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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

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

         For the fiscal year ended DECEMBER 31, 2002.

                                       OR

| |      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from ____________ to _____________

                         Commission file number: 1-10346

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

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

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

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

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

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

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

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

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

         The aggregate market value of the voting common equity held by
nonaffiliates of the registrant computed by reference to the closing sale price
of such stock, was approximately $4,078,744 at June 28, 2002. The registrant has
no non-voting common equity.

         The number of shares of the registrant's common stock, $0.0033 par
value, outstanding as of March 14, 2003 was 21,576,788.

         DOCUMENTS INCORPORATED BY REFERENCE:  NONE.

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                                     PART I
                                                                            PAGE

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

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

ITEM 3.    LEGAL PROCEEDINGS..................................................24

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................24

                                     PART II

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

ITEM 6.    SELECTED FINANCIAL DATA............................................25

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS..............................................26

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

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................47

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE...............................................47

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................48

ITEM 11.   EXECUTIVE COMPENSATION.............................................50

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           AND RELATED STOCKHOLDER MATTERS....................................57

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................59

ITEM 14.   CONTROLS AND PROCEDURES............................................59

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...59

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

INDEX TO EXHIBITS.............................................................60

SIGNATURES ...................................................................66

CERTIFICATIONS................................................................67

EXHIBITS FILED WITH THIS REPORT...............................................69

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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 wholly-owned operating
subsidiaries, CXR Telcom Corporation, a Delaware corporation formed in 1984 and
based in the United States ("CXR Telcom"), and CXR, S.A.S.U., a company
organized under the laws of France in 1973 and based in France ("CXR France").
These two subsidiaries manufacture, assemble and distribute transmission and
network access products and telecommunications field and central office test
instruments.

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

         In an effort to focus our attention and working capital on our
electronic components for the aerospace and defense markets and on our
communication products, we sold substantially all of the assets of XCEL Arnold
Circuits, Inc., a manufacturer of printed circuit boards, 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. T-Com was a privately-held telecommunications test
instrument manufacturer located in Sunnyvale, California. T-Com produced central
office test equipment, which is equipment that is typically used in carrier
company telephone switching centers and network operating centers. Prior to the
T-Com acquisition, our telecommunications test instrument 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 believed that on a long-term basis, communications companies
and other purchasers of communications test instruments may attempt to enhance
their efficiency by increasing reliance upon central office equipment and
decreasing reliance upon field equipment to the extent technology and
circumstances allow. We also believed that we would be able to take advantage of
T-Com cross-marketing opportunities for new central office equipment we were
planning to develop and our existing field equipment. However, since the T-Com
acquisition, our sales of both field and central office test instruments have
declined considerably as the telecommunications industry has experienced a
severe general downturn.

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

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

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o        Electronic Components

         --       digital switches

         --       electronic power supplies

o        Communications Equipment

         --       a range of transmission and network access products for
                  accessing public and private networks for the transmission of
                  data, voice and video

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

         Our sales are primarily in North America, Europe and Asia. Financial
information regarding our sales by geographic area is contained in Note 14 of
our audited consolidated financial statements that are included in Item 8 of
Part II of this report.

         Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 59.1% of
our total net sales during the year ended December 31, 2002. The remainder of
our sales were to telecommunications carrier customers and communications
products end users.

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

INDUSTRY OVERVIEW

    ELECTRONIC COMPONENTS

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

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

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

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<PAGE>

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

    COMMUNICATIONS EQUIPMENT

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

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

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

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

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

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

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

         Technicians who use service verification equipment in the field or in
central or branch offices 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,

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<PAGE>

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.

OUR SOLUTION

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

         Our extensive knowledge and understanding of our customers' needs,
together with the broad capabilities of our 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:

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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<PAGE>

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

         LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase 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 communications equipment products, enabling products to
be upgraded by the downloading of software or the addition of hardware to an
existing unit, allowing customers to protect their investment in test equipment
and generating follow-on sales opportunities as we develop new modules in the
future. We plan to continue to approach our existing digital switch customers to
determine whether they need additional switches that we do not already
manufacture for them.

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

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

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

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

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

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<PAGE>

PRODUCTS AND SERVICES

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

o        Electronic Components

         --       digital switches

         --       electronic power supplies

o        Communications Equipment

         --       a range of transmission and network access products for
                  accessing public and private networks for the transmission of
                  data, voice and video

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

         During the years ended December 31, 2002, 2001 and 2000, our total
sales were $22,664,000 $27,423,000 and $28,050,000, respectively, and the
percentages of total sales contributed by each product group within our two main
business segments were as follows:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                      -----------------------
       SEGMENT AND PRODUCT TYPE                              2002              2001              2000
       ------------------------                              ----              ----              ----
       <S>                                                   <C>              <C>               <C>
       Electronic Components

            Digital Switches                                  20.5%            23.1%             28.6%

            Electronic Power Supplies                         31.3%            20.0%             14.8%

            Other Products and Services                        7.3%             3.0%              0.7%
                                                        ----------------------------------------------------

                                                              59.1%            46.1%             44.1%
                                                        ----------------------------------------------------

       Communications Equipment

            Transmission and Network Access Products          23.8%            24.7%             26.2%

            Test Instruments                                  12.7%            26.7%             28.2%

            Other Products and Services                        4.4%             2.5%              1.5%
                                                        ----------------------------------------------------

                                                              40.9%            53.9%             55.9%
                                                        ----------------------------------------------------

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

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<PAGE>

                       OUR ELECTRONIC COMPONENTS BUSINESS

         Our electronic components segment includes digital switches and
electronic power supplies. During the years ended December 31, 2002, 2001 and
2000, this segment accounted for 59.1%, 46.1% and 44.1%, respectively, of our
net sales.

    DIGITAL SWITCHES

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

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

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

    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 AC. Units can be manufactured to satisfy input requirements
determined by military, civil aerospace, telecommunications or industrial
businesses, and sophisticated built-in test equipment, or BITE, and control
circuitry often is included. Operating environments for our units are diverse
and range from fighter aircraft to roadside cabinets.

    BACKLOG

         Our business is not generally seasonal, with the exception that
transmission and network access products and communications test instruments
purchases by telecommunications customers tend to be lower than average during
the first quarter of each year because capital equipment budgets typically are
not approved until late in the first quarter. At December 31, 2002 and 2001, our

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<PAGE>

backlog of firm, unshipped orders was approximately $12.7 million and $14.4
million, respectively. Our December 31, 2002 backlog was related approximately
94% 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 6% to our communications equipment business, the majority of which
portion relates to our transmission and network access products. Of these
backlog orders, we anticipate fulfilling approximately 70% of our electronic
components orders and 100% of our communications orders within the current
fiscal year. However, we cannot assure you that we will be successful in
fulfilling these orders in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

    WARRANTIES

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

                      OUR COMMUNICATIONS EQUIPMENT BUSINESS

         Our communications equipment business comprises transmission and
network access products and communications test equipment. During the years
ended December 31, 2002, 2001 and 2000, the sale of communications equipment
products, equipment and related services accounted for 40.9%, 53.9% and 55.9% 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 access.

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

         o        Time division multiplexing, or TDM, which is a technique for
                  consolidating multiple data sources into a single data stream
                  by allocating time slots to each data source
         o        Traditional telephone services, such as modems and plain old
                  telephone service, or POTS
         o        Competitive local exchange carriers, or CLECs
         o        Bit error rate test, or BERT
         o        Dial tone multi-frequency, or DTMF
         o        Transmission impairment measurement, or TIMS
         o        Central office and private business exchange, or CO/PBX,
                  services, where the central office houses the local exchange
                  equipment that routes calls to and from customers and to
                  Internet service providers and long-distance carriers
         o        Synchronous - in digital telephone transmission, synchronous
                  means that the bits from one call are carried within one
                  transmission frame
         o        Digital data services, or DDS, including the USA and worldwide
                  standards described below:
                  I. USA standards, including:
                  --       ISDN, which is an enhanced digital network that
                           offers more bandwidth and faster speed than the
                           traditional telephone network
                  --       Caller identification or caller-ID services

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                  --       Digital subscriber line technology, or DSL,
                           technology which transmits data up to 50 times faster
                           than a conventional dial-up modem using existing
                           copper telephone wires
                  --       Multi-rate symmetric DSL, or MSDSL, which allows the
                           transmission of data over longer distances than
                           single-rate technologies by adjusting automatically
                           or manually the transmission speed
                  --       T-1, which is a standard for digital transmission in
                           North America used by large businesses for broadband
                           access
                  --       FT-1, or fractional T-1, which uses only a selected
                           number of channels from a T-1
                  --       T-3, which is the transmission rate of 44 megabits,
                           or millions of bits, per second, or 44 Mbps, with 672
                           channels
                  --       Digital signal level 0, or DS0, which is 64 kilobits,
                           or thousands of bits, per second, or 64 kbps, with
                           one channel of a T-1, E-1, E-3 or T-3
                  --       Digital signal level 1, or DS1, which is the T-1
                           transmission rate of 1.54 Mbps, with 24 channels
                  --       Digital signal level 3, or DS3, which is the T-3
                           transmission rate of 44 Mbps, with 672 channels
                  --       Router, which is an intelligent device used to
                           connect local and remote networks
                  --       Terminal adapter, which is situated between
                           telephones or other devices and an ISDN line and
                           allows multiple voice/data to share an ISDN line
                  --       Transmission control protocol/Internet protocol, or
                           TCP/IP
                  --       STS/SONET, which is an acronym for synchronous
                           transport signal/synchronous optical networks or
                           fiber optic networks
                  --       SDH is an acronym for synchronous digital hierarchy
                  --       STM1 (SDH) is a standard technology for synchronous
                           data transmission on optical media and is the
                           international equivalent of synchronous optical
                           network; SDH uses the following synchronous transport
                           modules, or STMs, and rates: STM1- 155 Mbps, STM-4 -
                           622 Mbps, STM-16 - 2.5 gigabits per second (Gpbs),
                           and STM-64 - 10 Gbps
                  --       G703/G704 is a standard for transmitting voice over
                           digital carriers such as T-1 and E-1; G703 provides
                           the specifications for pulse code modulation at data
                           rates from 64 Kbps to 2.048 Mbps and is typically
                           used for interconnecting data communications
                           equipment such as bridges, routers and multiplexers
                  --       V11/V35/X21 are types of serial interfaces; serial
                           interfaces work best for short (perhaps less than 20
                           meters), low-speed applications
                  --       X.25 is a protocol that allows computers on different
                           public networks or a TCP/IP network to communicate
                           through an intermediary computer at the network layer
                           level
                 II. International standards, including:
                  --       E-1, which is the European standard for international
                           digital transmission used by large businesses for
                           broadband access, with 2.108 Mbps, with 30 channels
                  --       FE-1, or fractional E-1, which uses only a selected
                           number of channels from an E-1
                  --       E-3, which is the European standard for T-3, with
                           34.368 Mbps and 480 channels

    TRANSMISSION AND NETWORK ACCESS PRODUCTS

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

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<PAGE>

         Modems
         ------

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

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

         Together with modems, we offer a line of ISDN terminal adapters, which
are the 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.

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

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

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

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

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

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

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

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

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

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

                                       13





<PAGE>

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

PRODUCT NAME                          KEY USES, FEATURES AND FUNCTIONS

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

MD 2XXXX RANGE             A multi-rate MSDSL modem that has the ability to
                           manually or automatically adjust line transmission
                           speed to provide the optimum performance for a
                           particular pair of copper wires.
                           --       operates over a single twisted pair of
                                    copper wires, which allows
                                    telecommunications companies to take
                                    advantage of the large installed base of
                                    copper twisted pairs that has been deployed
                                    around the world over many years and upon
                                    private copper wire infrastructures that
                                    exist for networking purposes in locations
                                    such as universities, hospitals, military
                                    bases, power plants and industrial complexes
                           --       allows data transmission over a single
                                    copper pair at E-1 speed over a distance of
                                    up to 8.0 miles
                           --       available as both a standalone unit and as a
                                    rack-mountable card

CB 2XXXX RANGE             The primary function of this unit is to split one or
                           two primary rate interface links, or PRIs, into
                           multiple basic rate interfaces, or BRIs.
                           --       this allows substantial cost savings by
                                    allowing more effective use of available
                                    ISDN resources without the limitations of
                                    conventional voice PBX
                           --       this allows for migration from BRI to PRI
                                    when the number of ports needs to be
                                    increased while preserving the user's
                                    investment in existing BRI-based terminal
                                    equipment
                           --       this unit can be used in a wide variety of
                                    situations where multiple BRI and PRI access
                                    is required, such as: - videoconferencing,
                                    where the unit can be used to aggregate
                                    bandwidth of multiple BRI lines to provide
                                    the necessary bandwidth, and to connect the
                                    videoconferencing system to the ISDN network
                                    through a PRI access while still providing
                                    connectivity to other ISDN devices, or to
                                    connect two or more videoconferencing
                                    systems together within the same building or
                                    campus without going through the ISDN public
                                    network
                           -        ISDN network simulation, which can be used
                                    in places such as showrooms, exhibition and
                                    technical training centers to eliminate the
                                    need to have access to, and pay for access
                                    to, the ISDN public network for telephone or
                                    data calls
                           -        remote access servers, which usually use
                                    multiple BRIs, often need a method for
                                    migration from multiple BRIs to a single PRI
                                    as traffic and the number of users expands

                                       14





<PAGE>

PRODUCT NAME                            KEY USES, FEATURES AND FUNCTIONS

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

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

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

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

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

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

    COMMUNICATIONS TEST INSTRUMENTS

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

         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:

                                       15





<PAGE>

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

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

PRODUCT NAME                            KEY USES, FEATURES AND FUNCTIONS

                                   BASE UNITS
                                   ----------
HALCYON 704A-400 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 756A               --       handheld integrated test set for
                                    installation and maintenance of digital data
                                    circuits, including DDS, Switched 56K,
                                    2-wire Datapath, ISDN, T-1 and FT-1
                           --       provides users with intuitive user interface
                                    allowing quick circuit diagnosis and repair
                                    without extensive training

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

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

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

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

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

                                       16





<PAGE>

PRODUCT NAME                            KEY USES, FEATURES AND FUNCTIONS

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

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

MICROCEL 2001A ATM         These portable units, used in conduction with laptop
                           computers, are multi-layer asynchronous transfer
                           mode, or ATM, testers, analyzers and simulators.

                           --       basic unit has a 4-port capability that can
                                    be independently configured and provides
                                    full support of testing, generation and
                                    monitoring of ATM traffic

                           --       these units address the requirement for a
                                    small, portable unit that can provide
                                    monitoring and statistical and user analyses
                                    at all three ATM layers, as well as simulate
                                    or generate traffic patterns defined by the
                                    user

CUSTOMERS

    ELECTRONIC COMPONENTS

         We sell our components primarily to OEMs in the electronics industry,
including manufacturers of aerospace and defense systems, industrial instruments
and test equipment. During 2002, our top five electronic components customers in
terms of revenues were the BAE Systems companies, Lockheed Martin Systems, MBDA
(U.K.) Ltd., Thales Optronics Ltd. and TMD Technologies, Ltd. Sales to the BAE
Systems companies represented approximately 14% percent of our total revenues
during 2002. No other customer represented 10% or more of our total revenues
during 2002. Currently we are experiencing an increase in our electronic
components business due primarily to the war on terrorism and a general
expansion of defense-related business in Europe, the United States and Asia.

    COMMUNICATIONS EQUIPMENT

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

         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 2002, our top five communications test instruments and
transmission and network access products customers in terms of revenues were
Verizon, Siemens, ALO, France Telecom and SPIE. None of our communications
equipment customers represented 10% or more of our revenues during 2002.

                                       17





<PAGE>

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

         Due to a continuing general downturn in business activity in the
telecommunications capital equipment market during 2002, several RBOCs reduced
their capital expenditures, which negatively impacted our 2002 sales of test
instruments. We anticipate that capital expenditure levels of RBOCs and other
telecommunications carriers will remain at reduced levels in 2003, which will
cause a continued and perhaps more severe negative impact on our sales of test
instruments.

         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.

         The continuing general downturn in business activity in the
telecommunications market during 2002 also seriously impacted communications
equipment manufacturers, particularly following the collapse of many dotcom
companies. As a result, sales of our telecommunications central office equipment
to telecommunications carriers and communications equipment manufacturers have
been seriously impacted.

SALES, MARKETING AND CUSTOMER SUPPORT

     ELECTRONIC COMPONENTS

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

         We sell our electronic components primarily to OEMs 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.

         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, the Digitran Division's history spans over 40 years in the
electronic components industry and major OEMs have designed many of our switches
into their product specifications. These factors have frequently resulted in
customers seeking us out to manufacture for them unique as well as our standard
digital switches.

                                       18





<PAGE>

    COMMUNICATIONS EQUIPMENT

         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 forces from those of our competitors.

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

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

         We sell many of our communications test instruments and 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.

COMPETITION

    ELECTRONIC COMPONENTS

         The market for our components is highly fragmented and composed of a
diverse group of OEMs, 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:

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

         We have made substantial investments in machinery and equipment
tooling. In addition, the Digitran Division's history spans over 40 years in the
electronic components industry, and major OEMs have designed many of our digital
switches into their product specifications. 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.

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<PAGE>

    COMMUNICATIONS EQUIPMENT

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

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

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

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

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

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

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

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

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

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<PAGE>

         Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead-times for delivery often are
available. Typically, our electronic components segment produces products in
one- to 300-piece batches, with a ten- to thirty-week lead-time. The lead-time
is 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 9001- or 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
France. We manufacture all of our test equipment products at the Fremont,
California facility of CXR Telcom. 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
communications equipment products. We believe that outsourcing will lower our
manufacturing costs, in particular our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.

PRODUCT DEVELOPMENT AND ENGINEERING

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

         For the years ended December 31, 2002, 2001 and 2000, our engineering
and product development costs were approximately $1.02 million, $1.08 million
and $1.17 million, respectively. We closed our St. Charles, Illinois engineering
office in August 2001 and terminated the four engineers who worked at that
facility. We hired an engineering director at the Fremont, California facility
in December 2001 and developed engineering capability at that facility primarily
through the use of services provided by outside contractors.

         Our product development costs during the past three years were related
to development of new communications test equipment and voice, data and video
transmission equipment and development of a new line of rotary switches at our
Digitran facility. We expect to continue incurring engineering costs applicable
to the development of rotary switches during 2003. Current research expenditures
in the communications equipment segment are directed principally toward
enhancements to the current test instrument product line and the expansion of
our range of transmission and network access products. These expenditures are
intended to improve market share and gross profit margins, although we cannot
assure you that we will achieve these improvements.

                                       21





<PAGE>

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

INTELLECTUAL PROPERTY

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

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

EMPLOYEES

         As of February 28, 2003, we employed a total of 189 persons in our
various divisions and subsidiaries. None of our employees are represented by
labor unions, and there have not been any work stoppages at any of our
facilities. We believe that our relationship with our employees is good.

ITEM 2.  PROPERTIES.

         As of March 14, 2003, we leased or owned approximately 96,000 square
feet of administrative, production, storage and shipping space. All of this
space was leased other than the Abondant, France facility.

                                       22





<PAGE>

<TABLE>
<CAPTION>
                                                                                            FUNCTION /
     BUSINESS UNIT                                       LOCATION                    LEASE EXPIRATION DATE
     -------------                                       --------                    ---------------------
<S>                                                <C>                                <C>
MicroTel International, Inc.                       Rancho Cucamonga, California       Administrative;
(corporate headquarters)                                                              Expires October 2005

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

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

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

XCEL Japan, Ltd. Higashi-Gotanda                   Tokyo, Japan                       Sales;
(electronic components)                                                               Expires December 2003

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

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

CXR Telcom
(transmission and network access products,         Fremont, California                Administrative/Engineering/
communications test instruments)                                                      Manufacturing;
                                                                                      Expires July 2003
</TABLE>
         On November 1, 2002, CXR Telcom relocated from its Fremont facility to
another facility in Fremont that is smaller and less expensive than the former
facility. This new lease expires on July 31, 2003.

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

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

                                       23





<PAGE>

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.

                                     PART II

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

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

         Our common stock has been traded on the OTC Bulletin Board under the
symbol "MCTL" since May 13, 1999. The table below shows for each fiscal quarter
indicated the high and low bid prices per share of our common stock. This
information has been obtained from Pink Sheets LLC. The prices shown reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

                                                               PRICE RANGE
                                                               -----------
2002:                                                        LOW        HIGH
                                                             ---        ----
First Quarter (January 1 - March 31)....................    $0.28       $0.37
Second Quarter (April 1 - June 30)......................     0.15        0.32
Third Quarter (July 1 - September 30)...................     0.11        0.22
Fourth Quarter (October 1 - December 31)................     0.16        0.25
2001:
First Quarter...........................................     0.34        0.5625
Second Quarter..........................................     0.35        0.59
Third Quarter...........................................     0.26        0.45
Fourth Quarter..........................................     0.23        0.40

         As of March 14, 2003, we had 21,576,788 shares of common stock
outstanding held of record by approximately 3,600 stockholders, and the closing
bid price of our common stock on the OTC Bulletin Board was $0.16.

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

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

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

         In November 2002, we issued 5,000 shares of common stock with an
aggregate value of $1,000 to a former employee for services rendered.

                                       24





<PAGE>

         In December 2002, we issued an aggregate of 16,759 shares of common
stock to two holders of Series B Preferred Stock upon conversion of 1,675.9
shares of Series B Preferred Stock.

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

ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected consolidated historical financial data should be
read in conjunction with the consolidated financial statements and the notes to
those statements and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report. The consolidated statements of operations and comprehensive income data
with respect to the years ended December 31, 2002, 2001 and 2000 and the
consolidated balance sheet data at December 31, 2002 and 2001 are derived from,
and are qualified by reference to, the consolidated audited financial statements
included elsewhere in this document. The historical results are not necessarily
indicative of results to be expected for any future periods.

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS AND         --------------------------------------------------------------------
COMPREHENSIVE INCOME DATA:                           2002          2001           2000           1999           1998
                                                     ----          ----           ----           ----           ----
                                                             (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                                               <C>            <C>            <C>            <C>            <C>
Net sales ..................................      $ 22,664       $ 27,423       $ 28,050       $ 25,913       $ 30,100
Cost of sales ..............................        14,147         15,456         15,529         17,066         17,353
                                                  ---------      ---------      ---------      ---------      ---------
Gross profit ...............................         8,517         11,967         12,521          8,847         12,747
Selling, general and administrative expenses         7,731         10,129          9,827         10,584         10,202
Engineering and product development expenses         1,015          1,076          1,167          1,841          2,202
                                                  ---------      ---------      ---------      ---------      ---------
Income (loss) from operations ..............          (229)           762          1,527         (3,578)           343
Total other income (expense) ...............          (361)          (414)           207           (492)          (804)
                                                  ---------      ---------      ---------      ---------      ---------
Income (loss) from continuing operations
   before income taxes .....................          (590)           348          1,734         (4,070)          (461)
Income tax (benefit) expense ...............           (20)            77             31            128            101
                                                  ---------      ---------      ---------      ---------      ---------
Income (loss) from continuing operations ...          (570)           271          1,703         (4,198)          (562)
Discontinued operations:
   Loss from operations of
     discontinued segment ..................            --             56           (212)          (847)        (1,203)

   Gain (loss) on disposal of discontinued
    segment including provision for phase
    out period of $122 in 2000 .............            --             --           (487)           449            580
                                                  ---------      ---------      ---------      ---------      ---------
Net income (loss) ..........................          (570)           327          1,004         (4,596)        (1,185)

Foreign currency translation adjustment ....           446           (312)          (505)          (325)           206
                                                  ---------      ---------      ---------      ---------      ---------
Total comprehensive income (loss) ..........      $   (124)      $     15       $    499       $ (4,921)      $   (979)
                                                  =========      =========      =========      =========      =========
Basic earnings (loss) per share from
   continuing operations ...................      $  (0.03)      $   0.01       $   0.09       $  (0.26)      $  (0.05)
                                                  =========      =========      =========      =========      =========
Diluted earnings (loss) per share from
   continuing operations ...................      $  (0.03)      $   0.01       $   0.07       $  (0.26)      $  (0.05)
                                                  =========      =========      =========      =========      =========
Basic earnings (loss) per share from
   discontinued operations .................      $   0.00       $   0.00       $  (0.04)      $  (0.02)      $  (0.05)
                                                  =========      =========      =========      =========      =========
Diluted earnings (loss) per share from
   discontinued operations .................      $   0.00       $   0.00       $  (0.03)      $  (0.02)      $  (0.05)
                                                  =========      =========      =========      =========      =========
Basic earnings (loss) per share ............      $  (0.03)      $   0.02       $   0.05       $  (0.28)      $  (0.10)
                                                  =========      =========      =========      =========      =========
Diluted earnings (loss) per share ..........      $  (0.03)      $   0.01       $   0.04       $  (0.28)      $  (0.10)
                                                  =========      =========      =========      =========      =========
Weighted average shares outstanding, basic .        21,208         20,594         19,504         16,638         11,952
Weighted average shares outstanding, diluted        21,208         23,782         23,027         16,638         11,952
</TABLE>

                                                           25



<PAGE>
<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                    ------------------------------------------------------------
                                      2002         2001         2000         1999         1998
                                      ----         ----         ----         ----         ----
                                                        (IN THOUSANDS)
<S>                                 <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....      $   254      $   604      $   756      $   480      $   450
Working capital ..............        3,961        3,686        2,780        1,080        4,999
Total assets .................       16,786       17,688       19,484       16,489       20,352
Long-term debt, net of current
   portion ...................          927          763          282          143        1,175
Stockholders' equity .........        5,732        5,862        5,807        3,801        5,482
Convertible redeemable
   preferred stock ...........          282          270          259          588        1,516
</TABLE>

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

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

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

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

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

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

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

                                       26





<PAGE>

OVERVIEW

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

         o        Electronic Components

                  --       digital switches

                  --       electronic power supplies

         o        Communications Equipment

                  --       transmission and network access products

                  --       communications test instruments

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

         Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 59.1%,
46.1% and 44.1% of our total net sales during 2002, 2001 and 2000, respectively.
Sales of communications equipment and related services, primarily to
telecommunications equipment customers, were 40.9%, 53.9% and 55.8% of our total
net sales during 2002, 2001 and 2000, respectively.

         We experienced a 37.2% decline in our communications equipment segment
sales during 2002. We believe this decline primarily was due to a general
business downturn experienced by many of our telecommunications customers, the
disruption caused by the French elections in 2002 and our decision to
discontinue the resale in Europe of test equipment not manufactured by us. As a
result of the general business downturn, we experienced significant reductions
in sales and gross profit as well as changes in our product mix. Consequently,
we have shifted our overall focus toward growing our electronic components
business. However, we also plan to continue working to improve the growth and
performance of our communications equipment business.

         We do not anticipate a further decline in our communications equipment
segment sales in 2003 as compared to 2002. We believe that our communications
equipment segment may actually realize a modest improvement in sales in 2003 as
compared to 2002. We have reduced costs in our communications equipment segment
and lowered the breakeven point both in our U. S. and French operations through
various cost-cutting methods, such as using Asian contract manufacturers,
reducing facility rent expense and phasing out our administrative office in
Paris, France. We anticipate these cost-cutting efforts will improve our bottom
line performance in this segment if we are able to achieve at least the same
sales levels we achieved in 2002. However, we cannot predict the duration or
severity of the telecommunications market downturn or the extent to which the
downturn will continue to negatively affect our ability to sell our products and
services to customers in the telecommunications industry. A further reduction in
sales would reduce our accounts receivable balances, which in turn would
adversely affect our financial position by reducing cash availability under our
lines of credit. We have taken various actions, including staffing reductions as
recently as February 2003, to reduce cash outlays of our communications
equipment segment. However, if the downturn is long-lasting and more severe, we
may need to continue to downsize or to restructure, sell or discontinue all or
part of our communications equipment operations, which would negatively impact
our business, prospects, financial condition, results of operations and cash
flows.

                                       27





<PAGE>

CRITICAL ACCOUNTING POLICIES

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

     INVENTORY VALUATION

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

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

     IMPAIRMENT OF GOODWILL

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

         In assessing potential impairment of goodwill, we consider these
factors as well as forecasted financial performance of the acquired businesses.
If forecasts are not met, we may have to record additional impairment charges
not previously recognized. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of those respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets that were not previously
recorded. On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142, and
were required to analyze our goodwill for impairment issues by June 30, 2002,
and then at least annually after that date. During the year ended December 31,
2002, we did not record any impairment losses related to goodwill and other
intangible assets.

     FOREIGN CURRENCY TRANSLATION

         We have foreign subsidiaries that together accounted for 62.1% of our
net revenues, 72.3% of our assets and 74.7% of our total liabilities as of and
for the year ended December 31, 2002. In preparing our consolidated financial
statements, we are required to translate the financial statements of our foreign
subsidiaries from the currencies in which they keep their accounting records
into United States dollars. This process results in exchange gains and losses
which, under relevant accounting guidance, are either included within our
statement of operations or as a separate part of our net equity under the
caption "cumulative translation adjustment."

                                       28





<PAGE>

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

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

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

         Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries to be each
subsidiary's local currency. Accordingly we had cumulative translation losses of
$597,000 that were included as part of accumulated other comprehensive loss
within our balance sheet at December 31, 2002. During the year ended December
31, 2002, we included translation adjustments of a gain of approximately
$446,000 under accumulated other comprehensive income and loss.

         If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our loss for the year ended December 31, 2002. The magnitude of these
gains or losses depends upon movements in the exchange rates of the foreign
currencies in which we transact business as compared to the value of the United
States dollar. These currencies include the euro, the British pound and the
Japanese yen. Any future translation gains or losses could be significantly
higher than those we recorded for the year ended December 31, 2002.

                                       29





<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                       ------------------------
                                                              2002               2001               2000
                                                              ----               ----               ----
<S>                                                           <C>                <C>                <C>
Net sales.................................................    100.0%             100.0%             100.0%
Cost of sales.............................................     62.4               56.4               55.4
                                                              ------             ------             ------
Gross profit..............................................     37.6               43.6               44.6
Selling, general and administrative expenses..............     34.1               36.9               35.0
Engineering and product development expenses..............      4.5                3.9                4.2
                                                              ------             ------             ------
Operating income (loss)...................................     (1.0)               2.8                5.4
Interest expense..........................................     (1.9)              (1.4)              (1.5)
Other income (expense)....................................      0.3               (0.1)               2.3
                                                              ------             ------             ------
Income (loss) from continuing operations
  before income taxes.....................................     (2.6)               1.3                6.2
Income tax expense (benefit)..............................     (0.1)               0.3                0.1
                                                              ------             ------             ------
Income (loss) from continuing operations..................     (2.5)               1.0                6.1
Income (loss) from discontinued operations................       --                0.2               (0.8)
Gain (loss) on disposal of discontinued segment...........       --                 --               (1.7)
                                                              ------             ------             ------
Net income (loss).........................................     (2.5)%              1.2%               3.6%
                                                              ======             ======             ======
</TABLE>

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

     CONTINUING OPERATIONS

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

         Net sales of our electronic components increased by $744,000 (5.9%) to
$13,390,000 for 2002 as compared to $12,646,000 for 2001. Sales of power
supplies by XCEL Corporation, Ltd. increased by $1,616,000 (29.5%) to $7,098,000
for 2002 as compared to $5,482,000 for 2001 due to an increase in the number of
products shipped under long-term programs. We anticipate that during 2003 we
will experience similar increases in sales of power supplies. Sales of digital
switches manufactured by our Digitran Division declined by $1,593,000 (25.1%) to
$4,744,000 for 2002 as compared to $6,337,000 for 2001. The decline in sales of
digital switches was a result of lower than expected orders, which we believe
was primarily due to a temporary deferral of government orders that we believe
will result in an increase in sales of digital switches during 2003. XET
Corporation increased its sales of subassemblies by $892,000 (383%) to
$1,125,000 for 2002 as compared to $233,000 for 2001 due to new contracts for
electronic subsystems from a major aerospace company. These contracts were
executed beginning in January 2002, and the final shipments under these
contracts were in November 2002. We believe that our Digitran Division will have
an opportunity to acquire new electronic subsystems contracts in 2003.

         Net sales of our communications equipment products and services for
2002 declined by $5,503,000 (37.2%) to $9,274,000 as compared to $14,777,000 for
2001. Test equipment net sales for 2002 declined by $4,439,000 (60.6%) to
$2,881,000 as compared to $7,320,000 for 2001. The sales decline resulted from a
$2,546,000 reduction in sales of test equipment by CXR Telcom and a $1,893,000

                                       30





<PAGE>

reduction in resales by CXR France of test equipment not manufactured by us
following our decision to discontinue those resales due to the lower gross
margin trends on resale products. Management believes the sales decline for CXR
Telcom resulted primarily from reductions in capital spending in 2002 as
compared to capital spending in 2001 by many of our telecommunications customers
due to generally weak telecommunications markets. The sales decline for CXR
France occurred primarily because the exclusive distribution agreement that CXR
France had with Sunrise Telecom, Inc. terminated as of November 1, 2001, and CXR
France decided not to remain in the test instruments resale business except to
support a limited number of existing customers.

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

         We believe that many of the United States telecom customers that CXR
Telcom serves built networks to handle an anticipated demand for voice and data
traffic that has not yet occurred. Consequently, many of these customers reduced
their purchasing budgets for 2002. This has had a negative impact on CXR
Telcom's sales. We anticipate that CXR Telcom's sales during 2003 will remain
relatively unchanged from its sales for 2002.

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

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

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

         Gross profit for our communications equipment segment decreased in
dollar terms by $3,149,000 (48.7%) to $3,313,000 for 2002 as compared to
$6,462,000 for 2001, and decreased as a percentage of net sales from 43.7% for
2001 to 35.7% for 2002. The decrease in gross profit as a percentage of net
sales primarily was due to the substantial reduction in sales volume that
increased overhead costs on a per unit basis. We anticipate a modest improvement
in our sales of communications equipment products in 2003 which, when combined
with our cost cutting efforts, should improve the margins on our communications
equipment products in 2003 as compared to 2002.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $2,398,000 (23.7%) to $7,731,000 for 2002
as compared to $10,129,000 for 2001. Selling, general and administrative
expenses also declined as a percentage of total net sales, from 36.9% of net
sales during 2001 to 34.1% of net sales during 2002. The decrease in selling,
general and administrative expenses was due to several factors. For example, we
incurred $608,000 in legal and accounting fees during 2001 in connection with
amendments to a securities registration statement and periodic reports but did

                                       31





<PAGE>

not incur any of those expenses during 2002. Selling expenses were reduced by
$624,000 in our communications equipment segment and $117,000 in our electronic
components segment primarily due to lower commissions on reduced sales and cost
reductions during 2002. Administrative costs were reduced by $546,000 in our
communications equipment segment primarily due to staff reductions at CXR Telcom
and CXR France. Also, because of the new accounting rules of SFAS No. 142,
effective January 1, 2002 we no longer amortize goodwill. Goodwill accounted for
$370,000 of our amortization expense in 2001.

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

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

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

         NET LOSS. Net loss for 2002 was $570,000 as compared to net income of
$327,000 for 2001. The major cause of this change was the reduction in sales of
our communications equipment segment below the level needed to cover fixed
costs. We took in 2002 and 2001 and are continuing to take in 2003 various
actions to reduce costs through staffing reductions in our communications
equipment operations in the United States and France and through various other
cost-cutting methods, such as using contract manufacturers, reducing facility
rent expense and phasing out our administrative office in Paris, France. These
actions have substantially reduced the sales volume required to turn a profit at
both CXR Telcom and CXR France. However, if these actions are not sufficient to
reduce cash outlays below revenue levels, then we may be required to restructure
or divest all or part of our communications equipment operations.

     DISCONTINUED OPERATIONS

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

     YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

     CONTINUING OPERATIONS

         NET SALES. Net sales for the year ended December 31, 2001 decreased by
$627,000 (2.2%) to $27,423,000 as compared to $28,050,000 for the year ended
December 31, 2000.

         Net sales of our electronic components for 2001 increased by $254,000
(2.0%) to $12,646,000 as compared to $12,392,000 for the prior year, primarily
due to a $1,284,000 (27.1%) increase in sales of our U.K. subsidiary, to
$6,029,000 in 2001 from $4,745,000 in 2000. This increase in net sales was
primarily due to an increase in deliveries under outstanding contracts for power
supplies. In addition, our Japanese subsidiary increased its sales in 2001 by

                                       32





<PAGE>

$144,000 (15.3%) to $1,085,000 as compared to $941,000 for the prior year. These
increases were offset by a $1,128,000 (17.3%) decrease in XET's sales to
$5,405,000 as compared to $6,533,000 for the prior year, that resulted primarily
because of the completion in the first quarter of 2001 of XET's major digital
switch contract with BAE Systems, Canada.

         Net sales of our communications equipment products and services for
2001 declined by $881,000 (5.6%) to $14,777,000, as compared to $15,658,000 for
2000. Test equipment net sales for 2001 decreased by $586,000 (7.4%) to
$7,320,000, as compared to $7,906,000 for 2000. The primary reason for this
sales decline was a $458,000 reduction in sales of test equipment by CXR France
due to a generally weak market for telecommunications equipment in Europe. Also,
the exclusive distribution agreement that our French subsidiary had with Sunrise
Telecom, Inc. terminated as of November 1, 2001. Consequently, during the first
quarter of 2002, we began to implement personnel and other cost reductions.

         Net sales of our CXR HALCYON 704 series field test equipment increased
by $131,000 (3.5%) to $3,849,000 as compared to $3,718,000 for 2001. Net sales
of our T-Com central office test equipment product line that we acquired in
August 2000 declined by $212,000 (15.2%) to $1,186,000 for 2001 as compared to
$1,398,000 for the last five months of 2000, primarily due to a weakening market
in central office test equipment.

         Net sales of transmission products and networking equipment produced by
CXR France declined by $559,000 (7.6%) to $6,778,000 for 2001 as compared to
$7,337,000 for 2000, primarily because of the closure of that subsidiary's
networking division in 2000. Total net sales by CXR France, including both test
equipment and transmission and networking equipment, decreased by $1,271,000
(13.9%) to $7,847,000 for 2001 as compared to $9,118,000 for 2000. The decrease
in CXR France's net sales would have been 11.0% rather than 13.9% if there had
not been a decline in 2001 in the value of the French franc in relation to the
value of the U.S. dollar.

         GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 43.6% for 2001 as compared to 44.6% for 2000. In dollar terms, total gross
profit decreased by $554,000 (4.4%) to $11,967,000 for 2001 as compared to
$12,521,000 for 2000.

         Gross profit for our electronic components segment decreased in dollar
terms by $508,000 (8.4%) to $5,505,000 for 2001, as compared to $6,013,000 for
2000, and decreased as a percentage of related net sales from 48.5% in 2000 to
43.3% in 2001. This decrease was primarily the result of the completion of the
BAE Systems, Canada contract in the first quarter of 2001, which contract had
provided for sales of higher margin products and contributed to higher sales for
XET in the prior year and the first quarter of 2001. This decrease was partially
offset by the improved profit margins in connection with higher production
volumes and a higher margin product mix at our U.K. subsidiary, which
contributed to a $600,000 increase in gross profit at that subsidiary. Also, our
Japanese subsidiary's gross profit increased by $33,000. In addition, during the
fourth quarter of 2001, we recorded a $134,000 reduction to XET's reserve for
obsolete inventory as a result of a reevalution of that reserve.

         Gross profit for our communications equipment segment decreased in
dollar terms by $46,000 (0.7%) to $6,462,000 for 2001 as compared to $6,508,000
for 2000. Gross profit increased as a percentage of net sales from 41.6% in 2000
to 43.7% in 2001. The higher gross margin percentage in 2001 was due to a larger
proportion of sales of high margin products in France and also due to labor cost
reductions in California. Also, during the fourth quarter of 2001, we recorded
both an $85,000 reduction in warranty expense as a result of a reevaluation of
our warranty reserve and a $41,000 reduction to our reserve for obsolete

                                       33





<PAGE>

inventory. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that we intend to dispose of. Upon disposal of
obsolete inventory, the inventory is written off and the allowance for inventory
obsolescence is reduced.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $302,000 (3.1%) to $10,129,000 for 2001 as
compared to $9,827,000 for 2000. Selling, general and administrative expenses
also increased as a percentage of total net sales, from 35.0% of net sales
during 2000 to 36.9% of net sales during 2001. The increase was primarily due to
an increase from approximately $187,000 in 2000 to approximately $608,000 in
2001 of legal and accounting fees that we incurred in connection with a
securities registration statement and amendments to various periodic reports.
Selling expenses declined by $332,000, primarily due to the cost savings that
resulted from the closure of the networking division of CXR France in the fourth
quarter of 2000. Also, during the fourth quarter of 2001, we recorded a $78,000
reduction of expense to reflect a reduction in California sales tax liability
that occurred as a result of a favorable audit settlement.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment. These expenses decreased by
$91,000 (7.8%) to $1,076,000 for 2001 as compared to $1,167,000 for the prior
year, reflecting the cost savings from the closure of our St. Charles, Illinois
engineering facility in August 2001 and the relocation, consolidation and
downsizing of that engineering function into our Fremont, California facility.

         OTHER INCOME (EXPENSE). Interest expense decreased to $396,000 for 2001
from $424,000 in 2000 due to lower interest rates. We recorded other expense of
$18,000 in 2001 as compared to other income of $631,000 in 2000. This difference
occurred primarily because in 2000 we recorded a $197,000 gain on the sale of
stock of Wi-LAN, Inc., the reversal of a warranty reserve of $116,000 for a
warranty settlement related to sales made by HyComp, Inc., our former subsidiary
that we sold in April 1999, and $90,000 for reductions in accruals for
settlements related to leased equipment.

         INCOME TAXES. Income taxes consist primarily of foreign taxes because
we are in a loss carryforward position for U.S. federal income tax purposes.
Income tax expense for the year ended December 31, 2001 was $77,000 as compared
to $31,000 in 2000. A total of $67,000 of the $77,000 income tax expense for
2001 was for foreign income taxes as compared to $8,000 of the $31,000 income
tax expense for 2000.

     DISCONTINUED OPERATIONS

         As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported income of $56,000 in 2001 as a result of
reversal of excess accruals and a loss from discontinued operations of $699,000
for 2000. Net sales, gross profit and selling, general and administrative
expenses for our circuits business for the year ended December 31, 2000 were
$2,257,000, $10,000 and $375,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         During 2002, we funded our operations primarily through revenue
generated from our operations and through our lines of credit with Wells Fargo
Business Credit, Inc. and various foreign banks. As of December 31, 2002, we had
working capital of $3,961,000, an accumulated deficit of $19,042,000, an
accumulated other comprehensive loss of $597,000, $254,000 in cash and cash
equivalents and $5,356,000 of accounts receivable.

                                       34





<PAGE>

         Cash used in our operating activities totaled $657,000 during 2002 as
compared to $100,000 of cash used in our operating activities for the prior
year. This increase during 2002 primarily resulted from the net loss for the
year due to lower sales, from increases in inventory balances and from payments
of accrued expenses.

         Cash used in our investing activities totaled $176,000 during 2002 as
compared to $38,000 for the prior year. Our investing activities consisted of
the acquisition of plant and equipment.

         Cash used in our financing activities totaled $206,000 during 2002 as
compared to cash provided of $358,000 for the prior year, primarily due to
payments that reduced bank debt.

         On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation,
together with MicroTel acting as guarantor, obtained a credit facility extension
and modification from Wells Fargo Business Credit, Inc. In April 2002, the
maturity date of the facility was extended by two years to August 16, 2005.
Since April 17, 2002, the facility has provided for a revolving loan of up to
$3,000,000 secured by inventory and accounts receivable and a term loan in the
amount of $687,000 secured by machinery and equipment. On December 31, 2002, the
interest rate was the prime rate (then 4.25%) plus 1%, subject to a minimum
interest charge of $13,500 per month. The balance outstanding at December 31,
2002 was $1,070,000 on the revolving loan and $95,000 on the term loan, and we
had available to us $13,000 of additional borrowings under the revolving loan.
The credit facility contains restrictive financial covenants that are set by
mutual agreement each year. At December 31, 2002, we were not in compliance with
the net income covenant. However, we subsequently obtained a waiver from the
lender.

         As of December 31, 2002, our foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Venture Finance PLC,
an affiliate of ABN AMRO Holdings N.V., in England, Banc National de Paris,
Societe Generale and Banque Hervet in France and Johan Tokyo Credit Bank and
Johnan Shinkin Bank in Japan. At December 31, 2002, the balances outstanding
under our U.K., France and Japan credit facilities were $2,380,000, $849,000 and
$82,000, respectively. At December 31, 2001, the balances outstanding under our
U.K., France and Japan credit facilities were $1,665,000, $533,000 and $5,000,
respectively.

         XCEL Japan Ltd. , or XJL, obtained a term loan on November 29, 2002
from the Johnan Shinkin Bank. The loan is amortized over five years and carries
an annual interest rate 3.25%. The balance of the loan on December 31, 2002 was
$82,000 using the exchange rate in effect at December 31, 2002 for conversion of
Japanese yen into United States dollars.

         Our U.K. subsidiary, XCEL Power Systems, Ltd., or XPS, obtained a
credit facility with Venture Finance PLC, which new facility replaced a Lloyds
Bank facility as of November 12, 2002 and expires on November 15, 2005. Using
the exchange rate in effect at December 31, 2002 for the conversion of British
pounds into United States dollars, the new facility is for a maximum of
$2,415,000 and includes a $564,000 unsecured cash flow loan, a $129,000 term
loan secured by fixed assets and the remainder is a loan secured by accounts
receivable and inventory. The interest rate is the base rate of Venture Finance
PLC (4% at December 31, 2002) plus 2%, and is subject to a minimum rate of 4%
per annum. There are no financial performance covenants applicable to this
credit facility.

         As of December 31, 2002, CXR France had credit facilities with several
lenders totaling up to approximately $849,000 in the aggregate. Each credit
facility has a specified repayment term. However, each lender has the right to
demand payment in full at any time prior to the scheduled maturity date of a
particular credit facility. Because CXR France has experienced a substantial
reduction in revenue, some of its lenders are contemplating, and others have
made, reductions in the total available credit. Banque Hervet reduced
availability to $78,000 from $159,000 effective December 31, 2002. On February
10, 2003, Societe Generale notified CXR France that CXR France must pay back its
credit line balance by April 30, 2003. As of December 31, 2002, that credit line
balance was $298,000. As a result, we are in the process of seeking alternative
financing sources in France to replace all of the current lenders to our French
operations.

                                       35





<PAGE>

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

         We are currently working to obtain a credit facility from a subsidiary
of ABN AMRO Holdings, N.V. to replace our French credit facilities. One of our
current creditors in France has also expressed an interest in replacing our
other French credit lines. We anticipate closing on a new French credit facility
in April 2003. However, we cannot guarantee that we will be successful in
obtaining new financing in a timely manner, in sufficient amounts or at all.

         Our backlog was $12,702,000 as of December 31, 2002, as compared to
$14,385,000 as of December 31, 2001. Our backlog as of December 31, 2002 was
93.6% related to our electronic components business, which business tends to
provide us with long lead-times for our manufacturing processes due to the
custom nature of the products, and 6.4% related to our communications equipment
business, which business tends to deliver standard products from stock as orders
are received. The amount of backlog orders represents revenue that we anticipate
recognizing in the future, as evidenced by purchase orders and other purchase
commitments received from customers, but on which work has not yet been
initiated or with respect to which work is currently in progress. However, there
can be no assurance that we will be successful in fulfilling such orders and
commitments in a timely manner or that we will ultimately recognize as revenue
the amounts reflected as backlog.

         During 2002, 40.9% of our sales were generated by our communications
equipment segment. We experienced a 37.2% decline in our communications
equipment segment sales in 2002 as compared to 2001. We believe this decline
primarily was due to a general business decline experienced by many of our
telecommunications customers. We cannot predict the duration or severity of the
telecommunications market downturn or the extent to which the downturn will
continue to negatively affect our ability to sell our products and services to
customers in the telecommunications industry. A further reduction in sales would
reduce our accounts receivable balances, which in turn would have an adverse
effect on our financial position by reducing the amount of cash available under
our lines of credit.

         We took various actions to reduce costs in 2002. These actions were
intended to reduce the cash outlays of our telecommunications equipment segment
to match its revenue rate. Also, in February 2003, we reduced the staffing level
by 50% at CXR Telcom, which we anticipate will reduce costs at an annualized
rate of approximately $360,000. This savings is in addition to the approximate
$325,000 annualized savings we have begun to realize from moving CXR Telcom into
a lower cost facility in November 2002.

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<PAGE>

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

<TABLE>
<CAPTION>
                                                        PAYMENTS DUE BY PERIOD
                                                        ----------------------
          CONTRACTUAL
         OBLIGATIONS AT                                     (IN THOUSANDS)
       DECEMBER 31, 2002        2003          2004         2005        2006      2007    THERE-AFTER    TOTAL
       -----------------        ----          ----         ----        ----      ----    -----------    -----
<S>                            <C>          <C>         <C>         <C>         <C>        <C>         <C>
Line of Credit (Domestic)      $1,070       $   --      $   --      $    --     $  --      $   --      $1,070
   Average Interest Rate        P+1%
Line of Credit (U.K.) ...      $1,683       $   --      $   --      $    --     $  --      $   --      $1,683
   Average Interest Rate        B+2%
Overdraft (France) ......      $  722       $   --      $   --      $    --     $  --      $   --      $  722
   Average Interest Rate       5.5% -7.2%
Term Loan (Domestic) ....      $   82       $    8      $    5      $    --     $  --      $   --      $   95
   Average Interest Rate        P+1%
Term Loan (U.K.) ........      $   45       $   45      $  602      $    --     $  --      $   --      $  692
   Average Interest Rate        B+2%
Term Loan (France) ......      $   61       $   56      $   10      $   --      $  --      $   --      $  127
   Average Interest Rate       5.2% -5.6%
Term Loan (Japan) .......      $   17       $   17      $   17      $   16      $  15      $   --      $   82
   Average Interest Rate        3.25%
Capitalized Lease
  Obligations ...........      $  113       $   98      $   35      $    3      $  --      $   --      $  249
Operating Leases ........      $  633       $  562      $  382      $  286      $  --      $   --      $1,863
                               ------       ------      ------      ------      -----       ------     ------
                               $4,426       $  786      $1,051      $  305      $  15      $   --      $6,583
</TABLE>

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

EFFECTS OF INFLATION

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

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

         In August 2001, the Financial Accounting Standards Board, or the FASB,
issued FASB Statement No. 143, "Accounting for Asset Retirement Obligations," or
SFAS No. 143. This statement addresses financial and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to all entities and legal obligations
associated with the retirement of long-lived assets that result from the

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<PAGE>

acquisition, construction, development and/or normal operation of long-lived
assets, except for certain obligations of lessees. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
Our management has not yet determined the impact of the adoption of SFAS No. 143
on our financial position or results of operations.

         In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," or SFAS No. 144. SFAS No.
144 requires that long-lived assets be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for our consolidated financial
statements beginning January 1, 2002. The implementation of SFAS No. 144 did not
have a material impact on our consolidated financial position or results of
operations.

         In April 2002, the FASB issued FASB Statement No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," or SFAS No. 145. This statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" and amends SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." Under SFAS
No. 4, all gains and losses from extinguishment of debt were required to be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. With the elimination of SFAS No. 4, gains and losses
from extinguishment of debt are to be classified as extraordinary items only if
they meet the criteria for extraordinary items in APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Applying the provisions of APB Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the classification of an extraordinary
item. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets
of Motor Carriers," and amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The adoption of the provisions of SFAS No. 145 during 2002
did not have any impact on our financial position or results of operations.

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

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

                                       38





<PAGE>

         In December 2002, the FASB issued FASB Statement No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS
123," or SFAS No. 148. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees"
and related interpretations. Accordingly, compensation expense for stock options
is measured as the excess, if any, of the estimate of the market value of our
stock at the date of the grant over the amount an employee must pay to acquire
the stock. We have adopted the annual disclosure provisions of SFAS No. 148 for
our financial reports for the year ended December 31, 2002 and will adopt the
interim disclosure provisions for our financial reports beginning with the
quarter ending March 31, 2003. Because the adoption of this standard involves
disclosures only, we do expect a material impact on our results of operations,
financial position or liquidity.

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

EURO CONVERSION

         Our operating subsidiaries located in France and the U.K. had combined
net sales from operations approximating 58.7% of our total net sales for 2002.
Net sales from the French subsidiary participating in the euro conversion were
25.8% of our net sales for 2002. We continue to review the impact of the euro
conversion on our operations.

         Our European operations took steps to ensure their capability of
entering into euro transactions. No material changes to information technology
and other systems are necessary to accommodate these multiple currency
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.

RISK FACTORS

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

                                       39





<PAGE>

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

         During the year ended December 31, 2002, the sale of electronic
components accounted for 59.1% of our total sales, and the sale of
communications equipment and related services accounted for 40.9% of our total
sales. In many cases we have long-term contracts with our electronic components
and communications equipment customers that cover the general terms and
conditions of our relationships with them but that do not include long-term
purchase orders or commitments. Rather, our customers issue purchase orders
requesting the quantities of communications equipment they desire to purchase
from us, and if we are able and willing to fill those orders, then we fill them
under the terms of the contracts. Accordingly, we cannot rely on long-term
purchase orders or commitments to protect us from the negative financial effects
of a reduced demand for our products that could result from a general economic
downturn, from changes in the electronic components and communications equipment
industries, including the entry of new competitors into the market, from the
introduction by others of new or improved technology, from an unanticipated
shift in the needs of our customers, or from other causes.

     THE ECONOMIC DOWNTURN IN THE TELECOMMUNICATIONS EQUIPMENT MARKET CONTINUES
     TO NEGATIVELY AFFECT OUR COMMUNICATIONS EQUIPMENT SEGMENT SALES, WHICH
     SALES ACCOUNTED FOR SUBSTANTIAL PORTIONS OF OUR REVENUES IN THE YEARS ENDED
     DECEMBER 31, 2002 AND 2001.

         During the years ended December 31, 2002 and 2001, 40.9% and 53.9% of
our sales, respectively, were of communications equipment products and related
services. We experienced a 37.2% decline in our communications equipment segment
sales in the year ended December 31, 2002. We believe this decline primarily was
due to a general business decline experienced by many of our telecommunications
customers. We anticipate a further decline in our communications equipment
segment sales in 2003 as compared to 2002. We cannot predict the duration or
severity of the telecommunications market downturn or the extent to which the
downturn will continue to negatively affect our ability to sell our products and
services to customers in the telecommunications industry. A further reduction in
sales would reduce our accounts receivable balances, which in turn would have an
adverse effect on our financial position by reducing cash availability under our
lines of credit. We are taking various actions, including staffing reductions as
recently as February 2003, to reduce cash outlays of our communications
equipment segment. However, if the downturn is long-lasting and more severe, we
may need to continue to downsize or to restructure, sell or discontinue all or
part of our communications equipment operations, which would negatively impact
our business, prospects, financial condition, results of operations and cash
flows.

     IF WE ARE UNABLE TO OBTAIN ACCEPTABLE REPLACEMENT FINANCING FOR OUR FRENCH
     SUBSIDIARY ON A TIMELY BASIS, OUR RESULTS OF OPERATIONS AND CASH FLOWS
     COULD SUFFER.

         CXR France has credit facilities with several lenders that totaled up
to approximately $849,000 in the aggregate as of December 31, 2002. Because CXR
France has experienced a substantial reduction in revenue, some of its lenders
are contemplating, and others have made, reductions in the total available
credit. Banque Hervet reduced its credit line to CXR France to $78,000 from
$159,000 on December 31, 2002. On February 10, 2003, Societe Generale requested
CXR France to pay back its December 31, 2002 outstanding balance of $298,000 by
April 30, 2003. We are actively seeking replacement financing. However, we
cannot assure you that the various lenders to CXR France will not seek immediate
payment of all amounts owed by them under their respective credit facilities or
seek to terminate any of the other existing credit facilities. Similarly, we
cannot assure you that if either of these events were to occur we would be
successful in obtaining the required replacement financing for our operations in
France or, if we were able to obtain such financing, that the financing would
occur on a timely basis, would be on acceptable terms and would be sufficient to
allow us to maintain our business operations in France. Accordingly, any of
these actions on the part of any of the lenders to our French subsidiary could
adversely affect our results of operations and cash flows.

         We are currently working to obtain a credit facility from a subsidiary
of ABN AMRO Holdings, N.V. to replace our French credit facilities. One of our
current creditors in France has also expressed an interest in replacing our
other French credit lines. We anticipate closing on a new French credit facility
in April 2003. However, we cannot guarantee that we will be successful in
obtaining new financing in a timely manner, in sufficient amounts or at all.

                                       40





<PAGE>

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

         Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any additional financing will be available to us on acceptable terms, or at
all. Deteriorating global economic conditions may cause prolonged declines in
investor confidence in and accessibility to capital markets. 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.

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

         The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications equipment products have been in short supply and are
frequently on allocation by semiconductor manufacturers. We have, from time to
time, experienced difficulty in obtaining some components. We do not have
guaranteed supply arrangements with any of our suppliers, and there can be no
assurance that our suppliers will continue to meet our requirements. Further,
disruption in transportation services as a result of enhanced security measures
in response to terrorism threats or attacks may cause some increases in costs
and timing for both our receipt of components and shipment of products to our
customers. If our existing suppliers are unable to meet our requirements, we
could be required to alter product designs to use alternative components or, if
alterations are not feasible, we could be required to eliminate products from
our product line.

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

                                       41





<PAGE>

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

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

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

         Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
electronic components and communications equipment markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could reduce our
competitiveness, revenues, profit margins or market share.

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

         As of December 31, 2002, we had $12,702,000 in backlog orders for our
products. These orders were due in large part to the long lead-times associated
with our electronic components products. The amount of backlog orders represents
revenue that we anticipate recognizing in the future, as evidenced by purchase
orders and other purchase commitments received from customers, but on which work
has not yet been initiated or with respect to which work is currently in
progress. However, we cannot assure you that we will be successful in fulfilling
orders and commitments in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

                                       42





<PAGE>

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

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could affect our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. Sales of
our products and services to customers located outside of the United States
accounted for approximately 62.1% of our net sales for 2002. We currently
anticipate that foreign sales will account for a similar proportion of our net
sales for 2003. However, because historically the majority of our currency
exposure has related to financial statement translation rather than to
particular transactions, we do not intend to enter into, nor have we
historically entered into, forward currency contracts or hedging arrangements in
an effort to mitigate our currency exposure.

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

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

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

         The market prices of securities of technology-based companies currently
are highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during 2002, the high and low closing sale
prices of a share of our common stock were $0.40 and $0.12, respectively. The
market price of our common stock may continue to fluctuate in response to the
following factors, many of which are beyond our control:

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

                                       43





<PAGE>

          o    additions or departures of key personnel; and
          o    future sales of our common stock or other securities.

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

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

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

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

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

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

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

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

         We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our communications equipment products must
comply with various regulations defined by the United States Federal
Communications Commission, or FCC, and Underwriters Laboratories as well as
industry standards established by Telcordia Technologies, Inc., formerly
Bellcore, and the American National Standards Institute. Internationally, our

                                       44





<PAGE>

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

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

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

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

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

     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,

                                       45

<PAGE>

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

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

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

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

         Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 200 have been designated as
Series A Preferred, 25 of which were outstanding as of December 31, 2002. In
addition, 150,000 shares have been designated as Series B Preferred Stock,
64,057.8 of which were outstanding as of December 31, 2002. The rights of the
holders of our common stock are subject to the rights of the holders of our
currently outstanding preferred stock and will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that we
may issue in the future. The issuance of preferred stock, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock, which would delay, defer or
prevent a change in control of MicroTel. Furthermore, preferred stock may have
other rights, including economic rights senior to the common stock, and, as a
result, the issuance of preferred stock could adversely affect the market value
of our common stock.

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

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

         We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar 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.

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

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

                                       46





<PAGE>

         The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "B" represents the lender's
base rate. Balances are as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                                                              FAIR
                                                                                      THERE-                  VALUE
      LIABILITIES           2003        2004         2005        2006       2007      AFTER       TOTAL      12/31/02
      -----------           ----        ----         ----        ----       ----      ------      -----      --------
<S>                        <C>         <C>         <C>         <C>         <C>         <C>        <C>         <C>
Line of Credit
(Domestic)                 $1,070      $   --      $   --      $   --      $   --      $  --      $1,070      $1,070

  Average Interest Rate    P+ 1%

Line of Credit (U.K.)      $1,683      $   --      $   --      $   --      $   --      $  --      $1,683      $1,683

  Average Interest Rate    B+ 2%

Overdraft (France)         $  722      $   --      $   --      $   --      $   --      $  --      $  722      $  722

  Average Interest Rate   5.5% -7.2%

Term Loan (Domestic)       $   82      $    8      $    5      $   --      $   --      $  --      $   95      $   95

  Average Interest Rate    P+ 1%

Term Loan (U.K.)           $   45      $   45      $  602      $   --      $   --      $  --      $  692      $  692

  Average Interest Rate    B+ 2%

Term Loan (France)         $   61      $   56      $   10      $   --      $   --      $  --      $  127      $  127

  Average Interest Rate   5.2%-5.6%

Term Loan (Japan)          $   17      $   17      $   17      $   16      $   15      $  --      $   82      $   82

  Average Interest Rate    3.25%
</TABLE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

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

         The audit reports of BDO Seidman on our consolidated financial
statements and consolidated financial statement schedules as of and for the
years ended December 31, 2001 and 2000 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.

         Our decision to change accountants was approved by our audit committee
and board of directors. In connection with the audits of the years ended
December 31, 2001 and 2000, and during the subsequent interim period through
September 24, 2002, there were no disagreements with BDO Seidman on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which disagreements, if not resolved to BDO
Seidman's satisfaction, would have caused BDO Seidman to make reference to the
subject matter of the disagreement in connection with its opinion. In addition,
there were no reportable events as described in Item 304(a)(1)(v) of Regulation
S-K under the Securities Act of 1933, as amended.

                                       47





<PAGE>

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

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

         The names, ages and positions held by our directors and executive
officers as of March 15, 2003 are as follows:

        NAME                        AGE              TITLES
        ----                        ---              ------

Carmine T. Oliva                    60       Chairman of the Board, President,
                                             Chief Executive Officer and
                                             Director

Graham Jefferies                    45       Executive Vice President and Chief
                                             Operating Officer of our
                                             Telecommunications Group and
                                             Managing Director of various
                                             subsidiaries

Randolph D. Foote                   54       Senior Vice President, Chief
                                             Financial Officer and Assistant
                                             Secretary

Robert B. Runyon (1)(2)             77       Secretary and Director

Laurence P. Finnegan, Jr. (1)(3)    65       Director

-----------
(1) Member of the executive compensation and management development committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.

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

         GRAHAM JEFFERIES was appointed Executive Vice President and Chief
Operating Officer of our Telecommunications Group on October 21, 1999. Mr.
Jefferies served as Executive Vice President of MicroTel from April 1999 through
October 1999. Mr. Jefferies has served CXR France as a director since March 1997
and as General Manager since July 2002, has served as Managing Director of Belix
Power Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since

                                       48





<PAGE>

our acquisition of those companies in April 2000, as Managing Director of XCEL
Power Systems, Ltd. since September 1996 and as Managing Director of XCEL
Corporation, Ltd. since March 1992. Prior to joining us in 1992, he was Sales
and Marketing Director of Jasmin Electronics PLC, a major United Kingdom
software and systems provider, from 1987 to 1992. Mr. Jefferies held a variety
of project management positions at GEC Marconi from 1978 to 1987. Mr. Jefferies
earned a B.S. degree in Engineering from Leicester University, and has
experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident
of the United Kingdom.

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

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

         LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of XET Corporation from 1985 to March
1997, Mr. Finnegan was XET Corporation's Chief Financial Officer from 1994 to
1997. Mr. Finnegan has held positions with ITT (1970-74) as controller of
several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief
Financial Officer, Executive Vice President and Chief Operating Officer, and
Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial Officer
and Treasurer. Since August 1995, he has been a principal of GwynnAllen
Partners, Bethlehem, Pennsylvania, an executive management consulting firm.
Since December 1996, Mr. Finnegan has been a director and the President of GA
Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. From
September 1997 to January 2001, Mr. Finnegan served as Vice President Finance
and Chief Financial Officer of QuestOne Decision Sciences, an efficiency
consulting firm based in Pennsylvania. Since August 2001, Mr. Finnegan has
served as a director and the Vice President and Chief Financial Officer of
VerdaSee Solutions, Inc., a consulting and software company based in
Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's
University.

                                       49





<PAGE>

         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 2004,
and two of which are Class III directors whose term expires in 2005. Officers
are appointed by, and serve at the discretion of, our board of directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

         Based solely upon a review of copies of the reports furnished to us
during our fiscal year ended December 31, 2002 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during 2002, all Section 16(a) filing
requirements applicable to our reporting persons were met.

ITEM 11.   EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

         The following table provides information concerning the annual and
long-term compensation for the years ended December 31, 2002, 2001 and 2000
earned for services in all capacities as an employee by our Chief Executive
Officer and each of our other executive officers who received an annual salary
and bonus of more than $100,000 for services rendered to us during 2002
(collectively, the "named executive officers"):

<TABLE>
                                               SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                                    LONG-TERM
                                                                                  COMPENSATION
                                                                                      AWARD
                                                                                      -----
                                                      ANNUAL COMPENSATION           SECURITIES
                                                     ---------------------          UNDERLYING        ALL OTHER
        NAME AND PRINCIPAL POSITION     YEAR         SALARY          BONUS           OPTIONS         COMPENSATION
        ---------------------------     ----         ------          -----           -------         ------------
    <S>                                  <C>        <C>             <C>               <C>              <C>
    Carmine T. Oliva..................   2002       $250,010           --               --             $4,821 (1)
      President and Chief Executive      2001       $250,010        $40,000           100,000          $4,821 (1)
      Officer                            2000       $207,395        $80,000             --             $4,821 (1)

    Graham Jefferies..................   2002       $152,093           --               --             $9,000 (3)
      Executive Vice President and       2001       $142,639        $20,000             --             $7,697 (3)
    Chief                                2000       $128,775        $35,000             --             $6,869 (3)
      Operating Officer of Telecommuni-
      cations Group (2)

    Randolph D. Foote.................   2002       $144,168           --               --             $1,604 (4)
      Senior Vice President, Chief       2001       $130,005        $15,000             --                --
      Financial Officer and Assistant    2000       $103,754        $20,000             --                --
      Secretary (4)
</TABLE>

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

                                       50





<PAGE>

                    RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS

         We match up to the lesser of $2,000 and 20% of Mr. Foote's
contributions to his 401(k) account. During 2002, our matching contribution
amounted to $1,604. This matching arrangement was generally made available to
all employees of MicroTel International, Inc. and provides for the same method
of allocation of benefits between management and non-management participants.

         Also, XCEL Power Systems, Ltd. makes matching contributions of up to 6%
of Mr. Jefferies' salary to an executives' defined contribution plan. Other
employees of XCEL Power Systems, Ltd. may receive matching contributions to a
defined contribution plan of up to 4% of their salary. Amounts contributed to
the defined contribution plans are intended to used to purchase annuities upon
retirement. During 2002, 2001 and 2000, Mr. Jefferies received matching
contributions of $9,000, $7,697 and $6,869, respectively.

                        OPTION GRANTS IN LAST FISCAL YEAR

         We did not grant any options or stock appreciation rights to the named
executive officers during 2002.

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

         The following table provides information regarding the value of
unexercised options held by the named executive officers as of December 31,
2002. None of the named executives officers acquired shares through the exercise
of options during 2002.

<TABLE>
<CAPTION>
                                               NUMBER OF
                                         SECURITIES UNDERLYING            VALUE ($) OF UNEXERCISED
                                         UNEXERCISED OPTIONS AT           IN-THE-MONEY OPTIONS AT
                                           DECEMBER 31, 2002               DECEMBER 31, 2002 (1)
                                           -----------------               ---------------------
           NAME                      EXERCISABLE    UNEXERCISABLE        EXERCISABLE      UNEXERCISABLE
           ----                      -----------    -------------        -----------      -------------
<S>                                  <C>                   <C>                <C>                <C>
Carmine T. Oliva.....                230,633               --                 --                 --
Graham Jefferies.....                126,287               --                 --                 --
Randolph D. Foote....                 50,000               --                 --                 --

</TABLE>

--------------
(1)  Based on the last reported sale price of our common stock of $0.18 on
     December 31, 2002 (the last trading day during 2002) as reported on the OTC
     Bulletin Board, less the exercise price of the options.

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

     CARMINE T. OLIVA

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

         On October 15, 1997, we entered into a replacement agreement with Mr.
Oliva on substantially the same terms and conditions as the prior agreement. The
replacement agreement was subject to automatic renewal for three successive
two-year terms beginning on October 15, 2002, unless, during the required notice
periods (which run from August 15 to October 15 of the year preceding the year
in which a two-year renewal period is to begin), either party gives written
notice of its desire not to renew. The agreement provides that Mr. Oliva's
salary was to continue at the abated amount of $198,865 per annum until we have
reported two consecutive profitable quarters during the term of the agreement or
any renewals thereof, at which time his salary was to increase to its
pre-abatement level of $250,000 per annum. Based on our unaudited quarterly
financial statements, this increase to $250,000 occurred effective as of
November 1, 2000.

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

                                       51





<PAGE>

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

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

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

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

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

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

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

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

                                       52





<PAGE>

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

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

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

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

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

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

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

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

RANDOLPH D. FOOTE

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

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

                                       53





<PAGE>

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

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

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

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

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

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

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

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

GRAHAM JEFFERIES

         On July 2, 2001, we entered into an employment agreement with Graham
Jefferies at an initial annual salary of 100,000 British pounds (approximately
$141,000 at the then current exchange rates) that is subject to automatic
renewal for two successive one-year terms beginning on July 2, 2004, unless,
during the required notice periods (which run from May 2 to July 2 of the year
preceding the year in which the renewal period is to begin), either party gives
written notice of its desire not to renew. Mr. Jefferies is to act as Managing

                                       54





<PAGE>

Director of XCEL Corporation, Ltd. and as Executive Vice President and Chief
Operating Officer of our Telecom Group and is to perform additional services as
may be approved by our board of directors. This agreement replaces a
substantially similar agreement that had been effective since May 1, 1998.

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

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

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

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

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

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

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

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

                                       55





<PAGE>

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

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 and reviews
our financial statements for each interim period and for our year end. Since
June 26, 1999, this committee has consisted of Laurence Finnegan.

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

         The nominating committee selects nominees for the board of directors.
Beginning in and since 2000, the nominating committee has consisted of Robert B.
Runyon.

COMPENSATION OF DIRECTORS

         During 2002, each non-employee director was entitled to receive $1,000
per month as compensation for their services. Beginning January 1, 2003, this
compensation increased to $1,500 per month. In addition, since November 1, 2002,
each board member chairing a standing committee has been entitled to receive
$500 per month as compensation for their services. We reimburse all directors
for out-of-pocket expenses incurred in connection with attendance at board and
committee meetings. We may periodically award options or warrants to our
directors under our existing option and incentive plans.

         Mr. Runyon formerly acted as a consultant to MicroTel in the areas of
strategy development, business and organization planning, human resources
recruiting and development and administrative systems. For 2002, Mr. Runyon
became entitled to receive $8,551 in consulting fees. During 2002, we also paid
premiums of $2,411 for Mr. Runyon's health insurance. During the latter half of
2002, Mr. Runyon ceased acting as a consultant to MicroTel, and we discontinued
payment of his health insurance premiums.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity. During 2002, Mr. Oliva made salary recommendations to our
executive compensation and management development committee regarding salary
increases for key executives.

                                       56





<PAGE>

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

BENEFICIAL OWNERSHIP TABLE

         As of March 14, 2003, a total of 21,576,788 shares of our common stock
were outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock by:

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

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

<TABLE>
<CAPTION>
                                                                      AMOUNT AND NATURE
               NAME AND ADDRESS                                    OF BENEFICIAL OWNERSHIP    PERCENT OF
            OF BENEFICIAL OWNER(1)              TITLE OF CLASS             OF CLASS              CLASS
            ----------------------              --------------             --------              -----
<S>                                                 <C>                 <C>                       <C>
Orbit II Partners, L.P......................        Common              3,015,685 (2)             13.98%
Carmine T. Oliva............................        Common              1,384,938 (3)              6.34%
Robert B. Runyon............................        Common                338,206 (4)              1.56%
Laurence P. Finnegan, Jr....................        Common                202,231 (5)              *
Graham Jefferies............................        Common                129,563 (6)              *
Randolph D. Foote...........................        Common                 55,000 (7)              *
All executive officers and directors
   as a group (5 persons)...................        Common              2,109,938 (8)              9.44%
</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)  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. Excludes 7,500 shares of common stock held directly by
     Mr. MacKenzie. 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, 230,633 shares of common stock underlying options and 50,530 shares
     of common stock underlying Series A Preferred Stock.

                                       57





<PAGE>

(4)  Includes 158,060 shares of common stock underlying options.
(5)  Includes 158,060 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 723,040 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.

EQUITY COMPENSATION PLAN INFORMATION

         The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                                              NUMBER OF SECURITIES
                                                                                             REMAINING AVAILABLE FOR
                                       NUMBER OF SECURITIES TO       WEIGHTED-AVERAGE         FUTURE ISSUANCE UNDER
                                       BE ISSUED UPON EXERCISE        EXERCISE PRICE           EQUITY COMPENSATION
                                           OF OUTSTANDING         OF OUTSTANDING OPTIONS,       PLANS (EXCLUDING
                                          OPTIONS, WARRANTS              WARRANTS             SECURITIES REFLECTED
PLAN CATEGORY                                AND RIGHTS                 AND RIGHTS               IN COLUMN (a))
-------------                                ----------                 ----------               --------------
                                                 (a)                        (b)                       (c)
<S>                                         <C>                           <C>                     <C>
Equity compensation plans approved
   by security holders                      1,432,323(1)                  $1.11                   1,825,000(2)
Equity compensation plans not
   approved by security holders               404,381(3)                  $0.67                          --
                                           ----------                                         ---------------
     Total                                  1,836,704                                             1,825,000

</TABLE>

-----------

(1)      Represents shares of common stock underlying options that are
         outstanding under our 1993 Stock Option Plan, our Employee Stock and
         Stock Option Plan, our 1997 Stock Incentive Plan and our Amended and
         Restated 2000 Stock Option Plan.
(2)      Represents shares of common stock available for issuance under options
         that may be issued under our Amended and Restated 2000 Stock Option
         Plan.
(3)      Represents shares of common stock underlying warrants that are
         described in Note 10 to our consolidated financial statements for the
         years ended December 31, 2002, 2001 and 2000.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

                                       58





<PAGE>

ITEM 14.   CONTROLS AND PROCEDURES.

         Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of February 28, 2003 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) are effective to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange
Act is accumulated, recorded, processed, summarized and reported to our
management, including our principal executive officer and our principal
financial officer, as appropriate to allow timely decisions regarding whether or
not disclosure is required.

         There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.

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

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

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

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

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

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

         On October 8, 2002, we filed a Form 8-K for September 24, 2002 that
contained Item 4 - Changes in Registrant's Certifying Accountant, and Item 7 -
Financial Statements and Exhibits.

                                       59





<PAGE>

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

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

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

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

Consolidated Balance Sheets as of December 31, 2002 and 2001.................F-4

Consolidated Statements of Operations for the years ended
    December 31, 2002, 2001 and 2000.........................................F-5

Consolidated Statements of Comprehensive Income (Loss) for the years ended
    December 31, 2002,
    2001 and 2000............................................................F-6

Consolidated Statements of Stockholders' Equity for the years ended
    December 31, 2002, 2001 and 2000.........................................F-7

Consolidated Statements of Cash Flows for the years ended
    December 31, 2002, 2001 and 2000.........................................F-8

Notes to Consolidated Financial Statements for years ended
    December 31, 2002, 2001 and 2000........................................F-10

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

Consolidated Schedule II Valuation and Qualifying Accounts for the
    years ended December 31, 2002, 2001 and 2000............................F-41

                                      F-1





<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
MicroTel International, Inc.

         We have audited the accompanying consolidated balance sheet of MicroTel
International, Inc. as of December 31, 2002 and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity and
cash flows for the year then ended. 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 based on our audit.

         We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and 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
audit provides a reasonable basis for our opinion.

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

         As discussed in Note 6 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002.

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

/S/ GRANT THORNTON LLP

Los Angeles, California
March 28, 2003

                                      F-2





<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
MicroTel International, Inc.

         We have audited the accompanying consolidated balance sheet of MicroTel
International, Inc. as of December 31, 2001, and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 2001. We
have also audited the information for each of the years in the two-year period
ended December 31, 2001 in the consolidated financial statement schedules listed
in the accompanying index. These consolidated financial statements and the
consolidated financial statement schedules 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
schedules 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 schedules 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 schedules.
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 schedules. 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, 2001 and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the consolidated financial
statement schedules referred to above presents fairly, in all material respects,
the information set forth therein.

/S/ BDO Seidman, LLP
BDO Seidman, LLP

Costa Mesa, California
February 25, 2002

                                      F-3





<PAGE>
<TABLE>
                                 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                          CONSOLIDATED BALANCE SHEETS
                                          DECEMBER 31, 2002 AND 2001
                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

ASSETS (NOTES 7 AND 8)                                                              2002           2001
                                                                                    ----           ----
<S>                                                                               <C>            <C>
Current assets:
   Cash and cash equivalents                                                      $    254       $    604
   Accounts receivable, net of allowance for doubtful accounts of  $130 and
     $226, respectively                                                              5,356          5,627
   Notes receivable (Note 3)                                                            31             48
   Inventories (Note 4)                                                              7,505          7,433
   Prepaid and other current assets                                                    312            396
                                                                                  ---------      ---------
Total current assets                                                                13,458         14,108
Property, plant and equipment, net (Note 5)                                            588            758
Goodwill, net of accumulated amortization of $1,050 and $1,060, respectively
   (Notes 2 and 3)                                                                   2,346          2,389
Other assets                                                                           394            433
                                                                                  ---------      ---------
                                                                                  $ 16,786       $ 17,688
                                                                                  =========      =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable due on demand                                                    $  2,405       $  2,198
   Notes payable (Note 7)                                                            1,070          1,420
   Current portion of long-term debt (Note 8)                                          318            550
   Accounts payable                                                                  3,897          3,783
   Accrued expenses                                                                  1,807          2,471
                                                                                  ---------      ---------
Total current liabilities                                                            9,497         10,422
Long-term debt, less current portion (Note 8)                                          927            763
Other liabilities                                                                      348            371
                                                                                  ---------      ---------
Total liabilities                                                                   10,772         11,556

Commitments and contingences (Note 13)

Convertible redeemable Series A Preferred Stock, $10,000 unit value
   Authorized 200 shares; issued and outstanding 25 shares (aggregate
   liquidation preference of $250) (Note 9)                                            282            270

Stockholders' equity (Notes 2, 3, 9, 10 and 13):
   Preferred stock, authorized 10,000,000 shares;
     Convertible Series B Preferred Stock, $0.01 par value,
       issued and  outstanding 64,000 shares and 150,000 shares in 2002
       and 2001, respectively (aggregate liquidation preference of $410
       and $960 in 2002 and 2001, respectively)                                        400            938
   Common stock, $0.0033 par value. Authorized 50,000,000 shares;
     issued and outstanding 21,535,000 and 20,671,000 shares in 2002
     and 2001, respectively                                                             71             68
   Additional paid-in capital                                                       24,900         24,358
   Accumulated deficit                                                             (19,042)       (18,459)

   Accumulated other comprehensive loss                                               (597)        (1,043)
                                                                                  ---------      ---------

Total stockholders' equity                                                           5,732          5,862
                                                                                  ---------      ---------
                                                                                  $ 16,786       $ 17,688
                                                                                  =========      =========

                         See accompanying notes to consolidated financial statements.
</TABLE>

                                                     F-4





<PAGE>
<TABLE>
                                 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                 YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>

                                                                      2002           2001           2000
                                                                      ----           ----           ----
<S>                                                                 <C>            <C>            <C>
Net sales (Note 14)                                                 $ 22,664       $ 27,423       $ 28,050
Cost of sales                                                         14,147         15,456         15,529
                                                                    ---------      ---------      ---------
Gross profit                                                           8,517         11,967         12,521
Operating expenses:
   Selling, general and administrative                                 7,731         10,129          9,827
   Engineering and product development                                 1,015          1,076          1,167
                                                                    ---------      ---------      ---------
Income (loss) from operations                                           (229)           762          1,527
Other income (expense):
   Interest expense                                                     (441)          (396)          (424)
   Gain (loss) on sale of subsidiary/investment,
     net (Note 3)                                                         --             --            197
   Other, net (Note 3)                                                    80            (18)           434
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations before income
   taxes                                                                (590)           348          1,734
Income taxes (benefit) (Note 11)                                         (20)            77             31
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations                                (570)           271          1,703
                                                                    ---------      ---------      ---------
Discontinued operations (Note 15):
   Income (loss) from discontinued operations                             --             56           (212)
   Loss on disposal of discontinued operations,
     including provision for phase out period of $122
     in 2000                                                              --             --           (487)
                                                                    ---------      ---------      ---------
Income (loss) from discontinued operations                                --             56           (699)
                                                                    ---------      ---------      ---------
Net income (loss)                                                   $   (570)      $    327       $  1,004
                                                                    =========      =========      =========

Basic earnings (loss) per share from continuing
   operations                                                       $  (0.03)      $   0.01       $   0.09
                                                                    =========      =========      =========
Diluted earnings (loss) per share from continuing
   operations                                                       $  (0.03)      $   0.01       $   0.07
                                                                    =========      =========      =========
Basic earnings (loss) per share from discontinued operations        $     --       $   0.00       $  (0.04)
                                                                    =========      =========      =========
Diluted earnings (loss) per share from discontinued operations      $     --       $   0.00       $  (0.03)
                                                                    =========      =========      =========

Basic earnings (loss) per share (Note 12)                           $  (0.03)      $   0.02       $   0.05
                                                                    =========      =========      =========

Diluted earnings (loss) per share (Note 12)                         $  (0.03)      $   0.01       $   0.04
                                                                    =========      =========      =========

                         See accompanying notes to consolidated financial statements.
</TABLE>

                                                     F-5





<PAGE>
<TABLE>

                       MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                       YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                      (IN THOUSANDS)
<CAPTION>

                                                     2002          2001          2000
                                                     ----          ----          ----
<S>                                                <C>           <C>           <C>
Net income (loss)                                  $  (570)      $   327       $ 1,004
Other comprehensive income (loss) net of tax:
   Foreign currency translation adjustment             446          (312)         (505)
                                                   --------      --------      --------
Comprehensive Income (loss)                        $  (124)      $    15       $   499
                                                   ========      ========      ========
</TABLE>

               See accompanying notes to consolidated financial statements.

                                           F-6





<PAGE>
<TABLE>
                                      MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                      YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                     (IN THOUSANDS)
<CAPTION>

                                                 Series B                                                     Accumulated
                                                Convertible        Common Stock     Additional                   Other
                                              Preferred Stock    -----------------    Paid-in   Accumulated  Comprehensive
                                              Shares   Amount    Shares     Amount    Capital     Deficit    Income (Loss)   Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>     <C>     <C>          <C>     <C>        <C>          <C>            <C>
Balance at December 31, 1999                      --     $ --    18,152       $60     $23,726    $(19,759)    $  (226)       $3,801
Stock issued upon conversion of redeemable
  preferred stock (Note 9)                        --       --     1,743         6         343          --          --           349
Warrant repricing offer (Note 10)                 --       --        --        --          65          --          --            65
Warrants issued for services                      --       --        --        --          25          --          --            25
Warrants issued with T-Com purchase (Note 3)      --       --        --        --          62          --          --            62
Exercise of employee options                      --       --        90        --          18          --          --            18
Warrants exercised                                --       --       584         2          67          --          --            69
Stock issued under stock purchase plan            --       --         1        --           1          --          --             1
Preferred Stock issued with T-Com purchase
  (Note 3)                                       150      938        --        --          --          --          --           938
Foreign currency translation adjustment           --       --        --        --          --          --        (505)         (505)
Accretion of redeemable preferred stock           --       --        --        --          --         (20)         --           (20)
Net income                                        --       --        --        --          --       1,004          --         1,004
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                     150      938    20,570        68      24,307     (18,775)       (731)        5,807
Warrants issued for services                      --       --         --        --         21          --          --           21
Stock issued for services                         --       --        100        --         30          --          --           30
Stock issued under stock purchase plan            --       --          1        --         --          --          --           --
Foreign currency translation adjustment           --       --         --        --         --          --        (312)        (312)
Accretion of redeemable preferred stock           --       --         --        --         --         (11)         --          (11)
Net income                                        --       --         --        --         --         327          --          327
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                     150      938     20,671        68     24,358     (18,459)     (1,043)       5,862
Preferred Series B conversions                   (86)    (538)       864         3        535          --          --           --
Accretion of redeemable preferred stock           --       --         --        --         --         (13)                     (13)
Warrants issued for services                      --       --         --        --          6          --          --            6
Common stock issued for services                  --       --         --        --          1          --          --            1
Foreign currency translation adjustment           --       --         --        --         --          --         446          446
Net loss                                          --       --         --        --         --        (570)         --         (570)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                      64     $400     21,535       $71    $24,900    $(19,042)     $ (597)      $5,732
====================================================================================================================================

                                   See accompanying notes to consolidated financial statements.
</TABLE>

                                                               F-7





<PAGE>
<TABLE>
                                 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                (IN THOUSANDS)
<CAPTION>

                                                                                  2002          2001         2000
                                                                                  ----          ----         ----
<S>                                                                             <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                               $  (570)      $   327       $ 1,004
   Adjustments to reconcile net loss to cash provided by (used in)
     operating activities:
       Depreciation and amortization                                                349           345           431
       Amortization of intangible assets                                             --           370           352
       Provision for doubtful accounts                                              118           216            47
       Provision for inventory obsolescence                                         438           659           893
       Gain on sale of fixed assets                                                  (9)           --           (43)
       Gain on sale of stock                                                         --            --          (197)
       Reversal of previously estimated accruals                                     --            --          (399)
       Stock and warrants issued for services                                         7            51            25
       Repricing of warrants                                                         --            --            65
       Gain (loss) on disposal of discontinued operations                            --            --           487
       Net change in operating assets of discontinued operations                     --           (15)          401
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                                             22         1,609          (428)
     Inventories                                                                   (657)       (1,755)       (1,468)
     Prepaids and other assets                                                      219           458           274
     Note receivable                                                                 --            --          (130)
     Accounts payable                                                               114        (1,439)       (1,120)
     Accrued expenses and other liabilities                                        (688)         (926)         (395)
                                                                                ------------------------------------
Cash used in operating activities                                                  (657)         (100)         (201)
                                                                                ------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                                  (193)         (120)         (158)
   Cash received from sale of stock (DTS)                                            --            --           520
   Cash received from sale of stock (Wi-Lan)                                         --            --           918
   Cash received from sale of discontinued operations                                --            --           260
   Cash received from sale of fixed assets                                           --            --            43
   Cash paid, net of cash acquired in acquisition (Belix)                            --            --          (592)
   Cash paid, net of cash acquired in acquisition (T-Com)                            --            --           (82)
   Cash collected on notes receivable                                                17            82            --
                                                                                ------------------------------------
Cash provided by (used in) investing activities                                    (176)          (38)          909
                                                                                ------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (repayments) of notes payable                                    (206)          (34)        1,131
   Net proceeds (repayments) of long-term debt                                       --           392            --
   Repayment of notes payable                                                        --            --        (1,146)
   Proceeds from sale of common stock                                                --            --            88
                                                                                ------------------------------------
Cash provided by (used in) financing activities                                    (206)          358            73
                                                                                ------------------------------------

Effect of exchange rate changes on cash                                             689          (372)         (505)
Net (decrease) increase in cash and cash equivalents                               (350)         (152)          276
Cash and cash equivalents at beginning of year                                      604           756           480
                                                                                ------------------------------------
Cash and cash equivalents at end of year                                        $   254       $   604       $   756
                                                                                ====================================

                                   See accompanying notes to consolidated financial statements.
</TABLE>

                                                               F-8





<PAGE>
<TABLE>

                            MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                            YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                           (IN THOUSANDS)
<CAPTION>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                        2002     2001     2000
                                                                          ----     ----     ----
   <S>                                                                    <C>       <C>       <C>
   Cash paid during the year for:
     Interest                                                             $361      $400      $372
                                                                          ========================
     Income taxes                                                         $ 95      $ 45      $ 13
                                                                          ========================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES:
   Equipment acquired under capital lease                                 $143      $150      $ --
                                                                          ========================
   Common stock issued upon conversion of redeemable preferred stock      $ --      $ --      $349
                                                                          ========================
   Accretion of redeemable preferred stock                                $ 13      $ 11      $ 20
                                                                          ========================
   Issuance of preferred stock in connection with acquisition             $ --      $ --      $938
                                                                          ========================
   Issuance of warrants in connection with acquisition                    $ --      $ --      $ 62
                                                                          ========================
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                                F-9





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

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

         In October 2000, the Company decided to discontinue its circuits
segment operations (see Note 15). At that time, the circuits segment operations
consisted of XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits
Division ("XCD"), a division of XET. XCEL Etch Tek was offered for sale and sold
in November 2000. XCD, predominantly a captive supplier of printed circuit
boards to the electronic components segment, has been retained and is now
included in the electronic components segment. Accordingly, all current and
prior financial information related to the circuits segment operations has been
presented as discontinued operations in the accompanying consolidated financial
statements.

BASIS OF PRESENTATION

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

         The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 3) was accounted for using the equity method.

REVENUE RECOGNITION

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

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.

INVENTORIES

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

                                      F-10





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

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

DEBT ISSUANCE COSTS

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

PRODUCT WARRANTY LIABILITIES

         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 communications equipment products carry a two-year
limited parts and labor warranty. The Company's communications equipment
products may be returned within 30 days of purchase if a new order is received,
and the new order will be credited with 80% of the selling price of the returned
item. Products returned under warranty typically are tested and repaired or
replaced at the Company's option. Historically, the Company has not experienced
significant warranty costs or returns. During the fourth quarter of 2001, the
Company performed a study of its warranty costs incurred over the previous two
years. Based on the study, the Company determined that it was over accrued and,
accordingly, reduced its warranty accrual by approximately $85,000, which amount
is included in cost of sales in the accompanying 2001 consolidated statement of
operations. During the second quarter of 2000, the Company settled certain
warranty claims related to its former HyComp subsidiary that was sold in March
1999, for less than the amount originally accrued. Accordingly, the Company
reversed warranty accruals totaling $137,000 in 2000 that were no longer deemed
to be necessary.

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

                                      F-11





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         The changes in the Company's product warranty liability during 2002 and
2001 were as follows:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                          2002                    2001
                                                                     --------------------------------------
<S>                                                                      <C>                   <C>
Liability, beginning of year                                             $ 32,000               $117,000
Expense for new warranties issued                                          32,000                 32,000
Expense related to accrual revision for prior year warranties                 --                 (85,000)
Warranty claims                                                           (32,000)               (32,000)
                                                                     --------------------------------------
Liability, end of year                                                   $ 32,000               $ 32,000
                                                                     ======================================
</TABLE>

INCOME TAXES

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

STOCK-BASED COMPENSATION

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

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

                                      F-12





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                          2002         2001        2000
                                          ----         ----        ----
NET INCOME (LOSS)
       As reported                    $    (570)  $      327   $   1,004
       Pro forma                      $    (590)  $      211   $     909

NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS (LESS ACCRETION
OF PREFERRED STOCK)
       As reported                    $    (583)  $      316   $     984
       Pro forma                      $    (603)  $      200   $     889

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

DILUTED EARNINGS (LOSS) PER SHARE
       As Reported                    $   (0.03)  $    0.01    $    0.04
       Pro forma                      $   (0.03)  $    0.01    $    0.04

         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.

EARNINGS (LOSS) PER SHARE

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. This statement defines fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. As of December 31, 2002 and 2001, the fair value of all
financial instruments approximated carrying value.

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

                                      F-13





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the fourth quarter of 2001, the Company finalized a sales tax
audit, resulting in a final tax assessment at a lower amount than had been
accrued for at December 31, 2000. The Company reversed the over accrual in the
amount of approximately $78,000 in the fourth quarter of 2001, which amount is
included in selling, general and administrative expenses in the accompanying
2001 consolidated statement of operations. During 2000, the Company reversed
approximately $172,000 of previously estimated accruals related to sales
commissions and other accrued expenses which were no longer deemed necessary. Of
this amount, $90,000 relates to over-accrued commissions, $49,000 relates to
over-accrued accounts payable and $33,000 relates to the settlement of a sales
tax assessment. Throughout 2000, the Company reviewed its accrual for sales
commissions and its accounts payable and contacted the appropriate vendors to
verify the amounts outstanding. As outstanding amounts due were verified for
amounts less than the amount recorded, the Company reversed the excess accrual.
In the fourth quarter of 2000, the Company settled an outstanding disputed sales
tax assessment and the assessment was canceled. The Company reversed the accrual
for the sales tax assessment in the amount of approximately $33,000 in the
fourth quarter of 2000. These amounts are included in other, net in the
accompanying 2000 consolidated statement of operations.

CONCENTRATION OF CREDIT RISK

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

         The Company's accounts receivable result from sales to a broad customer
base. The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. Accounts receivable are generally due within 30 days in our
U.S. operations and are stated net of allowance for doubtful accounts. Accounts
outstanding for longer than the contractual payment terms are considered past
due. Provisions for uncollectible accounts are made based on the Company's
specific assessment of the collectibility of all past due accounts. Credit
losses are provided for in the financial statements and consistently have been
within management's expectations. Sales to various BAE Systems companies in the
U.S. and Europe represented approximately 14% and 10% of the Company's total net
revenues during 2002 and 2001. At December 31, 2000, one customer accounted for
10% of net accounts receivable. Provisions for uncollectible accounts are made
based on the Company's specific assessment of the collectibility of all past due
accounts.

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-14





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior years financial
statements to be consistent with the 2002 presentation.

(2)      MERGER WITH XET CORPORATION

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

         The merger was accounted for as a purchase of the Company by XET.
Accordingly, the purchase price, consisting of the $5,011,000 value of the
Company's common stock outstanding at the date of the merger and the $730,000
direct costs of the acquisition, 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 was to be 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 was being amortized
on a straight-line basis over ten years until December 31, 2001, after which no
amortization was incurred in accordance with SFAS 142 (see Note 6).

(3)      ACQUISITIONS AND DISPOSITIONS OF BUSINESSES

DIGITAL TRANSMISSION SYSTEMS

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

                                      F-15





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         On January 7, 2000, the Company sold all of its interest in the DTS
common stock 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 was included in other income (expense) in the
consolidated statement of operations for the year ended December 31, 1999. The
Company was restricted from selling the Wi-LAN stock until July 7, 2000 due to
Toronto exchange rules that restrict sales of stock obtained in an acquisition
related transaction. The 28,340 shares of Wi-LAN represented less than 1% of the
total outstanding shares of Wi-LAN common stock as of the date of acquisition.

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

BELIX COMPANY, LTD.

         On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd. ("Belix"), including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash and an earn-out for the former
stockholders based on sales, which totaled $252,000 at December 31, 2000. The
Company incurred expenses of approximately $257,000 for severance and relocation
costs and accrued an additional estimate of $49,000 for certain severance and
relocation costs related to Belix. The severance and relocation affected various
manufacturing, administrative and accounting personnel and was substantially
completed as of December 31, 2000. The Company also incurred approximately
$107,000 of legal and other expenses related to the acquisition. The Company has
included the expenses and accrual in the calculation of the cost of the
acquisition. Subsequent to the closing date, the purchase price was reduced by
$181,000 due to a shortfall in net assets per the purchase agreement. In 2001,
the Company settled a lawsuit brought by the Company against the former owners
of Belix, resulting in a final determination of the earn out provision and a
reduction in certain liabilities assumed. In addition, the Company incurred
additional legal costs. Net assets acquired totaled $223,000, after all such
adjustments. The assets acquired and liabilities assumed are as follows:

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

         Accounts payable                               $ 1,472,000
         Line of credit                                     419,000
         Notes payable                                      170,000
                                                        ------------
         Total liabilities assumed                      $ 2,061,000
                                                        ============

         Net assets acquired                            $   223,000
         Accrual of severance and relocation costs         (306,000)
         Accrual of legal and other costs                  (161,000)
         Goodwill                                         1,165,000
                                                        ------------
         Adjusted purchase price                        $   921,000
                                                        ============

                                      F-16





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         Initial purchase price                         $   790,000
         Reduction due to shortfall in net assets          (181,000)
         Earn-out accrual                                   312,000
                                                        ------------
         Adjusted purchase price                        $   921,000
                                                        ============

         The acquisition of Belix has been accounted for as a purchase by the
Company and resulted in approximately $1.2 million of goodwill. Belix is located
in England, U. K. and is in the business of manufacturing power supplies for
various applications. Belix has been integrated into the Company's existing
power supply producer, XCEL Power Systems, Ltd. Belix's assets consist mostly of
accounts receivable, inventories and fixed assets. All dollar amounts indicated
in this paragraph are derived from the conversion of British pounds into U. S.
dollars at the conversion rate in effect at the time of the acquisition with the
exception of the earn out amounts, which were converted at the conversion rate
at December 31, 2000, and the adjustments related to the lawsuit settlement,
which were converted at the conversion rate on the date the settlement was
finalized. The Belix acquisition was not material to the financial statements
and; accordingly, the pro forma effect of the transaction is not provided.

T-COM, LLC

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

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

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

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

                                      F-17





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

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

                  150,000 shares of Series B Preferred Stock of the Company
         ("Series B Shares"). The Series B Shares became convertible into shares
         of common stock of the Company in three equal lots of 50,000 Series B
         Shares each at the end of six, twelve and eighteen months,
         respectively, following the acquisition closing date of September 22,
         2000. Each Series B Share is convertible into ten common shares, and
         conversion rights are cumulative, with all 150,000 Series B Shares
         being convertible into common stock after eighteen months. The Series B
         Shares have a liquidation preference of $6.40 per share. The Company
         may redeem outstanding and unconverted Series B Shares for cash at a
         price per share equal to $7.36 by giving 20 days' prior written notice
         to the holders of Series B Shares to be redeemed. If less than all of
         the Series B Shares are to be optionally redeemed, the particular
         Series B Shares to be redeemed shall be selected by lot or by such
         other equitable manner determined by the Company's board of directors.
         The Company may not, however, redeem Series B Shares if there is an
         insufficient number of authorized and reserved shares of common stock
         to permit conversion by the holders of the Series B Shares during the
         20-day notice period, to the extent the Series B Shares are subject to
         a lock-up, or to the extent the Company receives a conversion notice
         for Series B Shares prior to the redemption date. If the Company fails
         to pay the redemption price after calling any Series B Shares for
         optional redemption, the Company will have no further option to redeem
         Series B Shares.

                  Warrants to purchase up to 250,000 shares of the Company's
         common stock at a fixed exercise price of $1.25 per share, which were
         exercisable for a period of twenty-four months following the
         acquisition closing date of September 22, 2000 and contained a cashless
         exercise feature. The warrants expired on September 22, 2002.

         The consideration described above is valued at approximately $938,000
for the Series B Shares based on a value of $0.6253 per common share, the market
value of the Company's common stock at the time the agreement in principal was
signed, multiplied by the 1,500,000 common shares into which the preferred
shares can be converted. The warrants were valued at approximately $62,000 based
on a calculation using the Black-Scholes pricing model with the following
assumptions: no dividend yield; expected volatility of 95%; a risk free rate of
6.3%; and an expected life of two years. The acquisition of T-Com has been
accounted for as a purchase by the Company and resulted in approximately
$365,000 of goodwill which was being amortized on a straight-line basis over ten
years until December 31, 2001, after which no amortization was incurred in
accordance with SFAS 142 (see Note 6).

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

                                      F-18





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                                             PRO FORMA
                                                             YEAR ENDED
                                                            DECEMBER 31,
(thousands except per share data)                               2000
------------------------------------------------------------------------------
Net sales                                                      $29,680
Income (loss) from continuing operations                         1,255
Net income (loss)                                                  556
Net income per common share
   Basic                                                          0.03
   Diluted                                                        0.02
------------------------------------------------------------------------------

XCEL ETCH TEK

         On November 15, 2000, the Company sold substantially all of the assets
of XCEL Etch Tek ("Etch Tek"), a wholly-owned subsidiary of XET, to a former
employee in exchange for $260,000 in cash, a $50,000 note receivable and the
assumption of $75,000 of liabilities. The note receivable bears interest at 8%
per annum, and all principal and interest was due in November 2001. The balance
due under the note receivable was approximately $31,000 and $34,000 at December
31, 2002 and 2001, respectively, and is included in notes receivable in the
accompanying consolidated balance sheets. The Company expects the remaining
balance of the note to be repaid during 2003. The Etch Tek transaction resulted
in a loss of $365,000, which is included in gain (loss) on disposal of
discontinued operations in the accompanying 2000 consolidated statement of
operations (see Note 15).

(4)      INVENTORIES

         Inventories are summarized as follows:

                                                          2002           2001
                                                          ----           ----
Raw materials.......................................   $2,904,000     $2,806,000
Work-in-process.....................................    2,988,000      2,879,000
Finished goods......................................    1,613,000      1,748,000
                                                       ----------     ----------
                                                       $7,505,000     $7,433,000
                                                       ==========     ==========

         Included in the amounts above are allowances for inventory obsolescence
of $1,591,000 and $1,152,000 at December 31, 2002 and 2001, 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.

                                      F-19





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(5)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

                                                    2002                2001
                                                    ----                ----
Land and buildings .....................        $   309,000         $   266,000
Machinery, equipment and fixtures ......          3,717,000           3,508,000
Leasehold improvements .................            450,000             449,000
                                                ------------        ------------
                                                  4,476,000           4,223,000
Accumulated depreciation ...............         (3,888,000)         (3,465,000)
                                                ------------        ------------
                                                $   588,000         $   758,000
                                                ============        ============

(6)      GOODWILL AMORTIZATION AND IMPAIRMENT TESTING

         The Company initially applied Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") on
January 1, 2002. SFAS 142 provides for impairment testing of goodwill carrying
values and disallows the amortization of goodwill. In applying SFAS 142, the
Company performed the transitional reassessment and impairment tests required as
of January 1, 2002 and determined that goodwill had indefinite useful lives and
that there was no impairment of these assets. At the time of adoption, the
Company had $1,060,000 of accumulated amortization of goodwill. The Company
performed its annual required test of impairment as of December 31, 2002. The
following table includes a reversal of the Company's goodwill amortization
expenses for 2001 and 2000 so that 2001 and 2000 can be compared with 2002,
during which year the Company had no goodwill amortization expense in accordance
with SFAS 142.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                2002              2001              2000
                                            -------------------------------------------------
<S>                                         <C>               <C>              <C>
Reported net income (loss) from
  continuing operations                     $  (570,000)      $   271,000      $   1,703,000
    Add back: goodwill
      amortization                                   --           370,000            352,000
                                            ------------      ------------     --------------
    Adjusted net income (loss)
      excluding amortization of
      goodwill                              $  (570,000)      $   641,000      $   2,055,000
                                            ============      ============     ==============
Income (loss) from discontinued
  operations                                         --            56,000           (699,000)
Pro forma net income (loss)                 $  (570,000)      $   697,000      $   1,356,000
                                            ============      ============     ==============

       Earnings (loss) per share:
       Basic
       Reported net income (loss) from
         continuing operations              $     (0.02)      $      0.01      $        0.09
           Add back: goodwill
             amortization                            --              0.02               0.02
           Adjusted net income (loss)
             excluding amortization of
             goodwill                       $     (0.03)      $      0.03      $        0.11
                                            ============      ============     ==============

                                      F-20





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

       Income (loss) from discontinued
         operations                                  --                --              (0.04)
       Net income (loss)                    $     (0.03)      $      0.03      $        0.07
                                            ============      ============     ==============

       Diluted
       Reported net income (loss) from
         continuing operations              $     (0.03)      $      0.01      $        0.07
           Add back: goodwill
             amortization                            --              0.02               0.02
           Adjusted net income (loss)
             excluding amortization of
             goodwill                       $     (0.03)      $      0.03      $        0.09
                                            ============      ============     ==============
       Income (loss) from discontinued
         operations                                  --                --              (0.03)
       Pro forma net income (loss)          $     (0.02)      $      0.03      $        0.06
                                            ============      ============     ==============
</TABLE>

(7)      NOTES PAYABLE

         A summary of notes payable is as follows:

                                                       2002            2001
                                                       ----            ----
Line of credit with a U.S. commercial lender       $1,070,000       $1,420,000
Lines of credit with foreign banks                  2,405,000        2,198,000
                                                   -----------      -----------
                                                   $3,475,000       $3,618,000
                                                   ===========      ===========

         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. The credit line was collateralized by
substantially all assets of the Company's domestic subsidiaries, bore interest
at the lender's prime rate plus 1% and was payable on demand. The line of credit
expired on June 23, 2000, but was extended to August 14, 2000. The Domestic
Facility was replaced by a new credit facility on August 16, 2000.

         On August 16, 2000, the Company's subsidiaries, CXR Telcom and XET,
together with the Company acting as guarantor, obtained a credit facility from
Wells Fargo Business Credit, Inc. that includes a revolving loan secured by the
Company's inventory and accounts receivable and a term loan secured by the
Company's machinery and equipment. The Company's President and CEO provided a
limited personal guarantee on these loans. As consideration for this guarantee,
the Company's President and CEO received a guarantee fee, approved by the board
of directors, in the amount of $35,000. On January 26, 2001, Wells Fargo
Business Credit, Inc. released the guarantee. No further amounts are due in
connection with this guarantee.

                                      F-21





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         In April 2002, the maturity date of the facility with Wells Fargo
Business Credit, Inc. was extended by two years to August 16, 2005. Since April
17, 2002, the facility has provided for a revolving loan of up to $3,000,000
secured by inventory and accounts receivable and a term loan in the amount of
$687,000 secured by machinery and equipment. On December 31, 2002, the interest
rate was the prime rate (then 4.25%) plus 1% subject to a minimum interest
charge of $13,500 per month. Due to the minimum interest charge, the effective
interest rate the Company paid for this credit facility during 2002 was 15.4%.
The balance outstanding at December 31, 2002 was $1,070,000 on the revolving
loan and $95,000 on the term loan, and $13,000 of additional borrowings were
available under the revolving loan. The credit facility contains restrictive
financial covenants that are set by mutual agreement each year. At December 31,
2002, the Company was not in compliance with the net income covenant. The
Company subsequently obtained a waiver from the lender on March 28, 2003.

         The Company's U.K. subsidiary, XCEL Power Systems, Ltd. ("XPS")
obtained a credit facility with Venture Finance PLC, which new facility replaced
a Lloyds Bank facility as of November 12, 2002 and expires on November 12, 2005.
Using the exchange rate in effect at December 31, 2002 for the conversion of
British pounds into United States dollars, the new facility is for a maximum of
$2,415,000 and includes a $564,000 unsecured cash flow loan, a $129,000 term
loan secured by fixed assets and the remainder of the loan is secured by
accounts receivable and inventory. The interest rate is the base rate of Venture
Finance PLC (4% at December 31, 2002) plus 2%, and is subject to a minimum rate
of 4% per annum. There are no financial performance covenants applicable to this
credit facility.

         CXR France has credit facilities with several lenders that totaled up
to approximately $849,000 in the aggregate as of December 31, 2002. The interest
rates on these facilities ranged from 5.2% to 7.2% at December 31, 2002. Each
credit facility has a specified repayment term. However, each lender has the
right to demand payment in full at any time prior to the scheduled maturity date
of a particular credit facility. Because CXR France has experienced a
substantial reduction in revenue, some of its lenders are contemplating, and
others have made, reductions in the total available credit. Banque Hervet
reduced availability to $78,000 from $159,000 effective December 31, 2002. On
February 10, 2003, Societe Generale notified CXR France that CXR France must pay
back its credit line balance by April 30, 2003. As of December 31, 2002, that
credit line balance was $298,000. As a result, the Company is in the process of
seeking alternative financing sources in France to replace all of the current
lenders to the Company's French operations.

         XCEL Japan Ltd. ("XJL") obtained a term loan on November 29, 2002 from
the Johnan Shinkin Bank. The loan is amortized over five years and carries an
annual interest rate 3.25%. The balance of the loan on December 31, 2002 was
$82,000 using the exchange rate in effect at December 31, 2002 for conversion of
Japanese yen into United States dollars.

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

                                      F-22





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(8)      LONG-TERM DEBT

         A summary of long-term debt follows:

                                                      2002              2001
                                                       ----             ----
Term notes payable to commercial lender (a)       $    95,000       $   232,000
Term notes payable to foreign banks (b)               901,000           760,000
Capitalized lease obligations (c)                     249,000           172,000
Other promissory notes                                     --           149,000
                                                  ------------      ------------
                                                    1,245,000         1,313,000
Current portion                                      (318,000)         (550,000)
                                                  ------------      ------------
                                                  $   927,000       $   763,000
                                                  ============      ============
---------------
         (a)      Two term notes payable to Wells Fargo Business Credit, Inc.
                  bearing interest at the lender's prime rate (4.25% at December
                  31, 2002) plus 1%, subject to a minimum interest charge of
                  $13,500 per month. The term notes payable are subject to the
                  same provisions and covenants as the credit facility discussed
                  in Note 7. The notes are collateralized by machinery and
                  equipment and are payable in total monthly principal
                  installments plus interest through the final maturity date of
                  August 16, 2005.

         (b)      The Company has agreements with several foreign banks that
                  include term borrowings that mature at various dates through
                  2007. Interest rates on the borrowings bear interest at rates
                  ranging from 2.9% to 6.0% and are payable in monthly
                  installments.

         (c)      Capital lease agreements are calculated using interest rates
                  appropriate at the inception of the lease and range from 6% to
                  22%. Lease liabilities are amortized over the lease term using
                  the effective interest method. The leases all contain bargain
                  purchase options and expire at dates through 2004.

         Principal maturities related to long-term debt as of December 31, 2002
are as follows:

                     Year Ending December 31,                      Amount
                     ------------------------                      ------
                               2003                                $ 318,000
                               2004                                $ 224,000
                               2005                                $ 668,000
                               2006                                $  20,000
                               2007                                $  15,000

(9)      REDEEMABLE PREFERRED STOCK

CONVERTIBLE REDEEMABLE PREFERRED STOCK

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

                                      F-23





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. Under the
original certificate of designation, the Series A Shares were convertible into
common stock of the Company at the option of the holder thereof at any time
after the ninetieth (90th) day of issuance thereof at the conversion price per
share of Series A Shares equal to $10,000 divided by the lesser of (x) $1.26 and
(y) One Hundred Percent (100%) of the arithmetic average of the three lowest
closing bid prices over the forty (40) trading days prior to the exercise date
of any such conversion. Also under the original certificate of designation, no
more than 20% of the aggregate number of Series A Shares originally purchased
and owned by any single entity could be converted in any thirty (30) day period
after the ninetieth (90th) day from issuance. In the event of any liquidation,
dissolution or winding up of the Company, the holders of shares of Series A
Shares are entitled to receive, prior and in preference to any distribution of
any assets of the Company to the holders of the Company's common stock, an
amount per share equal to $10,000 for each outstanding Series A Share. Any
unconverted Series A Shares may be redeemed at the option of the Company for
cash at a per share price equal to $11,500 per Series A Share and any Series A
Shares 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 Series A Shares agreed to revise
the certificate of designations relating to the Series A Shares to provide that:
(i) the conversion price would be fixed at $10,000 divided by $0.50 for so long
as the Company's common stock continued to be traded on the Nasdaq SmallCap
Market and the Company did not conduct a reverse split of its outstanding common
stock; and (ii) the Company would not exercise its redemption rights for the
outstanding shares of the Series A Shares for six months. The agreement also
provided that the existing restriction on the right of each holder of the Series
A Shares to convert more than 20% of the aggregate number of shares of the
Series A Shares originally purchased by such holder in any 30-day period would
be eliminated. Also, the agreement provided that the Company would replace the
existing warrants, which warrants had an exercise price of $1.25 per share, with
warrants that had an exercise price of $0.75 per share.

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

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

                                      F-24





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

         The Company filed an amended certificate of designation with the
Delaware Secretary of State to give effect to the December 1999 agreements by
fixing the conversion price of the Series A Shares at $10,000 divided by
$0.1979. However, because the Company inadvertently failed to obtain approval of
the Company's common stockholders for the amendment to the certificate of
designation, the amendment was invalid under the Delaware General Corporation
Law. However, in June 2000, a holder of Series A Shares converted 34.5 shares of
the Series A Shares into 1,743,285 shares of common stock based upon the $10,000
divided by $0.1979 per share conversion price that the Company and the holders
of the Series A Shares believed to be in effect. This conversion resulted in the
issuance of 1,048,654 more shares of common stock than would otherwise have been
issued upon conversion of the 34.5 shares of the Series A Shares under the
certificate of designations that was then in effect. The Company has determined,
however, that the excess shares were in fact validly issued under Delaware law.

         In November 2000, the Company realized that the modifications to the
conversion price of the Series A Shares were invalid because the Company had
inadvertently failed to obtain common stockholder approval for the modifications
to the certificate of designations and had also inadvertently failed to file an
amendment reflecting the November 1998 modifications. The Company's board of
directors distributed proxy materials requesting that holders of the Company's
common stock and the Series A Shares approve an amendment to the certificate of
designations that provided for a fixed conversion price of $10,000 divided by
$0.1979 and an amendment to the certificate of incorporation that increased the
authorized shares of common stock from 25,000,000 to 50,000,000. The amendments
were approved at a special meeting of stockholders that was held on January 16,
2001. The Company filed the amendments with the Delaware Secretary of State on
January 22, 2001, so that after that date, each outstanding Series A Share was
convertible into 50,530 shares of common stock.

                                      F-25





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         The following table reflects the convertible redeemable preferred stock
activity:

                                        Number
                                       of Shares        Amount
                                       ---------        ------
Balance at December 31, 1999             59.5           588,000
Conversion to common stock              (34.5)         (349,000)
Accretion of preferred stock             --              20,000
----------------------------           ------          ---------
Balance at December 31, 2000             25.0           259,000
Conversion to common stock               --                  --
Accretion of preferred stock             --              11,000
----------------------------           ------          ---------
Balance at December 31, 2001             25.0           270,000
Conversion to common stock               --                  --
Accretion of preferred stock             --              12,000
----------------------------           ------          ---------
Balance at December 31, 2002             25.0           282,000
                                       ======          =========

(10)     STOCKHOLDERS' EQUITY

STOCK OPTIONS AND WARRANTS

         The Company has four stock option plans:

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

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

o        The MicroTel International, Inc. 1997 Stock Incentive Plan (the "1997
         Plan") provides that options granted may be either qualified or
         nonqualified stock options and are required to be granted at fair
         market value on the date of grant. Subject to termination of
         employment, options may expire up to ten years from the date of grant
         and are nontransferable other than in the event of death, disability or
         certain other transfers that the committee of the Board of Directors
         administering the 1997 Plan may permit. Up to 1,600,000 stock options
         were authorized to be granted under the 1997 Plan. All outstanding
         options of former optionholders under the XET 1987 Employee Stock
         Option Plan were converted to options under the 1997 Plan as of the
         date of the merger between the Company and XET at the exchange rate of
         1.451478 (see Note 2). The Board of Directors does not intend to issue
         any additional options under this plan.

o        The 2000 Stock Option Plan was adopted by the Board of Directors in
         November 2000 and approved by the stockholders on January 16, 2001. The
         Board of Directors adopted the Amended and Restated 2000 Stock Option
         Plan ("2000 Plan") effective as of August 3, 2001. Under the 2000 Plan,

                                      F-26





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         options granted may be either incentive or nonqualified options.
         Incentive options must have an exercise price of not less than the fair
         market value of a share of common stock on the date of grant.
         Nonqualified options must have an exercise price of not less than 85%
         of the fair market value of a share of common stock on the date of
         grant. Up to 2,000,000 options may be granted under the 2000 Plan. No
         option may be exercised more than ten years after the date of grant.

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

         The following table shows activity in the outstanding options for the
years ended December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                            Weighted                     Weighted                  Weighted
                                            Average                      Average                    Average
                               2002         Exercise       2001          Exercise    2000          Exercise
                              Shares         Price        Shares          Price     Shares           Price
                              ------         -----        ------          -----     ------           -----
<S>                         <C>             <C>         <C>             <C>         <C>             <C>
Outstanding at
  beginning of year         1,718,000       $   1.34    1,454,000       $   1.34    1,602,000       $   1.46
Granted                        50,000           0.32      345,000           0.41      235,000           0.50
Exercised                          --          --              --             --      (90,000)          0.20
Forfeited                    (336,000)      $   1.37      (81,000)      $   0.64     (293,000)      $   1.10
                           -----------      --------    ----------      --------    ----------      --------
----------------------
Outstanding at end of
  year                      1,432,000       $   1.11    1,718,000       $   1.18    1,454,000       $   1.34
                           ===========      ========    ==========      ========    ==========      ========
</TABLE>

         The following table summarizes information with respect to stock
options at December 31, 2002:
<TABLE>
<CAPTION>

                                Options Outstanding                                        Options Exercisable
                      ------------------------------------------                     -----------------------------
                           Number           Weighted Average                              Number
      Range of           Outstanding            Remaining             Weighted         Exercisable       Weighted
      Exercise          December 31,        Contractual Life           Average         December 31,       Average
       Price                2002                 (Years)                Price              2002            Price
    -----------       ----------------   -----------------------     -----------     ----------------   -----------
<S>                      <C>                      <C>                     <C>           <C>                  <C>
$0.20 to $1.00              720,000               7.25                    $0.36            645,000           $0.36
$1.01 to $2.00              690,000               2.42                     1.83            690,000            1.83
$3.01 to $4.00               22,000               2.63                     3.21             22,000            3.21
                        -----------               ----                    -----          ---------           -----
$0.20 to $4.00            1,432,000               4.85                    $1.11          1,335,000           $1.15
                          =========               ====                    =====          =========           =====
</TABLE>

         The fair value of options granted during 2002 was $13,000, at a
weighted average value of $0.26 per share. The fair values of options granted
during 2001 and 2000 were $115,000 and $113,000, respectively, at weighted
average values of $0.41 and $0.48 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 2002, 2001 and 2000 has been estimated
based on a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 92% in 2002, 89% to 95% in 2001 and 101%
in 2000; risk-free interest rate of 3.0% to 6.0%; and average expected lives of
approximately seven to ten years.

                                      F-27





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

<TABLE>
<CAPTION>
                                                                                Warrant Price
                                                           Number         -------------------------
                                                          of Shares       Per Share          Total
                                                          ---------       ---------          -----
<S>                                                      <C>            <C>                <C>
Balance outstanding at December 31, 1999                  5,482,000      0.25 to 3.79       9,695,000
Warrants issued                                           1,784,000      0.61 to 1.90       2,023,000
Warrants expired/forfeited                               (4,317,000)     0.61 to 3.79      (9,602,000)
Warrants exercised                                         (777,000)     0.25 to 0.69        (413,000)
--------------------------------------------------     -------------------------------------------------
Balance outstanding at December 31, 2000                  2,172,000      0.25 to 2.50       1,703,000
Warrants issued                                             100,000      0.25 to 0.39          33,000
Warrants expired/forfeited                                 (300,000)     1.00 to 1.25        (362,000)
--------------------------------------------------     -------------------------------------------------
Balance outstanding at December 31, 2001                  1,972,000     $0.25 to 2.50      $1,374,000
Warrants issued                                             120,000         $0.50              60,000
Warrants expired/forfeited                                1,688,000     $0.25 to 1.73      $1,161,000
--------------------------------------------------     -------------------------------------------------
Balance outstanding at December 31, 2002                    404,000     $0.25 to 2.50      $  273,000
                                                       =================================================
</TABLE>

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

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

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

         The Company had an Employee Stock Purchase Plan at its CXR Telcom
subsidiary allowing eligible subsidiary employees to purchase shares of the
Company's common stock at 85% of market value. During 2001 and 2000, aggregates
of 900 and 1,000 shares, respectively, were issued pursuant to the plan. The
Company terminated this plan effective as of July 1, 2001.

                                      F-28





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

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

         As of December 31, 2002, the Company was authorized to issue 50,000,000
shares of common stock. As of that date, the Company had 21,535,125 shares of
common stock outstanding and 3,740,532 shares of common stock that could become
issuable pursuant to the exercise of outstanding stock options and warrants and
the conversion of convertible redeemable preferred stock.

DIVIDENDS

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

(11)     INCOME TAXES

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

                                      F-29





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

<TABLE>
<CAPTION>
                                                              2002                2001                 2000
                                                              ----                ----                 ----
<S>                                                    <C>                    <C>                <C>
Domestic                                               $   497,000            $ 718,000          $2,658,000
Foreign                                                 (1,087,000)            (370,000)           (924,000)
                                                      ---------------------------------------------------------
Total                                                  $  (590,000)           $ 348,000          $1,734,000
                                                      =========================================================

         Income tax expense (benefit) consists of the following:

                                                              2002                2001                 2000
                                                              ----                ----                 ----
Current
    Federal                                             $       --            $   5,000             $20,000
    State                                                   18,000                5,000               3,000
    Foreign                                                (38,000)              67,000               8,000
                                                      ---------------------------------------------------------
                                                        $  (20,000)            $ 77,000             $31,000
                                                      =========================================================

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

                                                              2002                2001                 2000
                                                              ----                ----                 ----
Tax (tax benefit) at U.S. federal statutory rate        $ (200,000)          $  118,000           $ 590,000
State taxes, net of federal income tax benefit             (34,000)               5,000               3,000
Foreign income taxes                                       (38,000)              67,000               8,000
Change in valuation allowances                             258,000                   --                  --
Permanent differences                                       11,000               54,000              88,000
Utilization of net operating losses                             --             (167,000)           (658,000)
Other                                                      (17,000)                  --                  --
                                                      ---------------------------------------------------------
                                                        $  (20,000)          $   77,000            $ 31,000
                                                      =========================================================
</TABLE>

                                      F-30





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         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>
                                                              2002                2001
                                                              ----                ----
<S>                                                    <C>                 <C>
Deferred tax assets:
    Fixed assets depreciation                          $       250,000     $            --
    Allowance for doubtful accounts                              3,000              60,000
    Inventory reserves and uniform capitalization              279,000             213,000
    Other accrued liabilities                                  216,000             453,000
    Deferred compensation                                      144,000             182,000
    Research credit carryforwards                              224,000             224,000
    Alternative Minimum Tax credit carryforwards               135,000             135,000
    Net operating loss carryforwards                        11,006,000          10,732,000
                                                       ----------------------------------------
Total deferred tax assets                                   12,257,000          11,999,000
Valuation allowance for deferred tax assets                (12,257,000)        (11,999,000)
                                                       ----------------------------------------
Net deferred tax assets                                $            --     $            --
                                                       ========================================
</TABLE>

         As of December 31, 2002, the Company had federal net operating loss
carryforwards of approximately $31,000,000, which expire at various dates
through 2022, and state net operating loss carryforwards of approximately
$3,000,000, which expire at various dates through 2010.

         As a result of an Internal Revenue Service audit concluded in 2001,
federal net operating loss carryforwards were reduced by approximately
$11,687,000.

         As a result of the merger with XET (see 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.

         Internal Revenue Code section 382 and the corresponding California
provisions place a limitation on the amount of taxable income that can be offset
by carryforwards after a change in control (generally greater than a 50% change
in ownership). As a result of these provisions, utilization of the net operating
loss carryforwards may be limited.

                                      F-31





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(12)     EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                        2002            2001             2000
                                                                        ----            ----             ----
<S>                                                               <C>               <C>              <C>
NUMERATOR:
Net income (loss)                                                 $    (570,000)    $    327,000     $ 1,004,000
     Less: accretion of the excess of the redemption value over
     the carrying value of redeemable preferred stock                    13,000           11,000          20,000
                                                                  --------------------------------------------------
Income (loss) attributable to common stockholders                 $    (583,000)    $    316,000    $    984,000
                                                                  ==================================================
DENOMINATOR:
Weighted average number of common shares outstanding during the
   period - basic                                                    21,208,000       20,594,000      19,504,000
Incremental shares from assumed conversions of warrants,
   options and preferred stock                                               --        3,188,000       3,523,000
                                                                  --------------------------------------------------
Adjusted weighted average shares - diluted                           21,208,000       23,782,000      23,027,000
                                                                  ==================================================
Basic earnings (loss) per share                                   $      (0.03)     $       0.02    $       0.05
                                                                  ==================================================
Diluted earnings (loss) per share                                 $      (0.03)     $        0.01   $       0.04
                                                                  ==================================================
</TABLE>

         The following table shows the common stock equivalents that were
outstanding as of December 31, 2002 and 2001 but were not included in the
computation of diluted earnings (loss) per share because the options' or
warrants' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be anti-dilutive:

                                           Number of          Exercise Price
                                             Shares             Per Share
                                             ------             ---------
Anti-dilutive common stock options:
    As of December 31, 2002               1,432,323        $0.2000 to $3.4400
    As of December 31, 2001               1,243,324        $0.4600 to $3.4375
Anti-dilutive common stock warrants:
    As of December 31, 2002                404,381         $0.2500 to $2.5000
    As of December 31, 2001               1,149,881        $0.6250 to $2.5000

         The computation of diluted loss per share for 2002 excludes the effect
of incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was anti-dilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 10.

(13)     COMMITMENTS AND CONTINGENCIES

LEASES

         The Company conducts most of its operations from leased facilities
under operating leases that expire at various dates through 2013. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2002, 2001 and 2000 was approximately $1,097,000,
$1,091,000 and $956,000, respectively.

                                      F-32





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

                        Year Ending December 31,                  Amount
                        ------------------------                  ------
                                  2003                         $    633,000
                                  2004                              562,000
                                  2005                              382,000
                                  2006                              286,000
                           2007 and thereafter                      272,000
                                                               -------------
                                                               $  2,135,000
                                                               =============

LITIGATION

         The Company is not currently a party to any material legal proceedings.
However, the Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows. During the fourth quarter of 2000, the Company settled
two outstanding lawsuits for approximately $90,000 less than the amount
previously accrued. Accordingly, the Company reversed a portion of the accruals
related to the lawsuits in the amount of $90,000 that was determined to no
longer be necessary.

EMPLOYEE BENEFIT PLANS

         Effective October 1, 1998, the Company instituted a defined
contribution plan ("401(k) Plan") covering the majority of its U.S. domestic
employees. Participants may make voluntary pretax contributions to such plans up
to the limit as permitted by law. Annual contributions to any plan by the
Company is discretionary. The Company made contributions of $22,000, $16,000 and
$21,000 to the 401(k) Plan for the years ended December 31, 2002, 2001 and 2000,
respectively.

EXECUTIVE MANAGEMENT

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

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

                                      F-33





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

(14)     SEGMENT AND MAJOR CUSTOMER INFORMATION

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

         In October 2000, the Company decided to discontinue its circuits
segment operations. At that time the circuits segment operations consisted of
XCEL Etch Tek, a wholly owned subsidiary, and XCEL Circuits Division ("XCD"), a
division of XET Corporation, a wholly-owned subsidiary of the Company. XCEL Etch
Tek was offered for sale (see Note 3). XCD is essentially a captive supplier of
printed circuit boards to the electronic components segment with total sales to
external customers of $160,000, $127,000 and $173,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. XCD has been retained and is now
included in the electronic components segment. Accordingly, all current and
prior financial information related to the circuits segment operations have been
presented as discontinued operations in the accompanying consolidated financial
statements, with the exception of XCD which has been included in the current and
prior financial information related to the electronic components segment in the
accompanying consolidated financial statements.

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

                                      F-34





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

                                       2002              2001            2000
                                       ----              ----            ----
SALES TO EXTERNAL CUSTOMERS:
     Electronic Components      $    13,390,000    $  12,646,000  $  12,392,000
     Communications Equipment         9,274,000       14,777,000     15,658,000
                                ------------------------------------------------
                                $    22,664,000    $  27,423,000  $  28,050,000
                                ================================================
INTERSEGMENT SALES:
     Electronic Components      $           --     $          --  $          --
     Communications Equipment               --                --             --
                                ------------------------------------------------
                                $           --     $          --  $          --
                                ================================================
INTEREST EXPENSE:
     Electronic Components      $       259,000    $     228,000  $     216,000
     Communications Equipment           168,000          158,000        131,000
                                ------------------------------------------------
                                $       427,000    $     386,000  $     347,000
                                ================================================
DEPRECIATION AND AMORTIZATION:
     Electronic Components      $        93,000    $     279,000  $     173,000
     Communications Equipment           177,000          322,000        528,000
                                ------------------------------------------------
                                $       270,000    $     601,000  $     701,000
                                ================================================
SEGMENT PROFITS (LOSSES):
     Electronic Components      $     2,452,000    $   2,882,000  $   3,365,000
     Communications Equipment        (1,257,000)         450,000        344,000
                                ------------------------------------------------
                                $     1,195,000    $   3,332,000  $   3,709,000
                                ================================================
SEGMENT ASSETS:
     Electronic Components      $     9,445,000    $   9,060,000  $   8,876,000
     Communications Equipment         6,773,000        8,317,000      9,901,000
                                ------------------------------------------------
                                $    16,218,000    $  17,377,000  $  18,777,000
                                ================================================

                                      F-35





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

<TABLE>
<CAPTION>
                                                                       2002              2001              2000
                                                                       ----              ----              ----
<S>                                                               <C>                <C>                <C>
Net Sales
---------
   Total sales for reportable segments                            $ 22,664,000       $ 27,423,000       $ 28,050,000
   Elimination of intersegment sales                                        --                 --                 --
                                                                  ---------------------------------------------------
Total consolidated revenues                                       $ 22,664,000       $ 27,423,000       $ 28,050,000
                                                                  ===================================================

Profit (loss) from continuing operations
----------------------------------------
   before income taxes
   -------------------
     Total profit (loss) for reportable segments                  $  1,195,000       $  3,332,000       $  3,709,000
     Unallocated amounts:
       General corporate expenses                                 $ (1,785,000)      $ (2,984,000)      $ (1,975,000)
                                                                  ---------------------------------------------------
Consolidated income (loss) from continuing operations before
   income taxes                                                   $   (590,000)      $    348,000       $  1,734,000
                                                                  ===================================================

Assets
------
   Total assets for reportable segments                           $ 16,218,000       $ 17,377,000       $ 18,777,000
   Other assets                                                        568,000            311,000            707,000
                                                                  ---------------------------------------------------
Total consolidated assets                                         $ 16,786,000       $ 17,688,000       $ 19,484,000
                                                                  ===================================================

Interest Expense
----------------
   Interest expense for reportable segments                       $    427,000       $    386,000       $    347,000
   Other interest expense                                               14,000             10,000             77,000
                                                                  ---------------------------------------------------
Total interest expense                                            $    441,000       $    396,000       $    424,000
                                                                  ===================================================

Depreciation and Amortization
-----------------------------
Depreciation and amortization expense
   for reportable segments                                        $    270,000       $    601,000       $    701,000
   Other depreciation and amortization expense                          79,000            114,000             82,000
                                                                  ---------------------------------------------------
Total depreciation and amortization                               $    349,000       $    715,000       $    783,000
                                                                  ===================================================
</TABLE>

                                      F-36





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

                                    2002              2001              2000
                                    ----              ----              ----
Net sales:
    United States                $ 8,598,000       $12,461,000       $13,246,000
    Japan                            768,000         1,085,000           941,000
    France                         5,854,000         7,848,000         9,118,000
    United Kingdom                 7,444,000         6,029,000         4,745,000
                                 -----------------------------------------------
                                 $22,664,000       $27,423,000       $28,050,000
                                 ===============================================
Long-lived assets:
    United States                $   399,000       $   422,000       $   418,000
    Japan                             15,000            14,000            14,000
    France                           177,000           186,000           251,000
    United Kingdom                    97,000           136,000           237,000
                                 -----------------------------------------------
                                 $   688,000       $   758,000       $   920,000
                                 ===============================================

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

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

(15)     DISCONTINUED OPERATIONS

         In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary and XCEL Circuits Division ("XCD"), a
division of XET Corporation, a wholly-owned subsidiary of the Company. During
1998 and 1999, the Company sold substantially all of the assets of two other
circuits operations, HyComp and XCEL Arnold Circuits. XCD is essentially a
captive supplier of printed circuit boards to the electronic components segment
with total sales to external customers of $160,000, $127,000 and $173,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. XCD has been
retained and is now included in the electronics components segment. Accordingly,
all current and prior financial information related to the circuits segment
operations (XCEL Etch Tek, HyComp and XCEL Arnold) has been presented as
discontinued operations in the accompanying consolidated financial statements.

         Summarized results of operations for the discontinued operations for
2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                      2002           2001         2000
                                                      ----           ----         ----
<S>                                               <C>           <C>          <C>
Net sales                                         $        --   $        --  $  2,257,000
                                                  ============= ============ =============
Operating income (loss)                           $        --   $    56,000  $   (212,000)
                                                  ============= ============ =============
Gain (loss) on sale of discontinued operations    $        --   $        --  $   (487,000)
                                                  ============= ============ =============
</TABLE>

                                      F-37





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

(16)     NEW ACCOUNTING PRONOUNCEMENTS

         In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). This statement addresses financial and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation
of long-lived assets, except for certain obligations of lessees. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company's management has not yet determined the impact of the
adoption of SFAS 143 on the Company's financial position or results of
operations.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires
that long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 is effective for the Company's consolidated financial
statements beginning January 1, 2002. The implementation of SFAS 144 did not
have a material impact on the Company's consolidated financial position or
results of operations.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). This statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt" ("SFAS 4") and amends SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." Under SFAS
4, all gains and losses from extinguishment of debt were required to be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. With the elimination of SFAS 4, gains and losses from
extinguishment of debt are to be classified as extraordinary items only if they
meet the criteria for extraordinary items in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the classification of an extraordinary
item. SFAS 145 also rescinds SFAS 44, "Accounting for Intangible Assets of Motor
Carriers," and amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The adoption of the provisions of SFAS 145 during 2002 did not have
any impact on the Company's financial position or results of operations.

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

                                      F-38





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

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

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

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

                                      F-39





<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(17)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of the quarterly operations for the years
ended December 31, 2002 and 2001 (in thousands, except for per share data).

<TABLE>
<CAPTION>

                   2002                         Mar. 31     June 30     Sept. 30     Dec. 31

                   ----                         -------     -------     --------     -------
<S>                                              <C>          <C>         <C>          <C>
Net Sales                                        4,820        6,118       5,764        5,962
Gross Profit                                     1,529        2,510       2,084        2,394
Income (loss) from continuing operations          (699)         255        (330)         204
Income (loss) from discontinued operations          --           --          --           --
Net income (loss)                                 (699)         255        (330)         204
Income (loss) available to common
   shareholder                                    (702)         252        (333)         201
Earnings (loss) per share:
   Continuing operations
     Basic                                       (0.03)        0.01       (0.02)        0.01
     Diluted                                     (0.03)        0.01       (0.02)        0.01
   Discontinued operations
     Basic                                          --           --          --           --
     Diluted                                        --           --          --           --
   Net income (loss)
     Basic                                       (0.03)        0.01       (0.02)        0.01
     Diluted                                     (0.03)        0.01       (0.02)        0.01

                   2001                         Mar. 31     June 30     Sept. 30      Dec. 31
                   ----                         -------     -------     --------      -------
Net Sales                                        7,465       7,083       6,345          6,530
Gross Profit                                     3,115       3,351       2,492          3,009
Income (loss) from continuing operations           107          54        (281)           391
Income (loss) from discontinued operations          --          --          --             56
Net income (loss)                                  107          54        (281)           447
Income (loss) available to common
   shareholder                                     104          51        (284)           445
Earnings (loss) per share:
   Continuing operations
     Basic                                        0.01        0.00       (0.01)          0.02
     Diluted                                      0.00        0.00       (0.01)          0.02
   Discontinued operations
     Basic                                          --          --          --           0.00
     Diluted                                        --          --          --           0.00
   Net income (loss)
     Basic                                        0.01        0.00       (0.01)          0.02
     Diluted                                      0.00        0.00       (0.01)          0.02
</TABLE>

                                      F-40





<PAGE>
<TABLE>

                                 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                           CONSOLIDATED SCHEDULE II
                                       VALUATION AND QUALIFYING ACCOUNTS
                                 YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
<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, 2002                  226,000        118,000      (214,000)       130,000
     Year ended December 31, 2001                  111,000        216,000      (101,000)       226,000
     Year ended December 31, 2000                  191,000         47,000      (127,000)       111,000
                                              ============== ============= ============== ==============

Allowance for inventory obsolescence:
     Year ended December 31, 2002                1,152,000        438,000       (93,000)     1,497,000
     Year ended December 31, 2001                1,169,000        659,000      (676,000)     1,152,000
     Year ended December 31, 2000                1,381,000        893,000    (1,105,000)     1,169,000
                                              ============== ============= ============== ==============

</TABLE>

                                                     F-41





<PAGE>

                                INDEX TO EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       60





<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 XET
         Corporation, the Registrant, Bryan Fuller, Tama-Lee Mapalo and Etch Tek
         Electronics Corporation (6)

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

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

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

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

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

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

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

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

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

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)

                                       61





<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 21, 2000 (15)

3.12     Certificate of Designations, Preferences and Rights of Series B
         Preferred Stock of the Registrant as filed with the Delaware Secretary
         of State on September 19, 2000 (5)

3.13     Bylaws of the Registrant (15)

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

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

3.16     Amendments to Bylaws effective as of June 1, 2001 (17)

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     Amended and Restated 2000 Stock Option Plan (#) (18)

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

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

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

10.8     Revolving Note dated August 16, 2000 in the principal sum of $3,000,000
         made by CXR Telcom Corporation and XET Corporation in favor of Wells
         Fargo Business Credit, Inc. (5)

10.9     Term Note dated August 16, 2000 in the principal sum of $646,765 made
         by XET Corporation in favor of Wells Fargo Business Credit, Inc. (5)

10.10    Term Note dated August 16, 2000 in the principal sum of $40,235 made by
         CXR Telcom Corporation in favor of Wells Fargo Business Credit, Inc.
         (5)

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

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

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

                                       62





<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, XET Corporation, CXR Telcom Corporation
         and HyComp, Inc. dated June 23, 1998 (8)

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

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

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

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

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

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

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

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

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

10.25    Employment Agreement dated as of July 2, 2001 between the Registrant
         and Randolph D. Foote (#) (18)

10.26    Employment Agreement dated as of January 1, 2001 between the Registrant
         and Graham Jefferies (#) (18)

10.27    First Amendment to Credit and Security Agreement dated as of September
         29, 2000 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (19)

10.28    Second Amendment to Credit and Security Agreement dated as of November
         29, 2000 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (19)

10.29    Third Amendment to Credit and Security Agreement dated as of September
         20, 2001 by and between CXR Telcom Corporation, XET Corporation and
         Wells Fargo Business Credit, Inc. (19)

10.30    Fourth Amendment to Credit and Security Agreement dated as of April 17,
         2002 by and between CXR Telcom Corporation, XET Corporation and Wells
         Fargo Business Credit, Inc. (20)

10.31    Sublease Agreement dated as of October 29, 2002, by and between
         Novellis Systems, Inc. and CXR Telcom Corporation

                                       63





<PAGE>

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

10.33    Advantage Facility dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC

10.34    Cashflow Loan Agreement dated November 12, 2002 between XCEL Power
         Systems Limited and Venture Finance PLC

10.35    Term Loan Agreement dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC

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

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

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

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

10.40    Description of Retirement Account Matching Contributions (#)

16.1     Letter dated October 4, 2002 from BDO Seidman, LLP regarding change in
         certifying accountant (21)

21.1     Subsidiaries of the Registrant (15)

23.1     Consent of Grant Thornton LLP, Independent Certified Public Accountants

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

99.1     Certifications of Chief Executive Officer and Chief Financial Officer
         Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
         of the Sarbanes-Oxley Act Of 2002

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

                                       64





<PAGE>

(6)      Incorporated by reference to the Registrant's current report on Form
         8-K for November 15, 2000 (File No. 1-10346)

(7)      Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 1999 (File No. 1-10346)

(8)      Incorporated by reference to the Registrant's interim report on Form
         10-Q for the six months ended June 30, 1998 (File No. 1-10346)

(9)      Incorporated by reference to the Registrant's registration statement on
         Form S-8 (Registration Statement No. 333-12567)

(10)     Incorporated by reference to the Registrant's definitive proxy
         statement for the annual meeting of stockholders to be held June 11,
         1998 (File No. 1-10346)

(11)     Incorporated by reference to the Registrant's definitive proxy
         statement for the special meeting of stockholders to be held January
         16, 2001 (File No. 1-10346)

(12)     Incorporated by reference to the Registrant's interim report on Form
         10-Q for the nine months ended September 30, 1999 (File No. 1-10346)

(13)     Incorporated by reference to the Registrant's registration statement on
         Form S-8 (Registration Statement No. 333-29925)

(14)     Incorporated by reference to the Registrant's annual report on Form
         10-K/A for the year ended December 31, 1996 (File No. 1-10346)

(15)     Incorporated by reference to Amendment No. 1 to Registrant's
         registration statement on Form S-1 (Registration Statement No.
         333-41580)

(16)     Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 2000 (File No. 1-10346)

(17)     Incorporated by reference to the initial filing of the Registrant's
         registration statement on Form S-1 (Registration Statement No.
         333-63024)

(18)     Incorporated by reference to Post-Effective Amendment No. 1 to the
         Registrant's registration statement on Form S-1 (Registration Statement
         No. 333-63024)

(19)     Incorporated by reference to the Registrant's interim report on Form
         10-Q for the nine months ended September 30, 2001 (File No. 1-10346)

(20)     Incorporated by reference to the Registrant's quarterly report on Form
         10-Q for the quarter ended June 30, 2002 (File No. 1-10346)

(21)     Incorporated by reference to the Registrant's current report on Form
         8-K for September 24, 2002

                                       65





<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 31st day of
March, 2003.

                                         MICROTEL INTERNATIONAL, INC.

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

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

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

<S>                                            <C>                                           <C>
/S/ Carmine T. Oliva                           Chairman of the Board, President,             March 31, 2003
------------------------------------           Chief Executive Officer (Principal
Carmine T. Oliva                               Executive Officer) and Director

/S/ Randolph D. Foote                          Chief Financial Officer                       March 31, 2003
------------------------------------           (Principal Accounting and
Randolph D. Foote                              Financial Officer),
                                               Senior Vice President and
                                               Assistant Secretary

/S/ Robert B. Runyon                           Secretary and Director                        March 31, 2003
------------------------------------
Robert B. Runyon

/S/ Laurence P. Finnegan, Jr.                  Director                                      March 31, 2003
------------------------------------
Laurence P. Finnegan, Jr.

</TABLE>

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<PAGE>

                                 CERTIFICATIONS

         I, Carmine T. Oliva, certify that:

         1. I have reviewed this annual report on Form 10-K of MicroTel
International, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

         Date: March 31, 2003

         /s/ CARMINE T. OLIVA

         Carmine T. Oliva,
         Chief Executive Officer (principal executive officer)

                                       67





<PAGE>

         I, Randolph D. Foote, certify that:

         1. I have reviewed this annual report on Form 10-K of MicroTel
International, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

         Date: March 31, 2003

         /s/ RANDOLPH D. FOOTE

         Randolph D. Foote,
         Chief Financial Officer (principal financial officer)

                                       68





<PAGE>

                         EXHIBITS FILED WITH THIS REPORT

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

10.31    Sublease Agreement dated as of October 29, 2002, by and between
         Novellis Systems, Inc. and CXR Telcom Corporation

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

10.33    Advantage Facility dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC

10.34    Cashflow Loan Agreement dated November 12, 2002 between XCEL Power
         Systems Limited and Venture Finance PLC

10.35    Term Loan Agreement dated November 12, 2002 between XCEL Power Systems
         Limited and Venture Finance PLC

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

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

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

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

10.40    Description of Retirement Account Matching Contributions (#)

23.1     Consent of Grant Thornton LLP, Independent Certified Public Accountants

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

99.1     Certifications of Chief Executive Officer and Chief Financial Officer
         Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
         of the Sarbanes-Oxley Act Of 2002

                                       69