197,500 shares of common
stock from the Series A Sellers. In conjunction with the purchase and sale, the
holders of the Series A Preferred Stock and our company agreed to modify the
conversion price of the Series A Preferred Stock to a fixed factor so that each
share of Series A Preferred Stock was to be convertible into 50,530 shares of
common stock. This fixed factor was calculated by dividing $10,000 by
approximately $0.1979 per share of Series A Preferred Stock. Also in conjunction
with the purchase and sale, the holders of the Series A Preferred Stock and our
company agreed that all of the outstanding warrants that had been issued to the
Series A Original Holders in 1998, including both the warrants that were
transferred to the Series A Purchasers and the warrants that were retained by
the Series A Sellers because they related to shares of Series A Preferred Stock
that already had been converted by the Series A Sellers into shares of common
stock, were amended to reduce the exercise price from $0.75 per share to $0.25
per share and to extend the expiration date from May 22, 2001 to December 22,
2002.

         On December 23, 1999, the closing price of a share of our common stock
on the OTC Bulletin Board was $0.30, and 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 $0.19 if the December 1999 modification to the
conversion price was not taken into account. The modifications to the exercise
price of the warrants and the conversion price of the Series A Preferred Stock
were intended to induce the sale of all of the Series A Sellers' unconverted
shares of Series A Preferred Stock to the Series A Purchasers. We believed that
this sale would benefit our company and its stockholders because the Series A
Purchasers had indicated an interest in voluntarily holding the Series A
Preferred Stock as a long-term investment rather than converting the Series A
Preferred Stock into shares of common stock that would further dilute existing
common stockholders and that could be sold in the public market at the low
prices at which our shares of common stock were trading.

         In November 2000, we determined that because the modifications to the
conversion price in November 1998 and December 1999 had not been submitted to
and approved by our stockholders in accordance with the Delaware General
Corporation Law, all conversions from November 1998 through July 1999 and in
December 1999 should have been made at the original conversion rate of $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 the conversions.
Under the original conversion terms, we would have issued approximately 250,000
additional shares of common stock for some conversions and approximately 90,000
less shares of common stock for other conversions. No modifications have been
made to our consolidated financial statements to reflect the potential issuance
of these additional shares of common stock because we are still in the process
of working with the holders of the Series A Preferred Stock to reach a
satisfactory resolution to this matter.

         We have submitted to our stockholders for approval at a special meeting
to be held on January 16, 2001 an amendment to the certificate of designations,
preferences and rights relating to the Series A Preferred Stock. If approved by
the holders of our common stock and Series A Preferred Stock , the amendment
will modify the conversion rate for conversions occurring after the amendment is
filed with the Delaware Secretary of State so that each share of Series A
Preferred Stock will be convertible into 50,530 shares of common stock, which is
the same number of shares into which each shares of Series A Preferred Stock
would now be convertible if the attempted modifications to the conversion prices
had been approved by our stockholders in accordance with the Delaware General
Corporation Law.


                                       63
<PAGE>

WARRANT EXCHANGE OFFER

         Between February and April 2000, we made an offer to all holders of
warrants to purchase shares of our common stock at exercise prices of $1.00 or
more pursuant to 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 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 our company or its subsidiaries. However,
exchanges were made with the following related parties:


                                       64
<PAGE>

<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 Board,                    250,000                 $3.45              125,000             $1.73
  President and Chief Executive Officer                      362,870                 $3.44              181,435             $1.72
                                                               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 Oliva,                        11,103                 $3.79                5,552             $1.90
  Chairman of the Board, President and Chief                   3,629                 $1.89                1,815             $0.95
  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

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 Carmine T                       3,628                 $1.89                1,814             $0.95
  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>


                                       65
<PAGE>

         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 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 awarded Mr. Oliva a
special bonus of $30,000 which was paid over a three-month period. Wells Fargo
Business Credit, Inc. has agreed to release the guarantee at the end of 2000 if
we reach specific profitability goals. If, however, we do not reach those goals,
the executive compensation and management development committee has authorized
payment to Mr. Oliva of up to an additional $30,000 to be paid in twelve equal
payments, twice per month, for so long as the guarantee remains in place or
until March 31, 2001, whichever comes first.


                                       66
<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 69 of this Report.

(b)        REPORTS ON FORM 8-K

           None.


                                       67
<PAGE>

                                   SIGNATURES

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

                                         MICROTEL INTERNATIONAL, INC.

                                         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.

<TABLE>
<CAPTION>
            SIGNATURE                     CAPACITY                                         DATE
            ---------                     --------                                         ----
<S>                                       <C>                                        <C>
/s/ Carmine T. Oliva                      Chairman of the Board, President,          December 29, 2000
--------------------------------          Chief Executive Officer (Principal
Carmine T. Oliva                          Executive Officer) and Director


/s/ Randolph D. Foote                     Chief Financial Officer                    December 29, 2000
--------------------------------          (Principal Accounting and
Randolph D. Foote                         Financial Officer)


/s/ Laurence P. Finnegan, Jr.             Director                                   December 29, 2000
--------------------------------
Laurence P. Finnegan, Jr.


/s/ Robert B. Runyon                      Director                                   December 29, 2000
--------------------------------
Robert B. Runyon
</TABLE>


                                       68
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                                  <C>
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

Consolidated Balance Sheets as of December 31, 1999 and 1998.....................................     F-3

Consolidated Statements of Operations and Comprehensive Income for the years ended
    December 31, 1999, 1998 and 1997 ............................................................     F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
    1998 and 1997 ...............................................................................     F-5

Consolidated Statements of Cash Flows for the years ended Decemer 31, 1999, 1998
    and 1997 ....................................................................................     F-6

Notes to Consolidated Financial Statements.......................................................     F-8


FINANCIAL STATEMENT SCHEDULE

Consolidated Schedule II Valuation and Qualifying Accounts for the years ended
    December 31, 1999, 1998 and 1997.............................................................    F-36
</TABLE>


                                      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, 1999 and 1998, 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, 1999. We have also audited the information for each of the years in
the three-year period ended December 31, 1999 in the financial statement
schedule listed in the accompanying index. These financial statements and the
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 financial statement schedule based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.

         Also, in our opinion, the financial statement schedule referred to
above presents fairly, in all material respects, the information set forth
therein.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
16 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is in default of a certain covenant of its domestic
credit facility agreement, the effects of which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 16. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



                                   /s/ BDO Seidman, LLP

Orange County, California
March 3, 2000, except as to
      the penultimate paragraph of
      Note 9 which is as of
      November 17, 2000


                                      F-2
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
ASSETS (NOTES 7 AND 8)                                                               1999              1998
                                                                                     ----              ----
<S>                                                                              <C>               <C>
Current assets:
     Cash and cash equivalents                                                   $        481      $        572
     Accounts receivable, net of allowance for doubtful accounts of
          $202 and $275                                                                 6,519             7,337
     Current portion of notes receivable (Notes 3 and 6)                                   --               291
     Inventories (Note 4)                                                               4,181             6,426
     Prepaid and other current assets                                                     578               926
                                                                                 ------------------------------
Total current assets                                                                   11,759            15,552
Property, plant and equipment, net (Note 5)                                             1,393             1,939
Goodwill, net of accumulated amortization of $433 and $239                              1,507             1,701
  (Notes 2 and 3)
Notes receivable, less current portion (Note 3)                                            --               533
Investment in affiliates (Notes 3 and 6)                                                1,240               150
Other assets                                                                              722             1,367
                                                                                 ------------------------------
                                                                                 $     16,621      $     21,242
                                                                                 ==============================

LIABILITIES. REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
     Notes payable (Note 7)                                                      $      2,107      $      3,379
     Current portion of long-term debt (Note 8)                                         1,422               805
     Accounts payable                                                                   4,771             4,269
     Accrued expenses                                                                   2,985             3,312
                                                                                 ------------------------------
Total current liabilities                                                              11,285            11,765
Long-term debt, less current portion (Note 8)                                             165             1,430
Other liabilities                                                                         782               954
Minority interest (Note 3)                                                                 --                95
                                                                                 ------------------------------
Total liabilities                                                                      12,232            14,244
Convertible redeemable preferred stock, $10,000 unit value
    Authorized 200 shares; issued and outstanding 59.5 shares in
    1999 and 161 shares in 1998 (aggregate liquidation preference of $595                 588             1,516
    and $1,610, respectively) (Note 9)
Commitment and contingencies (Notes 10, 14 and 16)
Subsequent event (Note 3)
Stockholders' equity (Notes 2, 3, 9, 10 and 14):
     Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
          no shares issued and outstanding                                                 --                --
    Common stock, $.0033 par value. Authorized 25,000,000 shares;
          issued and outstanding 18,152,000 and 12,622,000 shares                          60                42
     Additional paid-in capital                                                        23,726            20,463
     Accumulated deficit                                                              (19,759)          (15,122)
     Accumulated other comprehensive income (loss)                                       (226)               99
                                                                                 ------------------------------
Total stockholders' equity                                                              3,801             5,482
                                                                                 ------------------------------
                                                                                 $     16,621      $     21,242
                                                                                 ==============================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                    1999           1998           1997
                                                    ----           ----           ----
<S>                                           <C>            <C>            <C>
Net sales (Note 15)                           $     28,301   $     37,261   $     43,098
Cost of sales                                       19,659         23,871         32,670
                                              ------------------------------------------
Gross profit                                         8,642         13,390         10,428
Operating expenses:
     Selling, general and administrative            10,795         11,826         11,361
     Engineering and product development             1,873          2,454          2,046
     Write-down of goodwill (Note 11)                   --             --          5,693
                                              ------------------------------------------
Loss from operations                                (4,026)          (890)        (8,672)
Other income (expense):
     Interest expense                                 (411)          (675)          (895)
     Gain on sale of subsidiary/investment,
          net (Notes 3 and 6)                          359            580             --
     Other, net (Note 3)                              (390)           (99)           (29)
                                              ------------------------------------------
Loss before income taxes                            (4,468)        (1,084)        (9,596)
Income taxes (Note 12)                                 128            101             97
                                              ------------------------------------------
Net loss                                      $     (4,596)  $     (1,185)  $     (9,693)
                                              ------------------------------------------

Other comprehensive income (loss):
     Foreign currency translation adjustment          (325)           206           (260)
                                              ------------------------------------------
Total comprehensive income (loss)             $     (4,921)  $       (979)  $     (9,953)
                                              ==========================================

Basic and diluted loss per share (Note 13)    $       (.28)  $       (.10)  $       (.96)
                                              ==========================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                           Accumulated
                                                        Common Stock         Additional                       Other
                                                    ----------------------    Paid-in      Accumulated     Comprehensive
                                                    Shares          Amount    Capital        Deficit       Income (Loss)     Total
                                                    ------          ------    -------        -------       -------------     -----

<S>                                          <C>            <C>           <C>            <C>            <C>            <C>
Balance at December 31, 1996                        6,064   $         20  $      8,998   $     (4,124)           153   $      5,047
Stock issued in connection with reverse
  acquisition (Note 2)                              3,186             10         5,235             --             --          5,245
Stock issued in connection with private
  placement (Note 10)                               2,000              7         4,251             --             --          4,258
Stock issued in connection with acquisition
  (Note 3)                                            500              2         1,123             --             --          1,125

Stock issued for debt conversion (Note 10)             55             --            44             --             --             44
Stock issued upon exercise of stock options            30             --            97             --             --             97
Stock issued in connection with settlement
  of dispute (Note 10)                                 80             --           190             --             --            190
Stock issued as compensation and under
  stock purchase plan                                  11             --            22             --             --             22
Foreign currency translation adjustment                --             --            --             --           (260)          (260)
Accretion of preferred stock                           --             --            --            (60)            --            (60)
Net loss                                               --             --            --         (9,693)            --         (9,693)
                                             --------------------------------------------------------------------------------------
Balance at December 31, 1997                       11,926             39        19,960        (13,877)          (107)         6,015
Stock issued upon conversion of preferred
  stock (Note 9)                                      770              3           364             --             --            367
Repurchase of stock issued in connection
  with settlement of dispute (Note 10)                (80)            --          (168)            --             --           (168)
Stock issued under stock purchase plan                  7             --             7             --             --              7
Warrants issued in connection with
  issuance of preferred stock (Note 9)                 --             --           163             --             --            163
Warrants issued for services                           --             --            85             --             --             85
Repricing of warrants issued in connection
  with issuance of preferred stock (Note 9)            --             --            52             --             --             52
Foreign currency translation adjustment                --             --            --             --            206            206
Accretion of 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 preferred
  stock (Note 9)                                    2,659              9           960             --             --            969
Stock issued in connection with
  acquisition (Note 3)                              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 14)                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 preferred stock (Note 9)            --             --            91             --             --             91
Foreign currency translation adjustment                --             --            --             --           (325)          (325)
Accretion of preferred stock                           --             --            --            (41)            --            (41)
Net loss                                               --             --            --         (4,596)            --         (4,596)
                                             --------------------------------------------------------------------------------------
Balance at December 31, 1999                       18,152   $         60  $     23,726   $    (19,759)  $       (226)  $      3,801
                                             ======================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   1999           1998           1997
                                                                   ----           ----           ----
<S>                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                     $     (4,596)  $     (1,185)  $     (9,693)
   Adjustments to reconcile net loss to cash provided
     by (used in) operating activities:
       Depreciation and amortization                                  393            409            923
       Amortization of intangible assets                              540            449            358
       Provision for doubtful accounts and notes receivable           488             97            251
       Provision for inventory obsolescence                         1,145            885          3,134
       Write-down of goodwill                                          --             --          5,693
       Provision for impairment of investment                         419             --             --
       Equity in earnings of unconsolidated investments              (653)           (24)            21
       Gain on the sale of subsidiary/investment                     (359)          (580)            --
       Stock and warrants issued for services                       1,146             85             22
       Repricing of warrants                                           91             52             --
       Minority interest                                              (33)             7             20
   Changes in operating assets and liabilities:
     Accounts receivable                                              782         (1,101)          (554)
     Inventories                                                      741         (1,017)        (1,011)
     Prepaids and other assets                                        672           (411)           413
     Accounts payable                                                 621           (339)          (755)
     Accrued expenses and other liabilities                          (231)          (460)          (490)
                                                             ------------------------------------------
Cash provided by (used in) operating activities                     1,166         (3,133)        (1,668)
                                                             ------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                    (124)          (182)          (424)
   Cash received on sale of subsidiary/investment                     868          1,350             --
   Cash acquired in acquisition/merger                                 --             --            273
   Cash collected on notes receivable                                   9            451            125
                                                             ------------------------------------------
Cash provided by (used in) investing activities                       753          1,619            (26)
                                                             ------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net repayments of notes payable                                 (1,272)          (251)            (3)
   Proceeds from long-term debt                                        --          1,542            163
   Repayments of long-term debt                                      (415)        (2,916)        (1,606)
   Preferred stock dividends paid                                      --             --           (140)
   Proceeds from sale of preferred stock                               --          2,000             --
   Payment of preferred stock and debt issuance costs                  --           (423)            --
   Proceeds from sale of common stock                                   2              7          4,258
                                                             ------------------------------------------
Cash provided by (used in) financing activities                    (1,685)           (41)         2,672
                                                             ------------------------------------------

Effect of exchange rate changes on cash                              (325)           206             57
                                                             ------------------------------------------
Net increase (decrease) in cash and cash equivalents                  (91)        (1,349)         1,035
Cash and cash equivalents at beginning of year                        572          1,921            886
                                                             ------------------------------------------
Cash and cash equivalents at end of year                     $        481   $        572   $      1,921
                                                             ==========================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                             ----          ----          ----
<S>                                                      <C>           <C>           <C>
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
 Cash paid during the year for:
     Interest                                            $        443  $        652  $        827
                                                         ========================================
     Income taxes                                        $        124  $        138  $         58
                                                         ========================================
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 preferred
     stock                                               $        969  $        367  $         --
                                                         ========================================
   Accretion of preferred stock                          $         41  $         60  $         60
                                                         ========================================
   Issuance of common stock and warrants in
     connection with settlement of dispute               $         73  $         --  $        190
                                                         ========================================
   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  $         --  $      6,370
                                                         ========================================
   Issuance of common stock upon exercise of stock
     options                                             $         --  $         --  $         97
                                                         ========================================
   Issuance of common stock upon conversion of debt
     to equity                                           $         --  $         --  $         44
                                                         ========================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 XIT Corporation
("XIT"). CXR Telcom Corporation and CXR, S.A. (collectively "CXR") design,
manufacture and market electronic telecommunication test equipment and data
communications equipment. XIT designs, manufactures and markets information
technology products, including displays and input components, subsystem
assemblies, power supplies and various printed circuits. The Company conducts
its operations out of various facilities in the U. S., France, England and Japan
and organizes itself in three product line segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits.

BASIS OF PRESENTATION

         As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by XIT in a
"reverse acquisition" because the existing stockholders of the Company prior to
the merger did not have voting control of the combined entity after the merger.
In a reverse acquisition, the accounting treatment differs from the legal form
of the transaction, as the continuing legal parent company is not assumed to be
the acquirer and the financial statements of the combined entity are those of
the accounting acquirer (XIT), including any comparative prior year financial
statements presented by the combined entity after the business combination.
Consequently, the consolidated financial statements include the accounts of XIT
and its wholly and majority-owned subsidiaries, and beginning March 26, 1997,
include the Company and its other subsidiaries, CXR Telcom Corporation and CXR,
S.A. (the "Former Company").

         In connection with the reverse acquisition, the Company assumed the
number of authorized common shares of 25,000,000 and $.0033 par value per share
of the Former Company. Furthermore, the former stockholders of XIT were issued
approximately 6,199,000 shares of common stock, which resulted in a common share
exchange ratio of 1.451478. Accordingly, all references to the number of shares
and to the per share information in the accompanying consolidated financial
statements have been adjusted to reflect these changes on a retroactive basis.

         The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 3) and its 50% investment in a real estate
partnership (Note 6) are accounted for using the equity method.

         All significant intercompany balances and transactions have been
eliminated in consolidation.

REVENUE RECOGNITION

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

         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


                                      F-8
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


statements and is effective for all quarters of fiscal years beginning after
December 15, 1999. The Company believes that its current revenue recognition
policies comply with SAB 101.

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.

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, 1999 or 1998 but
will account for its investment in Wi-Lan (Note 3) 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 in stockholders' equity.

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:

<TABLE>
<S>                                                             <C>
                Buildings                                         50 years
                Machinery, equipment and fixtures                3-7 years
                Leasehold improvements                             5 years
</TABLE>

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

GOODWILL

         Goodwill represents the excess of purchase price over the fair value of
net assets acquired through business combinations accounted for as purchases and
is amortized on a straight-line basis over its estimated useful life. In
evaluating goodwill, the Company determines whether there has been an impairment
and the amount thereof, if any, by comparing the undiscounted future operating
income of the acquired business with the carrying value of the goodwill. During
1997, the Company wrote-down the value of goodwill by approximately $5.7 million
and reduced the estimated useful lives from 15 - 20 years to 10 years (see Note
11).


                                      F-9
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 $66,000 and $412,000 (net of accumulated amortization of $763,000 and
$417,000) at December 31, 1999 and 1998, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $346,000, $169,000 and $248,000 was charged to cost
of sales during 1999, 1998 and 1997, 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 1999, 1998 or 1997.

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.

LONG-LIVED ASSETS

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

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.

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


                                      F-10
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 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 an entity.

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, 1999 and 1998, the fair value of all
financial instruments approximated carrying value.

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

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.



                                      F-11
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

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.

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. All prior period data presented have been restated to conform to the
provisions of SFAS 130.

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 operates in three reportable segments:
Instrumentation and Test Equipment, Components and Subsystem Assemblies, and
Circuits.

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior year financial
statements to be consistent with the 1999 presentation.


                                      F-12
<PAGE>
(2)      MERGER WITH XIT CORPORATION

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         On March 26, 1997, privately held XIT merged with a wholly-owned, newly
formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant
to the transaction, the former stockholders of XIT 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 XIT 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 XIT
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.

         As described in Note 1, the merger has been accounted for as a purchase
of the Company by XIT. 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 (see Note 11).

         The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the year ended December 31,
1997.


<TABLE>
<CAPTION>
                                                                  1997
                                                                  ----
<S>                                                          <C>
            Net sales                                        $       46,094,000
                                                             ===================
            Net loss                                         $      (12,097,000)
                                                             ===================
            Basic and diluted loss per share                 $            (1.12)
                                                             ===================
</TABLE>

         The pro forma results of operations above do not purport to be
indicative of the results that would have occurred had the merger taken place at
the beginning of the respective period presented or of results which may occur
in the future.

(3)      ACQUISITIONS AND DISPOSITIONS OF BUSINESSES

CRITICAL COMMUNICATIONS

         On October 17, 1997, the Company's CXR Telcom subsidiary acquired all
the capital stock of Critical Communications Incorporated ("Critical") of St.
Charles, Illinois in exchange for 500,000 shares of the Company's common stock.
Founded in 1991, Critical is a provider of sophisticated, state-of-the-art,
portable telephone test instruments used by both long-distance carriers and
local telephone service providers as well as by corporate and government
telecommunications end users. The acquisition of Critical has been accounted for
as a purchase, and accordingly, the results of operations of Critical since the
date of the acquisition are included in the Company's consolidated statements of
operations. The 500,000 shares of common stock were valued at $1,125,000 based
on the fair value of the common stock on the acquisition date. The Company
acquired $9,000 in cash in the acquisition and the cost in excess of


                                      F-13
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


net assets acquired was $1,123,000 which is being amortized on a straight-line
basis over ten years. The pro forma effect of this acquisition was not material
to the results of operations for 1997.

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
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 are 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, and includes amounts
applicable to HyComp's preferred stock of $6,000 at December 31, 1998 and 1997.
Dividends on the preferred stock are cumulative at 8% per year, and minority
interest at December 31, 1998 and 1997 includes cumulative dividends in arrears
of $8,000.

         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.
Summarized below is the unaudited pro forma financial information of the Company
as though the assets had been sold at the beginning of the year ended December
31, 1998.

<TABLE>
<CAPTION>
                                                     1999                 1998
                                                     ----                 ----
<S>                                            <C>                  <C>
          Net sales                            $     27,845,000     $     34,435,000
                                               ================     ================
          Net loss                             $     (4,306,000)    $     (1,469,000)
                                               ================     ================
          Basic and diluted loss per share     $           (.26)    $           (.13)
                                               ================     ================
          Total assets                         $     16,621,000     $     19,125,000
                                               ================     ================
</TABLE>

         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.

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. On April 9,
1998, the Company completed the sale and received $1,350,000 in cash and a note
receivable aggregating $650,000, which was payable over three years. The sale
resulted in a gain of


                                      F-14
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


$580,000. The balance due under the note receivable was $650,000 at December 31,
1998 of which $144,000 is included in current portion of notes receivable in the
accompanying 1998 consolidated balance sheet. Summarized below is the unaudited
pro forma financial information of the Company as though the assets had been
sold at the beginning of the year ended December 31, 1997.

<TABLE>
<CAPTION>
                                                     1998                 1997
                                                     ----                 ----
<S>                                            <C>                  <C>
          Net sales                            $     35,752,000     $     34,068,000
                                               ================     ================
          Net loss                             $       (715,000)          (7,327,000)
                                               ================     ================
          Basic and diluted loss per share     $           (.06)                (.73)
                                               ================     ================
          Total assets                         $     21,242,000     $     21,021,000
                                               ================     ================
</TABLE>

         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 7) against the note receivable and then wrote-off
the net unpaid balance of $452,000. Such amount has been included in the net
amount of other expense in the accompanying 1999 consolidated statement of
operations.

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 electronic products used to build, access and monitor
high-speed telecommunications networks worldwide. 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:

<TABLE>
<CAPTION>
                                                                    December 31, 1999    June 30, 1999
                                                                        (unaudited)         (audited)
                                                                       ------------       ------------
<S>                                                                    <C>                <C>
          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
                                                                       ============       ============


                                      F-15
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

         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 statement of operations for the year ended December 31, 1999. The
Company is 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.
The Company will account for these shares as available-for-sale securities.

(4)      INVENTORIES

         Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                                       1999             1998
                                                       ----             ----
<S>                                                <C>              <C>
Raw materials                                      $  1,728,000     $  2,926,000
Work-in-process                                       1,199,000        2,375,000
Finished goods                                        1,254,000        1,125,000
                                                   ------------     ------------
                                                   $  4,181,000     $  6,426,000
                                                   ============     ============
</TABLE>

(5)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                      1999              1998
                                                      ----              ----
<S>                                               <C>               <C>
Land and buildings                                $    306,000      $    348,000
Machinery, equipment and fixtures                    3,805,000         3,971,000
Leasehold improvements                                 479,000         1,022,000
                                                  ------------      ------------
                                                     4,590,000         5,341,000
Accumulated depreciation and amortization           (3,197,000)       (3,402,000)
                                                  ------------      ------------
                                                  $  1,393,000      $  1,939,000
                                                  ============      ============
</TABLE>


(6)      INVESTMENT IN PARTNERSHIP

         On December 19, 1996, the Company's XIT 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 XIT's
Digitran Division under a long-term lease from the partnership. Immediately
following the formation of the partnership, XIT obtained a loan from a bank for


                                      F-16
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


$750,000 (Note 8), 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. XIT's original investment
in the partnership is adjusted for the income (loss) attributable to XIT's
portion of the partnership's results of operations. The investment in the
partnership of $150,000 was included in investment in affiliates in the
accompanying 1998 consolidated balance sheet. The balance due under the note
receivable was $124,000 at December 31, 1998 and was included in current portion
of notes receivable in the accompanying 1998 consolidated balance sheet.

         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
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.

(7)      NOTES PAYABLE

         A summary of notes payable is as follows:

<TABLE>
<CAPTION>
                                                      1999             1998
                                                      ----             ----
<S>                                               <C>              <C>
Line of credit with a commercial lender           $  2,014,000     $  2,485,000
Foreign subsidiary line of credit with a bank               --           77,000
Foreign subsidiary line of credit with a bank           93,000          317,000
Other notes payable                                         --          500,000
                                                  ------------     ------------
                                                  $  2,107,000     $  3,379,000
                                                  ============     ============
</TABLE>

         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 under the revolving line of credit provision of the Domestic
Facility totaled $2,014,000 and $2,485,000 at December 31, 1999 and 1998,
respectively. The credit line is collateralized by substantially all assets of
the Company's domestic subsidiaries, bears interest at the lender's prime rate
(8.5% at December 31, 1999) plus 1% and is 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 or 1998. The lines of credit expire on June 23,
2000.


                                      F-17
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         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 6). 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 3) in January 2000. The Domestic Facility agreement
requires 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 restricts payment of any
dividends.

         The Company's French subsidiary has a bank line of credit with $0 and
$77,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at 4.2% to 4.6% at December 31, 1999
and are based on eligible accounts receivable. Approximately $380,000 of
borrowings were available under the line at December 31, 1999.

         The Company's UK subsidiary has a bank line of credit with $93,000 and
$317,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at the bank's base rate (5.5% at
December 31, 1999) plus 2.5% and are based on eligible accounts receivable.
Approximately $350,000 of additional borrowings were available under the line at
December 31, 1999.

         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 3). 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 3). 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.

(8)      LONG-TERM DEBT

         A summary of long-term debt follows:

<TABLE>
<CAPTION>
                                                    1999              1998
                                                    ----              ----
<S>                                             <C>               <C>
Term notes payable to commercial lender (a)     $    954,000      $  1,526,000
Term note payable to bank (b)                           --             135,000
Term notes payable to foreign banks (c)              108,000           101,000
Capitalized lease obligations (d)                    258,000           380,000
Other promissory notes                               267,000            93,000
                                                ------------      ------------
                                                   1,587,000         2,235,000
Current portion                                   (1,422,000)         (805,000)
                                                ------------      ------------
                                                $    165,000      $  1,430,000
                                                ============      ============
</TABLE>

           (a)       Three term notes payable to a commercial lender bearing
                     interest at the lender's prime rate (8.5% at December 31,
                     1999) plus 1.25%. The notes are collateralized by machinery
                     and


                                      F-18
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                     equipment and are payable in total monthly principal
                     installments (aggregating $28,000 at December 31, 1999),
                     plus interest through final maturity dates in fiscal 2003.
                     As a result of the Company's non-compliance with the
                     adjusted net worth covenant of the Domestic Facility (Note
                     7), the Company has classified the entire balance of these
                     term notes as a current liability at December 31, 1999.

           (b)       Term note payable to a bank which bore interest at the
                     lender's prime rate plus 1.25%. The note was repaid during
                     1999.

           (c)       The Company has 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.

           (d)       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,
1999 are as follows:

<TABLE>
<CAPTION>
                     Year Ending December 31,               Amount
                     ------------------------               ------
<S>                                                      <C>
                     2000                                $  1,422,000
                     2001                                     157,000
                     2002                                       8,000
                                                         ------------
                                                         $  1,587,000
</TABLE>

(9)       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
3).


                                      F-19
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          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, 1996.............        1,000      $    340,000             1,000      $    454,000
Accretion of preferred stock.............           --            26,000                --            34,000
Preferred stock dividends paid...........           --           (60,000)               --           (80,000)
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 and 1999....           --      $         --                --      $         --
                                          ============      ============      ============      ============
</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. The New
Preferred Shares are 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 Share equal to
$10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%) of
the arithmetic average of the three lowest closing bid prices over the forty
(40) trading days prior to the exercise date of any such conversion. No more
than 20% of the aggregate number of New Preferred Shares originally purchased
and owned by any single entity may 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.


                                      F-20
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          In November 1998, the holders of the New Preferred Shares agreed to
modify the conversion rate to $10,000 divided by $0.50 in exchange for a
reduction in the exercise price of the Warrants to $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.

          In August 1999, the agreement previously reached with the holders of
the New Preferred Shares which limited the conversion rate of such stock to
$0.50 per common share so long as the Company's common stock continued to be
listed on Nasdaq was terminated as a result of the delisting (Note 10). The
conversion rate for the New Preferred Shares reverted to the terms of the
original subscription agreement which provided that conversion would occur at
the lower of $1.25 per common share or the arithmetic average of the three
lowest closing bid prices during the forty (40) days immediately prior to
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 whereby each share of the New Preferred
Shares is convertible into 50,530 shares of common stock (the fair value of the
underlying shares of common stock) 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 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.

          In November 2000, the Company determined that because the
modifications to the conversion rate in November 1998 and December 1999 had not
been submitted to and approved by the Company's shareholders in accordance with
the Delaware General Corporation law, all conversions from November 1998 through
July 1999 and in December 1999 should have been made at the original conversion
rate of $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 trading days prior to the exercise date of any such conversion. Under the
original conversion terms, the Company would have issued approximately 250,000
additional common shares for certain conversions and issued approximately 90,000
excess common shares for other conversions. No modifications have been made to
the accompanying consolidated financial statements to reflect the potential
issuance of these additional shares because the Company is still in the process
of working with the holders of the New Preferred Shares to reach a satisfactory
resolution to this matter. The Company has submitted to the shareholders for
approval at a special meeting to be held on January 16, 2001 an amendment to the
certificate of designations, preferences and rights relating to the New
Preferred Shares. If approved, the amendment will modify the conversion rate for
conversions occurring after such amendment is filed with the Delaware Secretary
of State so that each of the New Preferred Shares will be convertible into
50,530 shares of common stock, which is the same number of shares into which
each of the New Preferred Shares would now be


                                      F-21
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


convertible if the attempted modifications to the conversion rate had been
approved by the Company's shareholders in accordance with the Delaware General
Corporation Law.

          The following table reflects the convertible redeemable preferred
stock activity:

<TABLE>
<CAPTION>
                                    Number
                                   of Shares             Amount
                                   ---------             ------
<S>                              <C>               <C>
Balance at December 31, 1997               --                --
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
                                 ============      ============
</TABLE>

(10)      STOCKHOLDERS' EQUITY

          In April 1997, the Company sold 2,000,000 investment units at $2.50
per unit. The units consist of one share of common stock and one quarter of a
warrant to purchase one share of common stock. The warrants have an exercise
price of $3.45. The proceeds to the Company were $4,258,000 (net of $600,000 of
commissions and $142,000 for other expenses). In connection with this
transaction, 200,000 warrants were issued to the placement agents at an exercise
price of $2.66.

STOCK OPTIONS AND WARRANTS

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

     -    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.

     -    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.

     -    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 XIT 1987 Employee Stock
          Option Plan were converted


                                      F-22
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          to options under the 1997 Plan as of the date of the merger between
          the Company and XIT at the exchange rate of 1.451478 (see Note 2).

         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, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                  Weighted
                                                   Average
                                      1999         Exercise      1998          1997
                                     Shares         Price       Shares        Shares
                                     ------         -----       ------        ------
<S>                                 <C>          <C>           <C>           <C>
Outstanding at beginning of year    2,047,000    $     2.13    1,999,000       842,000
Granted                               430,000          0.20      200,000        96,000
XIT/MicroTel merger                        --            --           --     1,146,000
Exercised                                  --            --           --       (30,000)
Canceled                             (897,000)         2.39     (152,000)      (55,000)
                                   ---------------------------------------------------
Outstanding at end of year          1,580,000    $     1.46    2,047,000     1,999,000
                                   ===================================================
</TABLE>

         The following table summarizes information with respect to stock
options at December 31, 1999:

<TABLE>
<CAPTION>
                                      Options Outstanding                                     Options Exercisable
                          ---------------------------------------------                ---------------------------------
                                                     Weighted
                                                      Average
                                 Number              Remaining                             Number
        Range of               Outstanding          Contractual           Weighted       Exercisable      Weighted
        Exercise              December 31,             Life                Average      December 31,       Average
         Price                    1999                (Years)               Price           1999            Price
         -----                    ----                -------               -----           ----            -----
<S>                           <C>                   <C>                   <C>           <C>               <C>
$.20 to $1.00                      430,000                9.9                $0.20          215,000          $0.20
$1.01 to $2.00                     964,000                6.1                $1.71          964,000          $1.71
$2.01 to $3.00                      56,000                6.2                $2.71           56,000          $2.71
$3.01 to $4.00                     130,000                4.4                $3.16          130,000          $3.16
                          ----------------------------------------------------------------------------------------------
$.20 to $4.00                    1,580,000                7.0                $1.46        1,365,000          $1.65
                          ==============================================================================================
</TABLE>

         Options exercisable as of December 31, 1999, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                1999               1998              1997
                                                ----               ----              ----
<S>                                          <C>                <C>               <C>
Exercisable                                  1,365,000          1,892,000         1,843,000
Weighted Average Exercise Price                  $1.65              $2.26             $2.32
</TABLE>


                                      F-23
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Weighted average exercise prices for 1999 are calculated at prices
effective as of December 31, 1999. The fair value of options granted during 1999
was $63,000, at a weighted average value of $0.15 per share. Exercise prices for
options outstanding as of December 31, 1999 generally ranged from $0.20 to $3.45
per share and the weighted average remaining contractual life for these options
was 7 years. The fair value of options granted during the years ended December
31, 1998 and 1997 were $112,000 and $132,000, at weighted average prices of
$0.56 and $1.37 per share, respectively.

         If the Company had instead elected the fair value method of accounting
for stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair value
at date of grant for options granted in 1999, 1998 and 1997 has been estimated
based on a modified Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 85% in 1999, 25% to 57% in 1998 and
73% in 1997, 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 loss, net loss available for
common stockholders and loss per share amounts for the periods presented as if
the Company had elected the fair value method of accounting for stock options.

<TABLE>
<CAPTION>
                                                  (in thousands, except per share amounts)
                                                 1999                 1998                1997
                                                 ----                 ----                ----
<S>                                     <C>                  <C>                 <C>
NET LOSS
           As reported                  $         (4,596)    $        (1,185)    $         (9,693)
           Pro forma                    $         (4,628)    $        (1,297)    $         (9,825)

NET LOSS AVAILABLE FOR COMMON
  STOCKHOLDERS
           As reported                  $         (4,637)    $        (1,245)    $         (9,753)
           Pro forma                    $         (4,669)    $        (1,357)    $         (9,885)

BASIC AND DILUTED LOSS PER SHARE
           As reported                  $           (.28)    $          (.10)    $           (.96)
           Pro forma                    $           (.28)    $          (.11)    $           (.98)
</TABLE>

         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-24
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         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, 1996                   1,198,000         $1.21 to 3.79        $3,431,000
Warrant - MicroTel merger                                  122,000              2.50               305,000
Warrants issued                                          1,170,000          2.13 to 3.45         3,410,000
                                                     ----------------------------------------------------------
Balance outstanding, December 31, 1997                   2,490,000          1.21 to 3.79         7,146,000
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                   4,292,000          0.66 to 3.79         8,734,000
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                 5,232,000         $0.25 to 3.79        $8,918,000
                                                     ==========================================================
</TABLE>

         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 subsidiary
allowing eligible subsidiary employees to purchase shares of the Company's
common stock at 85% of market value. During 1999, 1998 and 1997, 5,000, 7,000
and 6,000 shares, respectively, had been issued pursuant to the plan with 27,000
shares reserved for future issuance.

         As of December 31, 1999, the Company has 18,152,000 shares of common
stock outstanding and potentially 9,846,000 shares of common stock issuable
pursuant to the exercise of outstanding stock options and warrants and
conversion of convertible redeemable preferred stock. In accordance with its
certificate of incorporation, the Company is authorized to issue 25,000,000
shares of common stock. Accordingly, the Company may be unable to issue the
common shares pursuant to its outstanding stock options, warrants and
convertible redeemable preferred stock until such time as the Company's articles
of incorporation are amended or until the terms of the related stock options,
warrants and/or convertible redeemable preferred stock are modified.

DEBT TO EQUITY CONVERSION

         In March 1997, the Company converted $44,000 in various promissory
notes to 55,000 shares of common stock.


                                      F-25
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

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.

(11)     NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL

         The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows (undiscounted and without interest charges) for
individual business units may not be sufficient to support recorded goodwill.
During the third quarter ended September 30, 1997 the Company, due to declines
in profit margins and continuing operating losses, wrote-off the carrying value
of goodwill originating with certain acquisitions. The Company also wrote-down
the carrying value of goodwill originating from the reverse acquisition with XIT
(see Note 2) to its net realizable value. These write-downs totaled $5,693,000
and were charged to operations.

(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) before income taxes was taxed under the following
jurisdictions:

<TABLE>
<CAPTION>
                                       1999              1998          1997
                                       ----              ----          ----
<S>                                   <C>              <C>             <C>
Domestic                              $(3,954,000)     $(1,090,000)    $(9,721,000)
Foreign                                  (514,000)           6,000         125,000
                              -----------------------------------------------------
Total                                 $(4,468,000)     $(1,084,000)    $(9,596,000)
                              =====================================================
</TABLE>


                                      F-26
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                          1999             1998             1997
                                          ----             ----             ----
<S>                                <C>              <C>             <C>
Current:
    Federal                        $           --   $           --  $          --
    State                                  30,000            8,000          17,000
    Foreign                                98,000           93,000          80,000
                              -----------------------------------------------------
                                   $      128,000   $      101,000  $       97,000
                              =====================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                    1999            1998            1997
                                                    ----            ----            ----
<S>                                             <C>             <C>             <C>
Tax at U.S. federal statutory rate              $ (1,519,000)   $   (368,000)   $ (3,263,000)
State taxes, net of federal income
  tax benefit                                         30,000           8,000          17,000
Foreign income taxes                                  98,000          93,000          80,000
Write-down of goodwill                                    --              --       1,936,000
Losses with no current benefit                     1,449,000         270,000       1,096,000
Permanent differences                                 70,000          98,000         157,000
Other                                                     --              --          74,000
                                                ------------    ------------    ------------
                                                $    128,000    $    101,000    $     97,000
                                                ============    ============    ============
</TABLE>


                                      F-27
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                        1999             1998
                                                        ----             ----
<S>                                                  <C>             <C>
Deferred tax assets:
     Allowance for doubtful accounts                 $     37,000    $     90,000
     Inventory reserves and uniform capitalization        254,000         387,000
     Other accrued liabilities                            140,000         279,000
     Deferred compensation                                326,000         537,000
     Research credit carryforwards                        256,000         256,000
     Alternative Minimum Tax credit carryforwards         134,000         134,000
     Net operating loss carryforwards                  17,436,000      15,423,000
                                                     ------------    ------------

Total deferred tax assets                              18,583,000      17,106,000

Valuation allowance for deferred tax assets           (18,335,000)    (16,591,000)
                                                     ------------    ------------

Net deferred tax assets                                   248,000         515,000
                                                     ------------    ------------

Deferred tax liabilities:
     Depreciation                                        (166,000)       (515,000)
     Gain on sale of investment                           (82,000)             --
                                                     ------------    ------------

Total deferred tax liabilities                           (248,000)       (515,000)
                                                     ------------    ------------

Net deferred taxes                                   $         --    $         --
                                                     ============    ============
</TABLE>

         As of December 31, 1999, the Company has a federal net operating loss
carryforward of approximately $50,000,000 which expires at various dates between
2001 and 2019 and a state net operating loss carryforward of approximately
$5,000,000 which expires at various dates through 2004.

         As a result of the merger with XIT (Note 2), 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-28
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13)     LOSS PER SHARE

         The following table illustrates the computation of basic and diluted
loss per share:

<TABLE>
<CAPTION>
                                                                  1999            1998            1997
                                                                  ----            ----            ----
<S>                                                           <C>             <C>             <C>
NUMERATOR:
      Net loss                                                $ (4,596,000)   $ (1,185,000)   $ (9,693,000)
      Less: accretion of the excess of the redemption value
      over the carrying value of redeemable preferred stock         41,000          60,000          60,000
                                                              ------------    ------------    ------------
Income available for common stockholders                      $ (4,637,000)   $ (1,245,000)   $ (9,753,000)
                                                              ============    ============    ============

DENOMINATOR:
Weighted average number of common shares
  outstanding during the year                                   16,638,000      11,952,000      10,137,000
                                                              ------------    ============    ============

Basic and diluted loss per share                              $       (.28)   $       (.10)   $       (.96)
                                                              ------------    ============    ============
</TABLE>

         The computation of diluted loss per share 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 10.

(14)     COMMITMENTS AND CONTINGENCIES

LEASES

         The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through 2003. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense for 1999,
1998 and 1997, was $1,711,000, $2,091,000 and $2,477,000, respectively.

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

<TABLE>
<CAPTION>
                     Year Ending
                     December 31,                        Amount
                     ------------                        ------
<S>                                                 <C>
                     2000                           $  1,215,000
                     2001                                897,000
                     2002                                626,000
                     2003                                122,000
                     2004                                 84,000
                                                    ------------
                                                    $  2,944,000
                                                    ============
</TABLE>


                                      F-29
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

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 8).

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 judgement against the
former Chairman in this litigation.

         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 XIT 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.


                                      F-30
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         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 the 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

         Though 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 $31,000, $22,000 and $43,000 to the 401(k) Plans for the
calendar years ended December 31, 1999, 1998 and 1997, respectively.

(15)     SEGMENT AND MAJOR CUSTOMER INFORMATION

         The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment 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
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Circuits Segment operates principally in the U.S. market and
designs, manufactures and markets various circuit products.

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


                                      F-31
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         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.

<TABLE>
<CAPTION>
                                     1999           1998           1997
                                     ----           ----           ----
<S>                              <C>            <C>            <C>
SALES FROM EXTERNAL CUSTOMERS:
     Instruments                 $ 15,666,000   $ 17,532,000   $ 15,054,000
     Components                    10,080,000     12,412,000     12,197,000
     Circuits                       2,555,000      7,317,000     15,847,000
                                 ------------------------------------------
                                 $ 28,301,000   $ 37,261,000   $ 43,098,000
                                 ==========================================
INTERSEGMENT SALES:
     Instruments                 $         --   $     17,000   $    133,000
     Components                       279,000        635,000        957,000
     Circuits                         433,000        699,000        819,000
                                 ------------------------------------------
                                 $    712,000   $  1,351,000   $  1,909,000
                                 ==========================================
INTEREST EXPENSE:
     Instruments                 $    110,000   $     79,000   $    109,000
     Components                        75,000        323,000        396,000
     Circuits                         114,000        168,000        346,000
                                 ------------------------------------------
                                 $    299,000   $    570,000   $    851,000
                                 ==========================================
DEPRECIATION AND AMORTIZATION:
     Instruments                 $    490,000   $    265,000   $    164,000
     Components                       101,000         91,000        284,000
     Circuits                         136,000        312,000        607,000
                                 ------------------------------------------
                                 $    727,000   $    668,000   $  1,055,000
                                 ==========================================
</TABLE>

<TABLE>
<CAPTION>
                                     1999           1998           1997
                                     ----           ----           ----
<S>                              <C>            <C>            <C>
SEGMENT PROFITS (LOSSES):
     Instruments                 $ (1,828,000)  $    367,000   $    536,000
     Components                     1,341,000      2,473,000        794,000
     Circuits                      (1,043,000)      (786,000)    (1,055,000)
                                 ------------------------------------------
                                 $ (1,530,000)  $  2,054,000   $    275,000
                                 ==========================================

SEGMENT ASSETS:
     Instruments                  $ 7,960,000   $ 10,234,000   $  9,691,000
     Components                     5,213,000      7,193,000      6,946,000
     Circuits                       1,379,000      2,737,000      7,966,000
                                 ------------------------------------------
                                 $ 14,552,000   $ 20,164,000   $ 24,603,000
                                 ==========================================
</TABLE>


                                      F-32
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                       1999            1998            1997
                                                       ----            ----            ----
<S>                                                <C>             <C>             <C>
NET SALES
     Total sales for reportable segments           $ 29,013,000    $ 38,612,000    $ 45,007,000
     Elimination of intersegment sales                 (712,000)     (1,351,000)     (1,909,000)
                                                   --------------------------------------------
Total consolidated revenues                        $ 28,301,000    $ 37,261,000    $ 43,098,000
                                                   ============================================

PROFIT (LOSS) BEFORE INCOME TAXES
     Total profit (loss) for reportable segments   $ (1,530,000)   $  2,054,000    $    275,000
     Write-down of goodwill                                  --              --      (5,693,000)
     Unallocated amounts:
         General corporate expenses                  (2,938,000)     (3,138,000)     (4,178,000)
                                                   --------------------------------------------
Consolidated loss before income taxes              $ (4,468,000)   $ (1,084,000)   $ (9,596,000)
                                                   ============================================

ASSETS
     Total assets for reportable segments          $ 14,552,000    $ 20,164,000    $ 24,603,000
     Other assets                                     2,069,000       1,078,000         837,000
                                                   --------------------------------------------
Total consolidated assets                          $ 16,621,000    $ 21,242,000    $ 25,440,000
                                                   ============================================

INTEREST EXPENSE
     Interest expense for reportable segments      $    299,000    $    570,000    $    851,000
     Other interest expense                             112,000         105,000          44,000
                                                   --------------------------------------------
Total interest expense                             $    411,000    $    675,000    $    895,000
                                                   ============================================

DEPRECIATION AND AMORTIZATION
     Depreciation and amortization expense
          for reportable segments                  $    727,000    $    668,000    $  1,055,000
     Other depreciation and amortization expense        206,000         190,000         226,000
                                                   --------------------------------------------
Total depreciation and amortization                $    933,000    $    858,000    $  1,281,000
                                                   ============================================
</TABLE>


                                      F-33
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows:

<TABLE>
<CAPTION>
                                     1999           1998           1997
                                     ----           ----           ----
<S>                              <C>            <C>            <C>
Net sales:
     United States               $ 11,878,000   $ 19,965,000   $ 28,098,000
     Japan                            658,000        706,000        857,000
     France                        10,958,000     11,118,000      8,450,000
     United Kingdom                 4,807,000      5,472,000      5,693,000
                                 ------------------------------------------
                                 $ 28,301,000   $ 37,261,000   $ 43,098,000
                                 ==========================================
Long-lived assets:
     United States               $  2,533,000   $  3,656,000   $  6,631,000
     Japan                             16,000         13,000         12,000
     France                           257,000        458,000        807,000
     United Kingdom                   190,000        133,000        296,000
                                 ------------------------------------------
                                 $  2,996,000   $  4,260,000   $  7,746,000
                                 ==========================================
</TABLE>

         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.

         The Company had sales to one customer which accounted for approximately
14% of net sales in 1997. No one customer accounted for more than 10% of net
sales in 1998 or 1999.

(16)     GOING CONCERN

         The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the years ended
December 31, 1999, 1998 and 1997, the Company experienced significant operating
losses. Additionally, the Company is in default of the Domestic Credit Facility
agreement (Note 7) as the Company is not in compliance with an adjusted net
worth covenant contained therein. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The Company's foreign subsidiaries in the United Kingdom,
France and Japan have separate borrowing arrangements. Although management has
been successful in obtaining working capital to fund operations to date, there
can be no assurance that the Company will be able to generate additional capital
in the future.

         During 1999, the Company took certain actions in an effort to become
profitable and improve cash flow from operations in the future. As a result of
the current and future anticipated operating losses at the Company's HyComp
subsidiary, the Company sold substantially all the assets of this subsidiary in
the first quarter of 1999. Additionally, during the second half of 1999, the
Company embarked on a cost reduction program, which included a significant
reduction in personnel at the Company's domestic subsidiaries and the relocation
and downsizing of the corporate headquarters and certain subsidiaries'
manufacturing and office facilities. Furthermore, the Company terminated its
lease obligation related to its corporate headquarters and one manufacturing
facility in connection with the sale of its investment in a partnership


                                      F-34
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Note 6) and also subleased a portion of another subsidiary's facility. In
addition, subsequent to year end, the Company sold its investment in the common
stock of Digital Transmission Systems, Inc. for which the Company received cash
proceeds of $520,000 and common shares of a foreign publicly-traded company,
with a then current market value of approximately $720,000 (Note 3).

         The Company is implementing a corporate finance program designed to
improve its working capital structure by considering certain alternatives to its
existing domestic credit facilities. The Company is actively searching for
alternative financing to replace the current domestic credit facility. Although
no replacement lender has been selected, the Company has identified several
prospective lenders, one of whom has submitted a proposal to the Company. The
finance program also involves the potential private placement of certain debt or
equity securities. Additionally, management is exploring the potential to
further leverage its common stock held in Wi-LAN, Inc. (Note 3) which has a fair
market value of approximately $1,600,000 as of February 29, 2000. The Company's
domestic credit facilities lender has provided an additional $400,000 of
borrowing capacity against this asset. In addition, the Company is in
negotiations with a foreign financial institution to leverage the Company's
existing United Kingdom subsidiary to provide additional working capital for
operations and acquisitions. Finally, management has developed and continues to
implement plans to reduce existing cost structures, improve operating
efficiencies, and strengthen the Company's operating infrastructure.


                                      F-35
<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                        ADDITIONS
                                         BALANCE AT     CHARGED TO       DEDUCTIONS
                                        BEGINNING OF    COSTS AND       WRITE-OFFS OF      BALANCE AT
DESCRIPTION                                 YEAR         EXPENSES         ACCOUNTS        END OF YEAR
-----------                                 ----         --------         --------        -----------
<S>                                   <C>               <C>            <C>                <C>
Allowance for doubtful accounts:
     Year ended December 31, 1999     $    275,000           36,000         (109,000)          202,000
     Year ended December 31, 1998          241,000           97,000          (63,000)          275,000
     Year ended December 31, 1997           63,000          251,000          (73,000)          241,000
                                      ============     ============     ============      ============
</TABLE>


                                      F-36
<PAGE>

                                  EXHIBIT INDEX

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

2.1    Merger  Agreement  dated December 31, 1996 between XIT  Corporation,  XIT
       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., XIT
       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.,  XIT
       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 XIT 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 XIT
       Corporation,  the Registrant,  Bryan Fuller, Tama-Lee Mapalo and Etch-Tek
       Electronics Corporation (6)

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 20, 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)

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
       XIT 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 XIT  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
       XIT 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)

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)

                                      71

<PAGE>

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

10.16  Security Agreement between Congress Financial  Corporation  (Western) and
       XIT 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 XIT, 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 XIT Corporation and P&S Development (14)

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

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

21.1   Subsidiaries of the Registrant (15)

23.1   Consent of 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)
(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)

                                      72

<PAGE>

(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 the Registrant's  registration  statement on
       Form S-1/A (Registration Statement No. 333-41580)

                                      73