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

                               AMENDMENT NO. 3 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) 987-9220
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
                                                            $.0033 PAR VALUE
                                                            (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
         Yes   X     No
             -----     -----

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
           -----

The aggregate market value of the voting stock held by nonaffiliates of the
registrant computed by reference to the closing price of such stock, was
approximately $6,035,793 at March 23, 2001.

The number of shares of the issuer's common stock, $.0033 par value, outstanding
as of March 23, 2001 was 20,570,113.

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>

                                     PART I

ITEM 1.  BUSINESS..........................................................    3

ITEM 2.  PROPERTIES........................................................   22

ITEM 3.  LEGAL PROCEEDINGS.................................................   23

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............   23

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS...........................................................   24

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........   44

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................   44

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE..............................................   44

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................   45

ITEM 11. EXECUTIVE COMPENSATION............................................   48

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....   58

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................   60

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K............   65

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

INDEX TO EXHIBITS..........................................................   66

SIGNATURES.................................................................   71

EXHIBITS FILED WITH THIS REPORT............................................   72

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                                     PART I

ITEM 1.       BUSINESS.

CORPORATE OVERVIEW

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

         On March 26, 1997 we acquired our third present direct wholly-owned
operating subsidiary, 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 MicroTel 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 representing a majority ownership interest in MicroTel.
Because the merger resulted in a change in control of MicroTel, the merger was
accounted for as a reverse acquisition, and historical financial information of
XIT Corporation is used as the historical financial information of MicroTel.

         We previously organized our operations in three business segments:

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

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

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

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

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and circumstances allow. We also believe that we may be able to take advantage
of cross-marketing opportunities for our central office and field equipment.
Further, we anticipated and have achieved initial success in increasing the
capacity of CXR Telcom Corporation's Fremont, California plant without
increasing our overhead by integrating T-Com's operations with those of CXR
Telcom Corporation.

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

         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:

         Telecommunications

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

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

         Electronic Components (digital switches and electronic power supplies)

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

INDUSTRY OVERVIEW

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

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

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

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

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

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

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

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

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

         ELECTRONIC COMPONENTS

         Electronic components are the building blocks for the high technology
applications that feed the information hungry society that is driving today's
world economy. The electronic components industry comprises three basic
segments, which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, aerospace, military, commercial, industrial and other
environments, each of which places constraints defining performance and
permitted use of differing grades of components.

         We are active only in the industry segments that are characterized by
low volume, high margin and long lead times, namely the aerospace, military and

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<PAGE>

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.

         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. We also manufacture and sell
electronic components such as digital switches for aerospace and military use
and custom electronic power supplies used primarily by aerospace, military and
telecommunications customers.

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

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

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

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

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

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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 versatility of this concept
has enabled us to offer numerous different product combinations to our
customers. These variations include customized selection of data speeds, data
interfaces, power inputs, operating temperatures, data formats and power
consumption. In addition, our desktop and rack mount transmission product lines
allow us to serve both central site data communications needs and remote access
and transmission sites on both the enterprise-wide and single location level.

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

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

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

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

OUR STRATEGY

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

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

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         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.

         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.

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

PRODUCTS AND SERVICES

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

         Telecommunications

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

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

         Electronic Components (digital switches and electronic power supplies)

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

                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
       SEGMENT AND PRODUCT TYPE                         2000     1999      1998
       ------------------------                        -------  -------  -------
       Telecommunications
         Test Instruments                               28.2%     19.2%    26.7%
         Transmission and Network Access Products       26.2%     39.3%    29.9%
                                                       -------------------------
         Other Products and Services                     1.5%      1.9%     1.7%
                                                       -------------------------
                                                        55.9%     60.4%    58.3%
                                                       -------------------------

       Electronic Components
         Digital Switches                               28.6%     20.5%    21.6%
         Electronic Power Supplies                      14.8%     15.8%    14.2%
         Other Products and Services                     0.7%      3.3%     5.9%
                                                       -------------------------
                                                        44.1%     39.6%    41.7%
                                                       -------------------------
                                                       100.0%    100.0%   100.0%
                                                       =========================

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OUR TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
PRODUCTS BUSINESS

         Our telecommunications business comprises telecommunications test
equipment and transmission and network access products. During the years ended
December 31, 2000 and 1999, the sale of telecommunications products, equipment
and related services accounted for approximately 55.9% and 60.4% of our total
revenues, respectively. These products, many of which are described below, are
configured in a variety of models designed to perform analog and digital
measurements or to transmit data at speeds varying from low-speed voice grade
transmission to high-speed broadband Internet access, including:

         --   Traditional telephone services, such as modems and plain old
              telephone service, or POTS
         --   Competitive local exchange carriers, or CLECs
         --   Bite error rate test, or BERT
         --   Dial tone multi-frequency, or DTMF
         --   Transmission impairment measurement, or TIMS
         --   Central office and private business exchange, or CO/PBX, services,
              where the central office houses the local exchange equipment that
              routes calls to and from customers, and to Internet service
              providers and long-distance carriers
         --   Digital data services, or DDS, including the USA and worldwide
              standards described below:
            I.USA standards, including:
              --   ISDN, which is an enhanced digital network that offers more
                   bandwidth and faster speed than the traditional telephone
                   network
              --   Caller identification or caller-ID services
              --   Digital subscriber line technology, or DSL, which transmits
                   data up to 50 times faster than a conventional dial-up modem
                   using existing copper telephone wires
              --   Multi-rate symmetric DSL, or MSDSL, which allows the
                   transmission of data over longer distances than single-rate
                   technologies by adjusting automatically or manually the
                   transmission speed
              --   T-1, which is a standard for digital transmission in North
                   America used by large businesses for broadband access
              --   FT-1, or fractional T-1, which uses only a selected number of
                   channels from a T-1
              --   T-3, which is the transmission rate of 44 megabits, or
                   millions of bits, per second, or 44 Mbps, with 672 channels
              --   Digital signal level 0, or DS0, which is 64 kilobits, or
                   thousands of bits, per second, or 64 kbps, with one channel
                   of a T-1, E-1, E-3 or T-3
              --   Digital signal level 1, or DS1, which is the T-1 transmission
                   rate of 1.54 Mbps, with 24 channels
              --   Digital signal level 3, or DS3, which is the T-3 transmission
                   rate of 44 Mbps, with 672 channels
              --   Router, or an intelligent device used to connect local and
                   remote networks
              --   Terminal adapter, which is situated between telephones or
                   other devices and an ISDN line and allows multiple voice/data
                   to share an ISDN line
              --   Transmission control protocol/Internet protocol, or TCP/IP
            II. Worldwide standards, including:
              --   E-1, which is the European standard for international digital
                   transmission used by large businesses for broadband access,
                   with 2.108 Mbps, with 30 channels
              --   FE-1, or fractional E-1, which uses only a selected number of
                   channels from an E-1
              --   E-3, which is the European standard for T-3, with 34.368 Mbps
                   and 480 channels

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         TELECOMMUNICATIONS TEST INSTRUMENTS

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

         We acquired our CXR HALCYON 700 series of telecommunications test sets
in 1997 with the goal of gradually replacing our CXR 5200 series of
telecommunications test sets that are larger, heavier and not computer
compatible. The unique modular nature of our CXR HALCYON 700 series test
equipment provides an easy configuration and upgrade path for testing of the
specific services offered by the various national and international service
providers. Recent key performance enhancements to this product family address
the trend toward conversion of analog service installations to high-speed
digital access lines. Some of these key features include:

         --       ability to conduct the 23-tone test, which is an automated
                  single key-stroke test that performs the equivalent of over 12
                  individual test sequences;
         --       load-coil analysis, which identifies the presence of voice
                  coils that prevent high-speed digital access;
         --       installation and testing of DS3, which is a very high-speed
                  digital transmission service that is equivalent to 28 T-1
                  circuits; and
         --       voice analysis and testing of individual T-1 channels.

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

            PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

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

         HALCYON 704A-456               --  universal data test set
                                        --  handheld wideband test set for
                                            installation and maintenance of
                                            analog voice and data and digital
                                            data circuits including Switched 56K
                                        --  expands upon the features of the
                                            704A-400 to add DDS BRI/ISDN and
                                            DS1/T-1/FT-1 test functions

         HALCYON 756A                   --  handheld integrated test set for
                                            installation and maintenance of
                                            digital data circuits, including
                                            DDS, Switched 56K, 2-wire Datapath,
                                            ISDN, T-1 and FT-1
                                        --  provides users with intuitive user
                                            interface allowing quick circuit
                                            diagnosis and repair without
                                            extensive training

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<PAGE>

            PRODUCT NAME                     KEY USES, FEATURES AND FUNCTIONS

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

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

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

         TRANSMISSION AND NETWORK ACCESS PRODUCTS

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

         Modems
         ------

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




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

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

                                       12


<PAGE>

         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

         CB2000                   The primary function of this unit is to split
                                  one or two primary rate interface links, or
                                  PRIs, into multiple basic rate interfaces,
                                  or BRIs.
                                        --  this allows substantial cost savings
                                            by allowing more effective use of
                                            available ISDN resources without the
                                            limitations of conventional voice
                                            PBX
                                        --  this allows for migration from BRI
                                            to PRI when the number of ports
                                            needs to be increased while
                                            preserving the user's investment in
                                            existing BRI-based terminal
                                            equipment

                                        --  this unit can be used in a wide
                                            variety of situations where multiple
                                            BRI and PRI access is required, such
                                            as:

                                                - videoconferencing, where the
                                                  unit can be used to aggregate
                                                  bandwidth of multiple BRI
                                                  lines to provide the necessary
                                                  bandwidth, and to connect the
                                                  videoconferencing system to
                                                  the ISDN network through a PRI
                                                  access while still providing
                                                  connectivity to other ISDN
                                                  devices, or to connect two or
                                                  more videoconferencing systems
                                                  together within the same
                                                  building or campus without
                                                  going through the ISDN public
                                                  network
                                                - ISDN network simulation, which
                                                  can be used in places such as
                                                  showrooms, exhibition and
                                                  technical training centers to
                                                  eliminate the need to have
                                                  access to, and pay for access
                                                  to, the ISDN public network
                                                  for telephone or data calls
                                                - remote access servers, which
                                                  usually use multiple BRIs,
                                                  often need a method for
                                                  migration from multiple BRIs
                                                  to a single PRI as traffic and
                                                  the number of users expands

                                       13


<PAGE>

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

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

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

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

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

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

                       OUR ELECTRONIC COMPONENTS BUSINESS

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

         DIGITAL SWITCHES

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

                                       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 December 31, 2000 and 1999, our
backlog of firm, unshipped orders was approximately $12.5 million and $6.2
million, respectively. Our December 31, 2000 backlog is related approximately
87% to our electronic components business, which tends to provide us with long
lead times for our manufacturing processes due to the custom nature of the
products, and 13% to our telecommunications business, the majority of which
portion relates to our data transmission and network access products. Of these
backlog orders, we anticipate fulfilling approximately 80% of our electronic
components orders and 100% of our telecommunications orders within the current
fiscal year. However, we cannot assure you that we will be successful in
fulfilling these orders in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

         WARRANTIES

         Generally, our electronic components carry a one-year limited parts and
labor warranty and our telecommunications products carry a two-year limited
parts and labor warranty. Typically our telecommunications products may be
returned within 30 days of purchase if a new order is received, and the new

                                       15


<PAGE>

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. During 2000, our top five telecommunications test instruments
and transmission and network access products customers in terms of revenues were
Verizon, Southeast Datacom Incorporated, La Poste (French post office), Nynex
and Bouygues Telecom. None of our telecommunications test instruments,
transmission or network access products customers represented more than ten
percent of our revenues during 2000. However, because we derive a significant
portion of our revenues from sales to regional Bell operating companies, or
RBOCs, we have experienced and will continue to experience for the foreseeable
future a significant impact on our quarterly operating results due to the
budgeting cycles of the RBOCs. RBOCs generally obtain approval for their annual
budgets during the first quarter of each calendar year. If an RBOC's annual
budget is not approved early in the calendar year or is insufficient to cover
its desired purchases for the entire calendar year, we are unable to sell
products to the RBOC during the period of the delay or shortfall.

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

         ELECTRONIC COMPONENTS

         We sell our components primarily to original equipment manufacturers in
the electronics industry, including manufacturers of aerospace and military
systems, communications equipment, industrial instruments and test equipment.
During 2000, our top five electronic components customers in terms of revenues
were BAE Systems Ltd. (including other U. K. companies affiliated with BAE
Systems, Ltd.), BAE Systems Canada, Inc., Smiths Industries Aerospace,

                                       16


<PAGE>

Electrical Maintenance, Inc. and Raytheon Systems Company. None of our
electronic components customers represented more than ten percent of our total
revenues during 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 centers.

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

     ELECTRONIC COMPONENTS

         We market and sell our electronic components through 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.

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

                                       17


<PAGE>

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

         We rely on long-term orders and repeat business from our existing
customers. We also approach our existing customers and their competitors to
discuss opportunities for us to provide them with additional types of switches
they may need. Also, Digitran Division's reputation spanning over 40 years in
the electronic components industry and the fact that major original equipment
manufacturers have designed many of our switches into their product
specifications has frequently resulted in customers seeking us out to
manufacture for them unique as well as our standard digital switches.

COMPETITION

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

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

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

         Our principal competitors for our telecommunications test instruments,
transmission and network access products include Patton Electronics Corporation,
Adtran, Digital Engineering. Ltd. and GDC for transmission and network access
products and TTC Corporation (a subsidiary of Dynatech Corporation), Ameritech
Corporation, Fluke and Sunrise Telecom, Inc. for test instruments. We believe
that some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.

         ELECTRONIC COMPONENTS

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

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

                                       18


<PAGE>

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

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

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

         Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead times for delivery are often
available. Typically, our electronic components segment produces products in 1
to 300 piece batches, with a ten- to thirty-week lead time. The lead time is
predominately to source sub-component piece parts such as electronic components,
mechanical components and services. Typical build time is six to eight weeks
from receipt of external components.

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

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

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

PRODUCT DEVELOPMENT AND ENGINEERING

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

                                       19


<PAGE>

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

         Our product development costs in 2000, 1999 and 1998 were related
primarily to development of new telecommunications test equipment, trunk testing
system products and data communications equipment. Current research expenditures
are directed principally toward enhancements to the current test instrument
product line and development of increased bandwidth, or faster speed,
transmission products. These expenditures are intended to improve market share
and gross profit margins, although we cannot assure you that we will achieve
these improvements.

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

INTELLECTUAL PROPERTY

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

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

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

                                       20


<PAGE>

Standards Institute. Internationally, our products must comply with standards
established by the European Committee for Electrotechnical Standardization, the
European Committee for Standardization, the European Telecommunications
Standards Institute, telecommunications authorities in various countries as well
as with recommendations of the International Telecommunications Union. The
failure of our products to comply, or delays in compliance, with the various
existing and evolving standards could negatively impact our ability to sell our
products.

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

EMPLOYEES

         As of March 23, 2001, we employed a total of 221 persons in our various
divisions and subsidiaries. None of our employees are represented by labor
unions, and there have not been any work stoppages at any of our facilities. We
believe that our relationship with our employees is good.

                                       21


<PAGE>

ITEM 2.       PROPERTIES.

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

<TABLE>
<CAPTION>
         BUSINESS UNIT                               LOCATION                   FUNCTION
         -------------                               --------                   --------

<S>                                           <C>                            <C>
MicroTel International, Inc.                  Rancho Cucamonga, California   Administrative
(corporate headquarters)

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

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

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

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

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

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

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

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

         In December 1996, 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 and manufacturing
facility are located within approximately one mile of each other in the City of
Rancho Cucamonga, California. The lease on the manufacturing facility expires in

                                       22


<PAGE>

November 2004, and the lease on the headquarters facility expires in October
2002. Concurrent with the relocation, 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 some other debt of approximately $17,000. The
sale also included a provision to release us from our future lease obligations
consisting of seven remaining years and approximately $3,000,000 of future lease
payments regarding the property. As part of the mutual release, we relinquished
our claim on a $51,000 deposit and a $115,000 note receivable from the lessor.

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

ITEM 3.       LEGAL PROCEEDINGS.

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

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

         None.

                                       23


<PAGE>
                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS.

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

         Until May 12, 1999, our common stock was traded on the Nasdaq SmallCap
Market. On May 13, 1999, the listing of our common stock on the Nasdaq SmallCap
Market was discontinued, and thereafter our common stock has been traded on the
NASD's OTC Bulletin Board under the symbol "MCTL." The table below shows for
each fiscal quarter indicated the high and low bid prices per share of our
common stock. The prices shown reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

                                                               PRICE RANGE
                                                          ----------------------
      1998:                                                 LOW          HIGH
                                                          -------     ----------
      First Quarter (January 1 - March 31).............   $ .875      $ 1.625
      Second Quarter (April 1 - June 30)...............     .75         1.28125
      Third Quarter (July 1 - September 30)............     .4375       1.00
      Fourth Quarter (October 1 - December 31).........     .375         .84375

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

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

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

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

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

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

         In June and July 1998, we sold 200 shares of Series A Preferred Stock
for $10,000 per share to three institutional investors. Each share of Series A

                                       24


<PAGE>

Preferred Stock was 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 July 1998, we issued warrants to purchase an aggregate of 250,000
shares of common stock at an exercise price of $1.25 per share to one entity and
one individual in consideration for placement agent services rendered in
connection with the private placement of Series A Preferred Stock.

         In July 1998, we issued warrants to purchase an aggregate of 250,000
shares of common stock at an exercise price of $1.25 per share to one individual
in consideration for investor relations services rendered.

         In December 1998, we 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, we exercised our 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, we 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, we issued 250,000 shares of common stock valued at
$225,675 to our then legal counsel in connection with legal services rendered.

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

         In March 1999, we issued warrants to purchase an aggregate of 15,000
shares of common stock at an exercise price of $0.75 per share to one individual
in consideration for investment banking services rendered.

         In March 1999, we issued warrants to purchase an aggregate of 50,000
shares of common stock at an exercise price of $0.75 per share to one individual
in consideration for investor relations services rendered.

         In March 1999, we issued warrants to purchase an aggregate of 150,000
shares of common stock at an exercise price of $0.75 per share to two
individuals in consideration for consulting services rendered.

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

                                       25


<PAGE>

         In June 1999, we 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.

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
CONSOLIDATED STATEMENTS OF                                    MONTHS
OPERATIONS AND COMPREHENSIVE INCOME                            ENDED
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      11,247
Engineering and product development
   expense...........................       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)     (4,478)
Other income (expense), net..........       274       (399)       (196)       (924)       (194)         10
                                       ---------  ---------   ---------   ---------   ---------   ---------
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
                                       =========  =========   =========   =========   =========   =========
</TABLE>

                                       26


<PAGE>

<TABLE>
<CAPTION>
                                       AS OF SEPTEMBER 30,             AS OF DECEMBER 31,
                                   ----------------------------  ----------------------------
                                     1995      1996      1996      1997      1998      1999
                                   --------  --------  --------  --------  --------  --------
CONSOLIDATED BALANCE SHEET DATA:                          (IN THOUSANDS)
<S>                                <C>       <C>       <C>       <C>       <C>       <C>
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.

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

         The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes to financial statements
included elsewhere in this Annual Report on Form 10-K. This report and our
consolidated financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:

         --   the projected growth in the telecommunications and electronic
              components markets;
         --   our business strategy for expanding our presence in these markets;
         --   anticipated trends in our financial condition and results of
              operations; and
         --   our ability to distinguish ourselves from our current and future
              competitors.

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

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

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

                                       27


<PAGE>

OVERVIEW

         We previously organized our operations in three business segments:

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

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

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

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

         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 2000 were to customers in the telecommunications
industry, we also have significant sales to industrial, aerospace and military
customers.

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

         Although our operations as of the date of filing of this report are
organized into two business segments, the financial statements and the
discussions relating to the financial statements contained in this item of this
report reflect our previous organization into three segments because the
discontinuation of our circuits segment did not occur until October 2000.

                                       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.

                                                      YEARS ENDED DECEMBER 31,
                                                    ----------------------------
                                                      1997      1998      1999
                                                    --------  --------  --------

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)

       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, the discontinuance of our low margin
subsystem assembly business, which represented sales of $404,000 in 1999 as
compared to $696,000 in 1998, a $1,199,000 decline in our switch business and a
$158,000 decline in sales of our power supply products.

                                       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. For the years ended December 31, 1999 and 1998, cost of
sales included provisions for inventory obsolescence of $1,145,000 and $885,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that MicroTel intends to dispose of. The
allowance for inventory obsolescence is reduced only upon disposal of such
inventory.

         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 $579,000 (4.9%) to $11,247,000 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 $565,000 (8.8%)
to $6,994,000 for 1999 as compared to $6,429,000 for 1998 primarily due to the

                                       30


<PAGE>

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, a
$452,000 write-off of a note receivable related to the divestiture of XCEL
Arnold Circuits, Inc. 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 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 income, net of $62,000 in 1999 includes 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

                                       31


<PAGE>

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.

         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. For the years ended December 31, 1998 and 1997, cost of
sales included provisions for inventory obsolescence of $885,000 and $3,134,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that MicroTel intends to dispose of. The
allowance for inventory obsolescence is reduced only upon disposal of such
inventory.

         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.

                                       32


<PAGE>

         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.

LIQUIDITY AND CAPITAL RESOURCES

         The consolidated financial statements included in this report were
prepared assuming we would continue as a going concern. During the years ended
December 31, 1999, 1998 and 1997, we experienced significant operating losses.
Also, 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 for our 1999 financial
statements to include an explanatory paragraph relating to our ability to
continue as a going concern. The consolidated financial statements included in
this report do not include any adjustments that might have resulted from the
outcome of this uncertainty.

         Subsequent to December 31, 1999, we replaced our previous domestic
credit facility, and we reported income from continuing operations in amendment
no. 1 to our annual report on Form 10-K for the year ended December 31, 2000.
Our independent certified public accountants rendered an unqualified opinion on
our financial statements for the year ended December 31, 2000. In light of the
important changes that have occurred in our financial position since December
31, 1999, we believe it is appropriate for us to base the following discussion
of liquidity and capital resources upon our 2000 financial statements and our
current financial position rather than upon our 1999 financial statements
included in this report. As a result of discontinued operations recorded in
2000, various reclassifications have been made to the 1999 cash flow
information included in the liquidity discussion below.

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

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

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

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

                                       33


<PAGE>

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

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

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

         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.

EFFECTS OF INFLATION

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

EURO CONVERSION

         Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 49% of our total net sales

                                       34


<PAGE>

for the year ended December 31, 2000. Net sales from the French subsidiary
participating in the Euro conversion were 33% of our net sales for the year
ended December 31, 2000. We continue to review the impact of the Euro conversion
on our operations.

         In 1998, our European operations took steps to ensure their capability
of entering into Euro transactions as of January 1, 1999. No material changes to
information technology and other systems were necessary to accommodate these
transactions because 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      3,342      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)    (1,429)      (724)      (657)
Other income (expenses), net ......       521       (242)      (220)      (253)       701        520       (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)
                                      ========   ========   ========   ========   ========   ========   ========   ========
Basic earnings (loss) per share ...     (0.08)     (0.02)     (0.01)     (0.00)     (0.07)     (0.06)     (0.06)     (0.09)
                                      ========   ========   ========   ========   ========   ========   ========   ========
Diluted earnings (loss) per share .     (0.08)     (0.02)     (0.01)     (0.00)     (0.07)     (0.06)     (0.06)     (0.09)
                                      ========   ========   ========   ========   ========   ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS                     AS A PERCENTAGE OF NET SALES
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 .........................     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.

                                       36


<PAGE>

         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 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 $452,000 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

                                       37


<PAGE>

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.

RISK FACTORS

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

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

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

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 52.8% of our net sales for the year ended December
31, 2000. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.

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

         Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
telecommunications and electronic components markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we

                                       38


<PAGE>

do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could cause us to reduce our
competitiveness, revenues, profit margins or market share.

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

         During the year ended December 31, 2000, the sale of telecommunications
equipment and related services accounted for approximately 56% of our total
sales and the sale of electronic components accounted for approximately 44% of
our total sales. In many cases we have long-term contracts with our
telecommunications and electronic components customers that cover the general
terms and conditions of our relationships with them but that do not include
long-term purchase orders or commitments. Rather, our customers issue purchase
orders requesting the quantities of telecommunications equipment they desire to
purchase from us, and if we are able and willing to fill those orders, then we
fill them under the terms of the contracts. Accordingly, we cannot rely on
long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.

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

         The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. We have, from time to time,
experienced difficulty in obtaining some components. We do not have guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that our suppliers will continue to meet our requirements. If our existing
suppliers are unable to meet our requirements, we could be required to alter
product designs to use alternative components or, if alterations are not
feasible, we could be required to eliminate products from our product line.

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

                                       39


<PAGE>

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

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

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

         Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President,
Graham Jefferies. Mr. Oliva co-founded XIT Corporation and has developed
personal contacts and other skills that we rely upon in connection with our
financing, acquisition and general business strategies. Mr. Jefferies is a
long-time employee of MicroTel who we have relied upon in connection with our
United Kingdom acquisitions and who fulfills significant operational
responsibilities in connection with our foreign operations. Consequently, the
loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management
could have a material adverse effect on us. Although we have entered into
employment agreements with several key employees, we have not entered into any
employment agreement with any of our executive officers other than with Mr.
Oliva and Mr. Jefferies. We maintain key-man life insurance on Mr. Oliva and Mr.
Jefferies. However, we cannot assure you that we will be able to maintain this
insurance in effect or that the coverage will be sufficient to compensate us for
the loss of the services of Mr. Oliva or Mr. Jefferies.

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

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

         For example, changes affecting the telecommunications industry,
including consolidations and restructuring of United States and foreign
telephone companies, can cause our sales to decrease or increase. Our sales may
increase if we obtain new customers as a result of the consolidations or
restructurings. However, our sales may decrease, either temporarily to the
extent we have difficulty collecting monies due from our customers who are in
the process of reorganizing, or permanently to the extent our customers are
acquired by or combined with companies that are and choose to remain customers
of our competitors.

         In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of RBOCs has had and will continue to have for the
foreseeable future a significant impact on our quarterly operating results.
RBOCs generally obtain approval for their annual budgets during the first

                                       40


<PAGE>

quarter of each calendar year. If an RBOC's annual budget is not approved early
in the calendar year or is insufficient to cover its desired purchases for the
entire calendar year, we are unable to sell products to the RBOC during the
period of the delay or shortfall.

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

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

         Our future success will be highly dependent on proprietary technology,
particularly in our telecommunications business. However, we do not hold any
patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology. Our financial condition would be adversely impacted if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.

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

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

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

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

                                       41


<PAGE>

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

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

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

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

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

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

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

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

                                       42


<PAGE>

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 additional financing will be available to us on acceptable terms, or at
all. If we raise additional funds by issuing equity securities, further dilution
to the existing stockholders may result. If adequate funds are not available, we
may be required to delay, scale back or eliminate portions of our operations and
product development and marketing efforts or to obtain funds through
arrangements with partners or others that may require us to relinquish rights to
some of our technologies or potential products, services or other assets.
Accordingly, the inability to obtain financing could result in a significant
loss of ownership and/or control of our proprietary technology and other
important assets and could also adversely affect our ability to fund our
continued operations and our product development and marketing efforts that
historically have contributed significantly to our competitiveness.

SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AFTER THE DATE OF THIS
REPORT COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO
RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.

         As of March 23, 2001, we had outstanding approximately 20.6 million
shares of common stock and options, warrants and preferred stock that were
exercisable for or convertible into approximately 6.5 million shares of common
stock. Many of the shares of common stock underlying outstanding warrants,
options or shares of preferred stock are or may in the future be registered or
otherwise become eligible for resale in the public market. Sales of a
substantial number of shares of our common stock in the public market, or the
perception that sales could occur, could adversely affect the market price for
our common stock. Any adverse effect on the market price for our common stock
could make it difficult for us to sell equity securities at a time and at a
price that we deem appropriate.

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

         Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap
Market. We were unable to maintain the minimum bid price of $1.00 per share and
our stock was delisted from that market. Since May 13, 1999, our common stock
has been traded under the symbol "MCTL" on the NASD's OTC Bulletin Board.
Because our stock trades on the OTC Bulletin Board rather than on a national
securities exchange, you may find it difficult to either dispose of, or to
obtain quotations as to the price of, our common stock.

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

         Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 200 have been designated as

                                       43


<PAGE>

Series A Preferred, of which 25 are currently outstanding. In addition, 150,000
shares have been designated as Series B Preferred Stock, all of which are
currently outstanding. The rights of the holders of our common stock are subject
to the rights of the holders of our currently outstanding preferred stock and
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that we may issue in the future. The issuance of
preferred stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, which would delay, defer or prevent a change in control of MicroTel.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.

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

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

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

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

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

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.

                                       44


<PAGE>

                                    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 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

                                       45


<PAGE>

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 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.

COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES

         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

                                       46


<PAGE>

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.

                                       47


<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
                                                                UNDERLYING      ALL OTHER
         NAME AND PRINCIPAL POSITION       YEAR      SALARY      OPTIONS      COMPENSATION
         ---------------------------      ------    ---------  -------------  ------------

    <S>                                    <C>      <C>          <C>            <C>
    Carmine T. Oliva.....................  1999     $198,872         --         $4,821 (2)
      President and Chief Executive        1998     $198,872         --         $2,411 (2)
      Officer (1)                          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 (5)
      Executive Vice President and Chief   1998     $ 98,918     30,000         $5,567 (5)
      Operating Officer of Telecommuni-    1997     $ 95,755         --         $6,527 (5)
      cations Group (4)

    Randolph D. Foote....................  1999     $ 23,267     50,000             --
      Senior Vice President, Chief         1998           --         --             --
      Financial Officer (6)                1997           --         --             --
</TABLE>

---------------
(1)  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.
(2)  Represents the dollar value of insurance premiums we paid with respect to
     term life insurance for the benefit of Mr. Oliva's spouse.
(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)  Consists of contributions to Mr. Jefferies' retirement plan.
(6)  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.

                                       48


<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                                      POTENTIAL
                                                          OF TOTAL                                  REALIZABLE VALUE
                                                          OPTIONS                                  AT ASSUMED ANNUAL
                                            NUMBER OF     GRANTED                                    RATES OF STOCK
                                            SECURITIES     TO ALL                                         PRICE
                                            UNDERLYING    EMPLOYEES     EXERCISE                    APPRECIATION FOR
                                             OPTIONS      IN FISCAL      PRICE       EXPIRATION      OPTION TERM(2)
            NAME              GRANT DATE     GRANTED         YEAR     ($/SHARE)(1)      DATE          5%($) 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.

                   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
                          SHARES                      DECEMBER 31, 1999               DECEMBER 31, 1999(1)
                       ACQUIRED ON        VALUE       -----------------               --------------------
        NAME             EXERCISE       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.
                                       49


<PAGE>

         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 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

                                       50


<PAGE>

              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

         --   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.

                                       51


<PAGE>

         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;

         --   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

                                       52


<PAGE>

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

         During 1999, each non-employee director was 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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.

STOCK OPTION PLANS

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

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

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

         The 1997 Stock Incentive Plan authorizes the issuance of ISOs, stock
appreciation rights or stock awards to our employees and directors for up to an
aggregate of 1,600,000 shares of common stock, except that ISOs may not be
granted to non-employee directors. Our board of directors' adoption of the 1997
Stock Incentive Plan was ratified by our stockholders at our 1998 annual meeting

                                       53


<PAGE>

of stockholders. The 1997 Stock Incentive Plan terminates on June 15, 2007. As
of March 23, 2001, options to purchase up to 1,573,924 shares of common stock
were outstanding under the 1997 Stock Incentive Plan.

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

     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.

                                       54


<PAGE>

     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.

     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

                                       55


<PAGE>

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.

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.

                                       56


<PAGE>

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

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

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

         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

                                       57


<PAGE>

PERFORMANCE GRAPH

         Set forth below is a line graph comparing the cumulative total
stockholder return on our common stock, based on its market price with the
cumulative total return on companies on the Nasdaq Stock Market (U.S.) and the
Nasdaq Telecom Index, assuming reinvestment of dividends for the period
beginning December 31, 1994 through our fiscal year ended December 31, 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.

                                 |GRAPHIC HERE|

           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>

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

         As of March 23, 2001, a total of 20,570,113 shares of our common stock
were outstanding. The following table sets forth information as of March 23,
2001 regarding the beneficial ownership of our common stock by:

         --   each person known by us to own beneficially more than five
              percent, in the aggregate, of the outstanding shares of our common
              stock as of the date of the table;

         --   each of our directors;

         --   each named executive officer in the Summary Compensation Table
              contained elsewhere in this report; and

         --   all of our directors and executive officers as a group.

                                       58


<PAGE>

         Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. Except as indicated in the footnotes to the
table, we believe each shareholder possesses sole voting and investment power
with respect to all of the shares of common stock owned by that shareholder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options or warrants held by that
person that are currently exercisable or are exercisable within 60 days after
the date of the table are deemed outstanding. Those shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person or group.

<TABLE>
<CAPTION>
                                                                 AMOUNT AND NATURE
               NAME AND ADDRESS                                  OF BENEFICIAL         PERCENT OF
            OF BENEFICIAL OWNER(1)            TITLE OF CLASS     OWNERSHIP OF CLASS       CLASS
            ----------------------            --------------     ------------------    ----------

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

---------------
*    Less than 1.00%
(1)  Unless otherwise indicated, the address of each person in this table is c/o
     MicroTel International, Inc., 9485 Haven Avenue, Suite 100, Rancho
     Cucamonga, CA  91730. Messrs. Oliva, Jefferies and Foote are executive
     officers of MicroTel. Messrs. Oliva, Runyon and Finnegan are directors of
     MicroTel.
(2)  Includes 43,125 shares of common stock underlying warrants. Alan S.
     MacKenzie, Jr., David N. Marino and Joel S. Kraut are: the managing
     partners of Orbit II Partners, L.P., a broker-dealer and member of the
     American Stock Exchange; the managing members of MKM Partners, LLC, an
     NASD-registered broker-dealer and member of the Pacific Stock Exchange; and
     general partners of OTAF Business Partners, a general partnership that owns
     over 10% of the outstanding membership interests in Blackwood Securities,
     LLC, an NASD member. The address for Orbit II Partners, L.P. is 2 Rector
     Street, 16th Floor, New York, New York 10006.
(3)  Includes 81,889 shares of common stock held individually by Mr. Oliva's
     spouse, 130,633 shares of common stock underlying options, 163,750 shares
     of common stock underlying warrants and 50,530 shares of common stock
     issuable upon conversion of Series A Preferred Stock.
(4)  Includes 250,000 shares of common stock underlying warrants and 1,010,600
     shares of common stock issuable upon conversion of Series A Preferred
     Stock. Patrick Siaretta, as fund manager, and Greg Fenlon, as fund
     administrator, each have voting power and investment power over the shares
     of common stock beneficially owned by Fortune Fund Ltd. Seeker III. The
     address for Mr. Siaretta is Au Republica Libano, 331, Sao Paulo, SP Brazil.
     The address for Mr. Fenlon is Kaya Flamboyan #9, Willenstad, Curacao,
     Netherlands Antilles.
(5)  Includes 108,060 shares of common stock underlying  options.
(6)  Includes 126,287 shares of common stock underlying options.
(7)  Includes 50,000 shares of common stock underlying options.
(8)  Includes 163,750 shares of common stock underlying warrants, 464,980 shares
     of common stock underlying options, 81,889 shares of common stock held
     individually by Mr. Oliva's wife and 50,530 shares of common stock issuable
     upon conversion of Series A Preferred Stock.

                                       59


<PAGE>

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

XCEL ARNOLD CIRCUITS, INC.

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

         The purchase price for our sale of the assets to Mr. Bertrand was
$2,000,000 plus the assumption of liabilities of the Arnold Circuits business.
The cash portion of the purchase price was paid by a cash payment of $1,350,000
and delivery of a promissory note in the amount of $650,000, which had a
maturity date of March 31, 2000 and an annual interest rate of 8.5%. The cash
proceeds were used to retire bank debt and certain other debt, including debt
owed to Mr. Bertrand and a related entity. As security for the note, XCEL Arnold
Circuits, Inc. received a second lien on substantially all of the assets of
Arnold Circuits, Inc. Mr. Bertrand and a related entity guaranteed payment of
the promissory note. Provisions of the transaction documents entitled XCEL
Arnold Circuits, Inc. to share in any subsequent gain of the sale of the Arnold
Circuits business while the note was outstanding.

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

         In connection with the transaction, in reconciliation of a prior
inter-company debt to the Arnold Circuits business, we issued to Mr. Bertrand
and an affiliated entity two non-interest bearing promissory notes totaling
$350,000 that were payable on our completion of a financing transaction and, if
no financing transaction occurred by May 31, 1998, on demand. In July 1998, we
made a payment of $100,000 against the notes and no demand has been made for the
balance.

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

DANIEL DROR AND ELK INTERNATIONAL LITIGATION

         In December 1996, we entered into a settlement agreement with Daniel
Dror, our former Chairman of the Board, in connection with his separation from
our company. In December 1997, Mr. Dror defaulted on the repayment of the first
installment of a debt obligation which was an obligation set forth in the
agreement. Also in December 1997, Mr. Dror filed suit in the District Court for

                                       60


<PAGE>

Galveston County, Texas alleging that we breached an alleged oral modification
of the agreement. In January 1998, we answered the complaint denying the
allegation, and litigation began in Texas.

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

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

SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS

         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 March 23,
2001 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 Fortune Fund Ltd. Seeker III, Rana General Holding, Ltd.
and Resonance, Ltd., who were 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 MicroTel 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 MicroTel 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

                                       61


<PAGE>

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, 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 MicroTel 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
MicroTel 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 MicroTel 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. On
January 16, 2001 our stockholders approved an amendment to the certificate of
designations, preferences and rights relating to the Series A Preferred Stock
which modified the conversion rate for conversions occurring after the amendment
was filed with the Delaware Secretary of State on January 22, 2001 so that each
share of Series A Preferred Stock will be convertible into 50,530 shares of
common stock. Based upon this modified conversion rate, Fortune Fund Ltd. Seeker
III beneficially owned more than five percent of our outstanding common stock as
of March 23, 2001.

                                       62


<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:

<TABLE>
<CAPTION>
                                                Shares         Exercise            Shares        Exercise
                                              Underlying       Price of          Underlying      Price of
                                               Warrants        Warrants           Warrants       Warrants
             Warrant Holder                   Surrendered     Surrendered         Received       Received
             --------------                   -----------     -----------         --------       --------

<S>                                              <C>               <C>            <C>              <C>
Carmine T. Oliva, Chairman of the                250,000           $3.45          125,000          $1.73
  Board, President and Chief Executive           362,870           $3.44          181,435          $1.72
  Officer                                          5,878           $1.21            2,939          $0.61
                                                   3,096           $3.79            1,548          $1.90
                                                  33,674           $3.79           16,837          $1.90
                                                   6,659           $3.79            3,330          $1.90
                                                  43,544           $2.58           21,772          $1.29
                                                 108,861           $1.38           54,431          $0.69
                                                  29,030           $1.89           14,515          $0.95
                                                  21,772           $1.89           10,886          $0.95

Carmine T. Oliva and Georgeann Oliva,             11,103           $3.79            5,552          $1.90
  Chairman of the Board, President and             3,629           $1.89            1,815          $0.95
  Chief Executive Officer and his
  spouse

Laurence P. Finnegan,                             17,418           $2.58            8,709          $1.29
  Director                                         7,257           $1.89            3,629          $0.95
                                                   5,443           $1.89            2,722          $1.89

Robert B. Runyon,                                  2,903           $2.58            1,452          $1.29
  Director and Secretary                          55,400           $2.58           27,700          $1.29
                                                   9,677           $2.58            4,839          $1.29
                                                  14,515           $1.89            7,258          $0.95
                                                   6,169           $1.89            3,085          $0.95
                                                     483           $1.29              242          $1.29

Samuel J. Oliva,                                  14,515           $1.89            7,258          $0.95
  Brother of Carmine T. Oliva                     30,481           $1.89           15,241          $0.95
                                                   3,919           $1.21            1,960          $0.61
                                                   5,008           $1.89            2,504          $0.95
                                                  11,103           $3.79            5,552          $1.90
                                                   3,629           $1.89            1,815          $0.95
</TABLE>

                                       63


<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>
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             3,628           $1.89            1,814          $0.95
  T Oliva

David Barrett,                                    14,515           $2.58            7,258          $1.29
  Former Director                                 13,789           $1.89            6,895          $0.95
                                                   5,443           $1.89            2,722          $0.95
</TABLE>

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

OTHER TRANSACTIONS

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

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

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

                                       64


<PAGE>

                                     PART IV

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

(a)(1), (a)(2) and (d)   Financial Statements and Financial Statement Schedules
                         ------------------------------------------------------
         Reference is made to the financial statements and financial statement
schedule listed on and attached following the Index to Financial Statements and
Financial Statement Schedule contained at page F-1 of this Report.

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

         Reference is made to the exhibits listed on and attached following the
Index to Exhibits beginning at page 66 of this Report.

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

         None.

                                       65


<PAGE>


                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----

Financial Statements As Of December 31, 1999 and 1998 And For The Years Ended
December 31, 1999, 1998 And 1997
-----------------------------------------------------------------------------

<S>                                                                                             <C>
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 consolidated financial
statement schedule listed in the accompanying index. These consolidated
financial statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTel
International, Inc. at December 31, 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 accounting principles generally
accepted in the United States of America.

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

         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
     January 22, 2001

                                      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>
<S>                                                                            <C>         <C>
ASSETS (NOTES 7 AND 8)                                                           1999         1998
                                                                               ---------   ---------
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
  (Notes 2 and 3)                                                                 1,507       1,701
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
    and $1,610, respectively) (Note 9)                                              588       1,516
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)

                                                 1999        1998         1997
                                               ---------   ---------   ---------
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         11,247      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                             (4,478)       (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)                             62         (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)
                                               =========   =========   =========

          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
                                                                                              Other
                                                                                             Compre-
                                                    Common Stock     Additional              hensive
                                              ---------------------   Paid-in   Accumulated   Income
                                                Shares      Amount    Capital     Deficit     (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
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.

                                      F-8


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

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

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

LONG-LIVED ASSETS AND GOODWILL

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

                                      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.

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 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."

                                      F-10


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

                                      F-11


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO 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.

(2)      MERGER WITH XIT CORPORATION

         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).

                                      F-12


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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.

                                                                      1997
                                                                      ----

                 Net sales                                      $    46,094,000
                                                                ================
                 Net loss                                       $   (12,097,000)
                                                                ================
                 Basic and diluted loss per share               $         (1.12)
                                                                ================

         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 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.

                                      F-13


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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.

                                                          1999          1998
                                                          ----          ----

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

         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 $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.

                                                          1998          1997
                                                          ----          ----

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

         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 which is included in selling, general and
administrative expenses in the accompanying 1999 consolidated statement of
operations. The warrants provided as collateral were cancelled and the Company
attempted to recover the amount due under the guarantees executed by Mr.
Bertrand and a related party. In order to avoid a potentially expensive lawsuit,
the Company agreed to cancel the guarantee in exchange for a $40,000 payment
from Mr. Bertrand, of which $20,000 was paid in December 1999 and the remainder
was paid in the first quarter of 2000. This amount has been included in selling,
general and administrative expenses in the accompanying 1999 consolidated
statement of operations.

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

                                      F-14


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

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

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

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

         On January 7, 2000, the Company sold all of its interest in the common
stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a
market value of $720,000 on the date of the transaction. Accordingly, as of
December 31, 1999, the Company wrote-down the carrying value of its investment
in the common stock of DTS to the value of the consideration received in January
2000. The write-down of $419,000 is included in other income (expense) in the
accompanying 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.



                                      F-15


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)      INVENTORIES

         Inventories are summarized as follows:

                                                   1999                  1998
                                                -----------          -----------

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

         Included in the amounts above is an allowance for inventory
obsolescence of $1,388,000 and $1,766,000 at December 31, 1999 and 1998,
respectively. Allowances for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that the Company intends to dispose of. The
inventory items identified for disposal at each year end are generally discarded
during the following year.

(5)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

                                                       1999             1998
                                                   ------------     ------------

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

                                      F-16


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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
$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:

                                                       1999            1998
                                                   -------------   -------------

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

         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,

                                      F-17


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

         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:

                                                        1999            1998
                                                    ------------    ------------

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

                                      F-18


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         (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 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:

                  Year Ending December 31,                     Amount
                  ------------------------                --------------

                  2000                                    $   1,422,000
                  2001                                          157,000
                  2002                                            8,000
                                                          --------------
                                                          $   1,587,000
                                                          ==============

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

         In November 1998, the holders of the New Preferred Shares agreed to
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

                                      F-20


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. On January 16,
2001 the Company's stockholders approved an amendment to the certificate of
designations, preferences and rights relating to the New Preferred Shares which
modified the conversion rate for conversions occurring after the amendment was
filed with the Delaware Secretary of State on January 22, 2001 so that each of
the New Preferred Shares will be convertible into 50,530 shares of common stock
at any time. The Company believes that neither the original conversion terms nor
the subsequent modifications to the conversion terms through December 31, 1999
resulted in an embedded beneficial conversion feature that would have a material
effect on the financial statements.

                                      F-21


<PAGE>
                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following table reflects the convertible redeemable preferred stock
activity:

                                                  Number
                                                of Shares         Amount
                                               ------------   ------------
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
                                               ============   ============

(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:

    o    Employee Stock and Stock Option Plan, effective July 1, 1994, providing
         for non-qualified stock options as well as restricted and
         non-restricted stock awards to both employees and outside consultants.
         Up to 520,000 shares may be granted or optioned under this plan. Terms
         of related grants under the plan are at the discretion of the Board of
         Directors.

    o    Stock Option Plan adopted in 1993, providing for the granting of up to
         300,000 incentive stock options to purchase stock at not less than the
         current market value on the date of grant. Options granted under this
         plan vest ratably over three years and expire 10 years after date of
         grant.

    o    The MicroTel International Inc. 1997 Stock Incentive Plan (the "1997
         Plan") provides that options granted may be either qualified or
         nonqualified stock options and are required to be granted at fair
         market value on the date of grant. Subject to termination of
         employment, options may expire up to ten years from the date of grant
         and are nontransferable other than in the event of death, disability or
         certain other transfers that the committee of the Board of Directors
         administering the 1997 Plan may permit. Up to 1,600,000 stock options
         may be granted under the 1997 Plan. All outstanding options of former
         optionholders under the XIT 1987 Employee Stock Option Plan were
         converted 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

                                      F-22


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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>

                                      F-23


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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:

                                             1999            1998         1997
                                             ----            ----         ----
Exercisable                               1,365,000       1,892,000    1,843,000
Weighted Average Exercise Price             $  1.65         $  2.26      $  2.32

         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.

                                      F-24


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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.

                                        (in thousands, except per share amounts)
                                            1999        1998        1997
                                            ----        ----        ----
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)

         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.

         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

                                      F-25


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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.

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

                                      F-26


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

                                          1999           1998          1997
                                      ------------   ------------   ------------
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)
                                      ============   ============   ============

         Income tax expense consists of the following:

                                          1999           1998          1997
                                      ------------   ------------   ------------
Current:
    Federal                           $        --    $        --    $        --
    State                                  30,000          8,000         17,000
    Foreign                                98,000         93,000         80,000
                                      ------------   ------------   ------------
                                      $   128,000    $   101,000    $    97,000
                                      ============   ============   ============

         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:

                                          1999           1998          1997
                                      ------------   ------------   ------------

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

                                      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.

                                      F-29


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         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:

                  Year Ending
                  December 31,                                      Amount
                  ------------                                ----------------

                  2000                                        $     1,215,000
                  2001                                                897,000
                  2002                                                626,000
                  2003                                                122,000
                  2004                                                 84,000
                                                              ----------------
                                                              $     2,944,000
                                                              ================

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

                                      F-30


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.

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

         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.

         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.

                                          1999           1998           1997
                                      ------------   ------------   ------------
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
                                      ============   ============   ============

                                      F-32


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       1999            1998            1997
                                   -------------   -------------   -------------
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
                                   =============   =============   =============

         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 and identifiable assets by
geographical area follows:

                                      1999             1998            1997
                                  ------------     ------------     ------------
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                $   998,000      $ 1,543,000      $ 4,425,000
     Japan                             16,000           13,000           12,000
     France                           257,000          250,000          235,000
     United Kingdom                   190,000          133,000          296,000
                                  ------------     ------------     ------------
                                  $ 1,461,000      $ 1,939,000      $ 4,968,000
                                  ============     ============     ============

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

         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 (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

                                      F-34


<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Allowance for inventory obsolescence:
     Year ended December 31, 1999       $1,766,000    1,145,000   (1,523,000)    1,388,000
     Year ended December 31, 1998        1,856,000      885,000     (975,000)    1,766,000
     Year ended December 31, 1999          685,000    3,134,000   (1,963,000)    1,856,000
                                        ===========  ===========  ===========  ============
</TABLE>

                                      F-36


<PAGE>

                                INDEX TO EXHIBITS

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)

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

                                       66


<PAGE>

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)

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

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

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

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

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

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

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

3.7      Certificate of Designations, Preferences and Rights of Preferred Stock
         of the Registrant, as filed with the Delaware Secretary of State on May
         20, 1998 (15)

3.8      Amended Certificate of Designations, Preferences and Rights of
         Preferred Stock of the Registrant, as filed with the Delaware Secretary
         of State on July 1, 1998 (15)

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)

                                       67


<PAGE>

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)

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

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

10.1     1993 Stock Option Plan (15) (#)

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

10.3     1997 Stock Incentive Plan (10) (#)

10.4     2000 Stock Option Plan (11) (#)

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

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

10.7     Credit and Security Agreement dated as of August 16, 2000 by and among
         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)

                                       68


<PAGE>

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

10.15    Loan and Security Agreement between Congress Financial Corporation
         (Western) and the Registrant, 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)

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

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

21.1     Subsidiaries of the Registrant (15)

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

                                       69


<PAGE>

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

                                       70


<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,      April 6, 2001
------------------------------------     Chief Executive Officer (Principal
Carmine T. Oliva                         Executive Officer) and Director

/s/ Randolph D. Foote                    Chief Financial Officer                April 6, 2001
------------------------------------     (Principal Accounting and
Randolph D. Foote                        Financial Officer)

/s/ Laurence P. Finnegan, Jr.            Director                               April 6, 2001
------------------------------------
Laurence P. Finnegan, Jr.


/s/ Robert B. Runyon                     Director                               April 6, 2001
------------------------------------
Robert B. Runyon
</TABLE>

                                       71


<PAGE>

                         EXHIBITS FILED WITH THIS REPORT
Exhibit
Number   Description
------   -----------

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

                                       72