<PAGE>
================================================================================

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

                                    FORM 10-K
(Mark One)
|X|      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended DECEMBER 31, 2001.

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

         The aggregate market value of the voting stock held by nonaffiliates of
the registrant computed by reference to the closing price of such stock, was
approximately $4,732,408 at March 18, 2002.

         The number of shares of the registrant's common stock, $0.0033 par
value, outstanding as of March 18, 2002 was 20,670,703.

         DOCUMENTS INCORPORATED BY REFERENCE:  NONE.

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

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                                     PART I
                                                                            PAGE

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

ITEM 2.  PROPERTIES...........................................................23

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

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...........45

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

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

                                  PART III

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

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......56

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................57

                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......61

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

         INDEX TO EXHIBITS....................................................62

         SIGNATURES...........................................................67

         EXHIBITS FILED WITH THIS REPORT......................................68

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                                     PART I

ITEM 1. BUSINESS.

CORPORATE OVERVIEW

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

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

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

         We previously organized our operations in the following three business
segments:

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

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

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

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

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

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

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

         o        Telecommunications

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

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

         o        Electronic Components

              --   Digital Switches

              --   Electronic Power Supplies

         Our sales are primarily in North America, Europe and Asia. In 2001,
53.9% of our sales were to customers in the telecommunications industry, and the
remainder of our sales were to aerospace customers, military contractors and
industrial customers. Our objective in our telecommunications test instruments
and transmission and network access products business is to become a leader in
quality, cost effective solutions to meet the requirements of telecommunications
customers. We believe that we can achieve this objective through
customer-oriented product development, superior product solutions, and
excellence in local market service and support. Our objective in our electronic
components business is to become the supplier of choice for harsh environment
switches and custom power supplies.

INDUSTRY OVERVIEW

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

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

         o        a surge in demand for both analog and high-speed Internet
                  access and data transmission service; among other uses,
                  high-speed access enables consumers to access bandwidth
                  intensive content and services, such as highly graphical web
                  sites and audio, video and software downloads, and enables

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                  businesses to implement e-commerce strategies, to access the
                  Internet for a variety of purposes and to provide employees
                  with telecommuting capabilities;

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

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

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

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

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

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

         ELECTRONIC COMPONENTS

         The electronic components industry comprises three basic segments,
which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, aerospace, military, commercial, industrial and other
environments, each of which places constraints 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, military and
telecommunications segments. To support the myriad industrial, commercial and

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

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

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

OUR SOLUTION

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

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

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

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

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

         BROAD RANGE OF TRANSMISSION AND NETWORK ACCESS PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of industrial grade
transmission products that are capable of connecting to a wide range of remote
monitoring devices and equipment. Many of these products are designed to operate
in extended temperatures and harsh environments and generally exceed the surge

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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.

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

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

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

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

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         CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH GROWTH
MARKET OPPORTUNITIES. We plan to continue investing in markets and technologies
that we believe offer substantial growth prospects. For example, we intend to
expand our line of universal test equipment products that enable customers to
perform digital and analog tests with a single piece of equipment. We believe
that the expertise we have developed in creating our existing products will
permit us to enhance these products, develop new products and respond to
emerging technologies in a cost-effective and timely manner.

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

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

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

         PURSUE STRATEGIC ACQUISITIONS. The telecommunications test instruments,
transmission and network access products markets are large and highly
fragmented. We plan to extend our market position by acquiring or investing in
complementary businesses or technologies on a selected basis. We believe that
acquisitions and joint ventures, such as our acquisition of our CXR HALCYON 700
series of telecommunications test sets in 1997 and our acquisition of T-Com
central office telecommunications test sets in 2000, provide an efficient way of
expanding our business, product offerings and access to different customers and
market niches.

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

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

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

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PRODUCTS AND SERVICES

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

         o        Telecommunications

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

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

         o        Electronic Components

              --   Digital Switches

              --   Electronic Power Supplies

         During the years ended December 31, 2001, 2000 and 1999, our total
sales were $27,423,000, $28,050,000 and $25,913,000, 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                                       2001              2000              1999
       ------------------------                                       ----              ----              ----

       <S>                                                             <C>              <C>               <C>
       Telecommunications

            Test Instruments                                           26.7%            28.2%             19.2%

            Transmission and Network Access Products                   24.7%            26.2%             39.3%

            Other Products and Services                                 2.5%             1.5%              1.9%
                                                                 ---------------- ----------------- -----------------

                                                                       53.9%            55.9%             60.4%
                                                                 ================ ================= =================

       Electronic Components

            Digital Switches                                           23.1%            28.6%             20.5%

            Electronic Power Supplies                                  20.0%            14.8%             15.8%

            Other Products and Services                                 3.0%             0.7%              3.3%
                                                                 ---------------- ----------------- -----------------

                                                                       46.1%            44.1%             39.6%
                                                                 ---------------- ----------------- -----------------

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

        OUR TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK
                            ACCESS PRODUCTS BUSINESS

         Our telecommunications business comprises telecommunications test
equipment and transmission and network access products. During the years ended
December 31, 2001, 2000 and 1999, the sale of telecommunications products,
equipment and related services accounted for 53.9%, 55.9% and 60.4% of our total
revenues, respectively. These products, many of which are described below, are

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configured in a variety of models designed to perform analog and digital
measurements or to transmit data at speeds varying from low-speed voice grade
transmission to high-speed broadband Internet access, including:

         o        Traditional telephone services, such as modems and plain old
                  telephone service, or POTS
         o        Competitive local exchange carriers, or CLECs
         o        Bite 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        Digital data services, or DDS, including the USA and worldwide
                  standards described below:

                  I. USA standards, including:
                  --       ISDN, which is an enhanced digital network that
                           offers more bandwidth and faster speed than the
                           traditional telephone network
                  --       Caller identification or caller-ID services
                  --       Digital subscriber line technology, or DSL, which
                           transmits data up to 50 times faster than a
                           conventional dial-up modem using existing copper
                           telephone wires
                  --       Multi-rate symmetric DSL, or MSDSL, which allows the
                           transmission of data over longer distances than
                           single-rate technologies by adjusting automatically
                           or manually the transmission speed
                  --       T-1, which is a standard for digital transmission in
                           North America used by large businesses for broadband
                           access
                  --       FT-1, or fractional T-1, which uses only a selected
                           number of channels from a T-1
                  --       T-3, which is the transmission rate of 44 megabits,
                           or millions of bits, per second, or 44 Mbps, with 672
                           channels
                  --       Digital signal level 0, or DS0, which is 64 kilobits,
                           or thousands of bits, per second, or 64 kbps, with
                           one channel of a T-1, E-1, E-3 or T-3
                  --       Digital signal level 1, or DS1, which is the T-1
                           transmission rate of 1.54 Mbps, with 24 channels
                  --       Digital signal level 3, or DS3, which is the T-3
                           transmission rate of 44 Mbps, with 672 channels
                  --       Router, or an intelligent device used to connect
                           local and remote networks
                  --       Terminal adapter, which is situated between
                           telephones or other devices and an ISDN line and
                           allows multiple voice/data to share an ISDN line
                  --       Transmission control protocol/Internet protocol, or
                           TCP/IP
                  --       STS/SONET, which is an acronym for synchronous
                           transport signal/synchronous optical networks or
                           fiber optic networks
                  II. Worldwide standards, including:
                  --       E-1, which is the European standard for international
                           digital transmission used by large businesses for
                           broadband access, with 2.108 Mbps, with 30 channels
                  --       FE-1, or fractional E-1, which uses only a selected
                           number of channels from an E-1
                  --       E-3, which is the European standard for T-3, with
                           34.368 Mbps and 480 channels

         TELECOMMUNICATIONS TEST INSTRUMENTS

         Our primary field test instruments, built by our CXR Telcom subsidiary
in Fremont, California, are our CXR HALCYON 700 series of products, which we
believe provide performance and value in integrated installation, maintenance
and testing of telecommunications services. These test instruments are modular,

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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.

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

         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;
         o        installation and testing of DS3, which is a very high-speed
                  digital transmission service that is equivalent to 28 T-1
                  circuits; 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:

<TABLE>
<CAPTION>

                      PRODUCT NAME                            KEY USES, FEATURES AND FUNCTIONS

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

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

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

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

                                       11




<PAGE>

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

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

         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

         T-COM 324A+                     This is a versatile, low-cost, full-function handheld T-1 test instrument.
                                             --    suited for field technician applications for the installation
                                                   and maintenance of T-1 and FT-1 services
                                             --    provides high-end T-1 test functions, including all
                                                   major BERT stress patterns, loop codes, alarm monitoring
                                                   and detection, DS0 tone insertion, DTMF digit capture and
                                                   drop & insert measurements

         T-COM SENTINEL                  This is a high-performance, cost-effective T-1, T-3 and STS centralized test system.
                                             --    operates in conjunction with the T-Com 440B T-ACE test head
                                             --    provides total remote surveillance of unmanned test centers
                                             --    provides cost savings, service reliability and quality benefits for
                                                   medium-size central offices that could not otherwise justify
                                                   the cost of high-end test systems
</TABLE>

         TRANSMISSION AND NETWORK ACCESS PRODUCTS

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

         Modems
         ------

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

                                       12




<PAGE>

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

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

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

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

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

<TABLE>
<CAPTION>

                 PRODUCT               NAME KEY USES, FEATURES AND FUNCTIONS

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

         MD 2000                        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

                                       13




<PAGE>

                 PRODUCT               NAME KEY USES, FEATURES AND FUNCTIONS

         CB2000                           The primary function of this unit is to split one or
                                          two primary rate interface links, or PRIs, into
                                          multiple basic rate interfaces, or BRIs.
                                           --    this allows substantial cost savings by allowing more effective
                                                 use of available ISDN resources without the limitations of
                                                 conventional voice PBX
                                           --    this allows for migration from BRI to PRI when the number of ports
                                                 needs to be increased while preserving the user's investment in
                                                 existing BRI-based terminal equipment
                                           --    this unit can be used in a wide variety of situations where
                                                 multiple BRI and PRI access is required, such as:
                                                - videoconferencing, where the unit can be used to aggregate
                                                  bandwidth of multiple BRI lines to provide the necessary
                                                  bandwidth, and to connect the videoconferencing system to the
                                                  ISDN network through a PRI access while still providing
                                                  connectivity to other ISDN devices, or to connect two or more
                                                  videoconferencing systems together within the same building or
                                                  campus without going through the ISDN public network
                                                - ISDN network simulation, which can be used in places such as
                                                  showrooms, exhibition and technical training centers to
                                                  eliminate the need to have access to, and pay for access
                                                  to, the ISDN public network for telephone or data calls
                                                - remote access servers, which usually use multiple BRIs,
                                                  often need a method for migration from multiple BRIs
                                                  to a single PRI as traffic and the number of users expands

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

         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
</TABLE>

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

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

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

         Our modem cards and our ISDN terminal adapter cards generally are
available in standalone versions or in versions that can be mounted in our Smart
Rack, our universal card cage that provides remote management through a
menu-driven user interface. Each part of the framework, or chassis, of the Smart
Rack has slots to house up to 16 cards (or up to 4 cards in a smaller
installation) plus one optional management card. Each slot can be used to insert
any member of our transmission products family, such as analog modems, ISDN
terminal adapters, ISDN digital modems and high-speed MSDSL modems. The optional

                                       14




<PAGE>

management card that can be inserted into each chassis can be used to configure
any card in the chassis and can provide additional features, including alarm
reporting, tracking of configurations, running of diagnostic routines and
generation of statistics. Up to eight chassis can be linked together to form a
fully-managed node with 128 slots. Our Smart Rack arrangement allows each
chassis to be used to its full capacity while reducing floor space needed to
house complex systems.

                       OUR ELECTRONIC COMPONENTS BUSINESS

         Our electronic components segment includes digital switches and
electronic power supplies. During the years ended December 31, 2001, 2000 and
1999, this segment accounted for 46.1%, 44.1% and 39.6%, respectively, of our
net sales.

         DIGITAL SWITCHES

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

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

         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;
                  and
         o        night vision compatibility.

         ELECTRONIC POWER SUPPLIES

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

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

                                       15




<PAGE>

         BACKLOG

         Our business is not generally seasonal, with the exception that
telecommunications test instruments, transmission and network access products
purchases by telecommunications customers tend to be lower than average during
the first quarter of each year because capital equipment budgets typically are
not approved until late in the first quarter. At December 31, 2001 and 2000, our
backlog of firm, unshipped orders was approximately $14.4 million and $12.5
million, respectively. Our December 31, 2001 backlog is related approximately
95% 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 5% to our telecommunications business, the majority of which
portion relates to our data transmission and network access products. Of these
backlog orders, we anticipate fulfilling approximately 70% of our electronic
components orders and 100% of our telecommunications orders within the current
fiscal year. However, we cannot assure you that we will be successful in
fulfilling these orders in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

         WARRANTIES

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

CUSTOMERS

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

         We market our telecommunications test instruments and transmission and
network access products primarily to telecommunications service providers,
communications equipment manufacturers and end users. Telecommunications service
providers offer telecommunications, wireless and, increasingly, data
communication services to end users, enterprises or other service providers.
Typically, communications service providers use a variety of network equipment
and software to originate, transport and terminate communications sessions.
Communications service providers rely on our products and services to configure,
test and manage network elements and the traffic that runs across them. Also,
our products help to ensure smooth operation of the network and increase the
reliability of services to customers.

         The major communications service providers to whom we market our
telecommunications test instruments and transmission and network access products
and services include inter-exchange carriers, incumbent local exchange carriers,
competitive local exchange carriers, internet service providers, integrated
communications providers, cable service providers, international post, telephone
and telegraph companies, banks, brokerage firms, government agencies and other
service providers. During 2001, our top five telecommunications test instruments
and transmission and network access products customers in terms of revenues were
Verizon, Southeast Datacom Incorporated, France Telecom, SBC Communications Inc.
and Siemens. None of our telecommunications test instruments, transmission or
network access products customers represented more than ten percent of our
revenues during 2001.

                                       16




<PAGE>

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

         Due to a general downturn in business activity in the
telecommunications market during 2001, several RBOCs reduced their capital
expenditures, which negatively impacted our 2001 sales of test instruments and
transmission products. We anticipate that capital expenditure levels of RBOCs
and other telecommunications carriers will be at reduced levels in 2002, which
will cause a continued and perhaps more severe negative impact on our sales of
test instruments and transmission products.

         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 general downturn in business activity in the telecommunications
market during 2001 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.

         ELECTRONIC COMPONENTS

         We sell our components primarily to OEMs in the electronics industry,
including manufacturers of aerospace and military systems, communications
equipment, industrial instruments and test equipment. During 2001, our top five
electronic components customers in terms of revenues were the BAE Systems
companies, Electrical Maintenance, Inc., Temura Denki, Litton Corporation and
Raytheon Systems Company. Sales to the BAE Systems companies represented
approximately ten percent of our total revenues during 2001. 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.

SALES, MARKETING AND CUSTOMER SUPPORT

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

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

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

                                       17




<PAGE>

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

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

     ELECTRONIC COMPONENTS

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

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

COMPETITION

         TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
         PRODUCTS

         The market for our telecommunications test instruments, transmission
and network access products and services is fragmented and intensely
competitive, both inside and outside the United States, and is subject to rapid

                                       18




<PAGE>

technological change, evolving industry standards and regulatory developments.
We believe that the principal competitive factors affecting our
telecommunications test instruments, transmission and network access products
business include:

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

         The reputation in the telecommunications industry of our subsidiary,
CXR Telcom, spans over 35 years. We believe this reputation 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 telecommunications 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.

         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.

                                       19




<PAGE>

         We have made substantial investments in machinery and equipment
tooling. In addition, our Digitran Division has a reputation spanning over 40
years in the electronic components industry, and major 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.

MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE

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

         Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead times for delivery are often
available. Typically, our electronic components segment produces products in
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 9002-compliant. We have consolidated
all of our transmission and network access manufacturing for our North American
and European markets at our French manufacturing facility at CXR, S.A. We
manufacture all of our test equipment products at the Fremont, California
facility of CXR Telcom Corporation. We manufacture all of our digital switches
in our Rancho Cucamonga, California facility. We manufacture our electronic
power supplies in Ashford, Kent, England.

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

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

PRODUCT DEVELOPMENT AND ENGINEERING

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

                                       20




<PAGE>

         Accordingly, for the years ended December 31, 2001, 2000 and 1999, our
engineering and product development costs were approximately $1.08 million,
$1.17 million and $1.84 million, respectively. The decline in engineering
expenses in 2000 as compared to 1999 was primarily due to the termination of
engineering services at our Fremont, California facility and the consolidation
of engineering activities in our St. Charles, Illinois facility. The decline in
these expenses in 2001 as compared to 2000 was primarily due to the closure of
our St. Charles, Illinois engineering office in August 2001 and the layoff of
the four engineers who worked at that facility. We hired an engineering director
at the Fremont, California facility in December 2001 and intend to develop
engineering capability at that facility primarily through the use of services
provided by outside contractors.

         Our product development costs in 2001, 2000 and 1999 were related
primarily to development of new telecommunications test equipment and voice,
data and video transmission equipment. Current research expenditures are
directed principally toward enhancements to the current test instrument product
line and development of increased bandwidth, or faster speed, transmission
products. These expenditures are intended to improve market share and gross
profit margins, although we cannot assure you that we will achieve these
improvements.

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

                                       21




<PAGE>

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

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

EMPLOYEES

         As of March 18, 2002, we employed a total of 218 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.

                                       22




<PAGE>

ITEM 2.  PROPERTIES.

         As of March 18, 2002, we leased or owned approximately 110,000 square
feet of administrative, production, storage and shipping space. All of this
space was leased other than the Abondant, France facility.

<TABLE>
<CAPTION>

         BUSINESS UNIT                                    LOCATION                          FUNCTION
         -------------                                    --------                          --------

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

XET Corporation/Digitran                           Rancho Cucamonga, California
(electronic components)                            Monrovia, California               Manufacturing
 XCEL Power Systems, Ltd.
 and XCEL Corporation Ltd.                         Ashford, United Kingdom            Administrative/
 (electronic components)                           Wales, United Kingdom              Manufacturing

Belix Power Conversion Ltd.
(electronic components)                            Newtown, Wales, United Kingdom     Manufacturing

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

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

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

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

</TABLE>

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

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

ITEM 3.  LEGAL PROCEEDINGS.

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

                                       23




<PAGE>

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 NASD's OTC Electronic 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 the Historical Research
Department of The Nasdaq Stock Market, Inc. and 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
                                                              -----------
2000:                                                       LOW         HIGH
                                                            ---         ----
First Quarter (January 1 - March 31)............           $0.42        $2.8125
Second Quarter (April 1 - June 30)..............            0.4375       1.25
Third Quarter (July 1 - September 30)...........            0.4375       0.8438
Fourth Quarter (October 1 - December 31)........            0.20         0.56

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 18, 2002, we had 20,670,703 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 $0.29.

         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 October 2001, we issued 100,000 shares of common stock valued at
$30,000 to an investor relations consultant in consideration for services
rendered to us.

         In October 2001, we issued a warrant to purchase up to 50,000 shares of
common stock at an exercise price of $0.31 per share to one individual in
consideration for employee relations services rendered.

                                       24




<PAGE>

         In October 2001, we issued a warrant to purchase up to 15,000 shares of
common stock at an exercise price of $0.25 per share to one individual in
consideration for investment banking services rendered.

         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.

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
document. The consolidated statements of operations and comprehensive income
data with respect to the years ended December 31, 1999, 2000 and 2001 and the
consolidated balance sheet data at December 31, 2000 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:                            1997        1998         1999        2000       2001
                                                      ----        ----         ----        ----       ----
<S>                                                 <C>         <C>         <C>         <C>         <C>
Net sales........................................   $ 27,251    $ 30,100    $ 25,913    $ 28,050    $ 27,423
Cost of sales....................................     18,069      17,353      17,066      15,529      15,456
                                                    ---------   ---------   ---------   ---------   ---------
Gross profit.....................................      9,182      12,747       8,847      12,521      11,967
Selling, general and administrative expenses.....      8,608      10,202      10,584       9,827      10,129
Engineering and product development expenses.....      1,797       2,202       1,841       1,167       1,076
Write-down of goodwill...........................      5,693          --          --          --          --
                                                    ---------   ---------   ---------   ---------   ---------
Income (loss) from operations....................     (6,916)        343      (3,578)      1,527         762
Total other income (expense).....................       (627)       (804)       (492)        207        (414)
                                                    ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations before
  income taxes...................................     (7,543)       (461)     (4,070)      1,734         348

Income tax expense...............................         97         101         128          31          77
                                                    ---------   ---------   ---------   ---------   ---------
Income (loss) from continuing operations.........     (7,640)       (562)     (4,198)      1,703         271
Discontinued operations:
   Loss from operations of
     discontinued segment........................     (2,053)     (1,203)       (847)       (212)         56
   Gain (loss) on disposal of discontinued
    segment including provision for phase out
    period of $122 in 2000.......................         --         580         449        (487)         --
                                                    ---------   ---------   ---------   ---------   ---------
Net income (loss)................................     (9,693)     (1,185)     (4,596)      1,004         327

Foreign currency translation adjustment..........       (260)        206        (325)       (505)       (312)
                                                    ---------   ---------   ---------   ---------   ---------
Total comprehensive income (loss)................   $ (9,953)   $   (979)   $ (4,921)   $    499    $     15
                                                    =========   =========   =========   =========   =========
Basic earnings (loss) per share from continuing
  operations.....................................   $  (0.76)   $  (0.05)   $  (0.26)   $   0.09    $   0.01
                                                    =========   =========   =========   =========   =========
Diluted earnings (loss) per share from continuing
  operations.....................................   $  (0.76)   $  (0.05)   $  (0.26)   $   0.07    $   0.01
                                                    =========   =========   =========   =========   =========
Basic earnings (loss) per share from discontinued
  operations.....................................   $  (0.20)   $  (0.05)   $  (0.02)   $  (0.04)   $   0.00
                                                    =========   =========   =========   =========   =========
Diluted earnings (loss) per share from
  discontinued operations........................   $  (0.20)   $  (0.05)   $  (0.02)   $  (0.03)   $   0.00
                                                    =========   =========   =========   =========   =========
Basic earnings (loss) per share..................   $  (0.96)   $  (0.10)   $  (0.28)   $   0.05    $   0.02
                                                    =========   =========   =========   =========   =========
Diluted earnings (loss) per share................   $  (0.96)   $  (0.10)   $  (0.28)   $   0.04    $   0.01
                                                    =========   =========   =========   =========   =========
Weighted average shares outstanding, basic.......     10,137      11,952      16,638      19,504      20,594
Weighted average shares outstanding, diluted.....     10,137      11,952      16,638      23,027      23,782
</TABLE>

                                       25




<PAGE>
<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                      ------------------------------------------------
                                        1997      1998      1999      2000       2001
                                        ----      ----      ----      ----       ----
<S>                                   <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents...........  $ 1,571   $   450   $   480   $   756   $   604
Working capital.....................    4,625     4,999     1,080     2,780     3,686
Total assets........................   20,129    20,352    16,489    19,484    17,688
Long-term debt, net of current
   portion..........................    2,012     1,175       143       282       763
Stockholders' equity................    6,011     5,482     3,801     5,807     5,862
Convertible redeemable
   preferred stock..................        1     1,516       588       259       270

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

         o        the projected growth in the telecommunications and electronic
                  components markets;
         o        our business strategy for expanding 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 document is not a complete
description of our business or the risks associated with an investment in our
common stock. Before deciding to buy or maintain a position in our common stock,
you should carefully review and consider the various disclosures we made in this
report, and in our other materials filed with the Securities and Exchange
Commission that discuss our business in greater detail and that disclose various
risks, uncertainties and other factors that may affect our business, results of
operations or financial condition.

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

                                       26




<PAGE>

OVERVIEW

         We previously organized our operations in the following three business
segments:

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

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

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

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

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

         o        Telecommunications

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

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

         o        Electronic Components

              --   Digital Switches

              --   Electronic Power Supplies

         Our sales are primarily in North America, Europe and Asia. In 2001,
53.9% of our sales were to customers in the telecommunications industry, and the
remainder of our sales were to aerospace customers, military contractors and
industrial customers. Revenues are recorded when products are shipped if shipped
FOB shipping point or when received by the customer if shipped FOB destination.

                                       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 Form 10-K. We
believe our most critical accounting policies include inventory valuation,
goodwill impairment and foreign currency translation.

     INVENTORIES

         We value our inventory at the lower of the actual cost to purchase
and/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 for 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," and will be required
to analyze our goodwill for impairment issues during the first six months of
2002, and then periodically after that time. During 2001, 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 54.6% of our
net revenues, 66.3% of our assets and 68.4% of our total liabilities as of
December 31, 2001. 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

                                       28




<PAGE>

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."

         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 our management deems any subsidiary's functional currency to be the
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 our 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
$1,043,000 and $731,000 that were included as part of accumulated other
comprehensive loss within our balance sheets at December 31, 2001 and 2000,
respectively. During 2001, 2000 and 1999, we included translation adjustments of
approximately $312,000, $505,000 and $325,000, respectively, under accumulated
other comprehensive loss.

         If we had determined that the functional currency of our subsidiaries
was United States dollars, these losses would have increased our loss for each
of the years presented. 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 Japanese yen, the euro and the British pound. Any future translation
gains or losses could be significantly higher than those we recorded for 2001,
2000 and 1999. Also, if we determine that a change in the functional currency of
one of our subsidiaries has occurred, we would be required to include in our
statement of operations any translation gains or losses from the date of change.

                                       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,
                                                                     ------------------------
                                                            1999               2000               2001
                                                            ----               ----               ----
<S>                                                       <C>                  <C>                <C>
Net sales..........................................       100.0%               100.0%             100.0%
Cost of sales......................................        65.9                 55.4               56.4
                                                          ------               ------             ------
Gross profit.......................................        34.1                 44.6               43.6
Selling, general and administrative expenses.......        40.8                 35.0               36.9
Engineering and product development expenses.......         7.1                  4.2                3.9
                                                          ------               ------             ------
Operating income (loss)............................       (13.8)                 5.4                2.8
Interest expense...................................        (1.6)                (1.5)              (1.4)
Other income (expense).............................        (0.3)                 2.3               (0.1)
                                                          ------               ------             ------
Income (loss) from continuing operations
  before income taxes..............................       (15.7)                 6.2                1.3
Income taxes.......................................         0.5                  0.1                0.3
                                                          ------               ------             ------
Income (loss) from continuing operations...........       (16.2)                 6.1                1.0
Income (loss) from discontinued operations.........        (3.2)                (0.8)               0.2
Gain (loss) on disposal of discontinued segment....         1.7                 (1.7)               0.0
                                                          ------               ------             ------
Net income (loss)..................................       (17.7)%                3.6%               1.2%
                                                          ======               ======             ======
</TABLE>

     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 telecommunications 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, S.A., our French
subsidiary, 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. Our French
subsidiary will continue to distribute Sunrise products under an exclusive
arrangement for select customers and under a non-exclusive arrangement for other
customers and also will continue to distribute other manufacturers' products.
Based on this revised relationship with Sunrise Telecom, Inc., management
estimates that net sales of Sunrise products will be approximately $400,000 in
2002, as compared to $1,384,000 in 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.

                                       30




<PAGE>

         Our French subsidiary produces all of our transmission products and
networking equipment. Net sales of transmission products and networking
equipment produced by our French subsidiary decreased 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
our French subsidiary, 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 our French subsidiary'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.

         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
$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.

         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 telecommunications 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
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.

         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.

         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. 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 prior periodic reports. Selling
expenses declined by $332,000, primarily due to the cost savings that resulted
from the closure of the networking division of our French subsidiary 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.

                                       31




<PAGE>

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$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.

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

     CONTINUING OPERATIONS

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

         Net sales of our telecommunications products and services during 2000
declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment
sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to
$4,983,000 for 1999. This increase in sales of test equipment was primarily due
to the positive market acceptance of our CXR HALCYON 704 series product line
which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this
increase was substantially attributable to additional test equipment sales as a
result of our acquisition of the business of T-Com in August 2000. We have not
provided or discussed pro forma information because there was not a material
change in revenues of T-Com from 1999 to 2000. This increase in net sales of
test equipment was offset by a reduction in sales of transmission and networking
equipment produced by our French subsidiary, which sales declined $2,931,000
(37.8%) from $10,683,000 during 1999 to $7,752,000 for 2000. The decline in the
net sales of these products was primarily due to the conversion of sales amounts
from French francs to U.S. dollars. The average U.S. dollar value of the French
franc declined approximately 15% from 1999 to 2000. In addition, budget delays
and reductions within the French public sector contributed to the reduction in
transmission equipment sales.

                                       32




<PAGE>

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

         GROSS PROFIT. Gross profit as a percentage of net sales increased to
44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit
increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to
$8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for
inventory obsolescence of $893,000 and $1,144,000, respectively.

         Gross profit for our telecommunications segment increased in dollar
terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for
1999, and increased as a percentage of related net sales from 33.4% in 1999 to
41.5% in 2000. This increase in gross profit was primarily due to an increase in
2000 of the portion of telecommunications segment sales that involved higher
margin test equipment such as our CXR HALCYON 704 series test equipment and our
central office test equipment. These products generated a higher gross profit
margin than our older model test equipment and generally contributed a higher
margin than our transmission products.

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

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as
compared to $10,584,000 for 1999 and decreased as a percentage of net sales from
40.8% in 1999 to 35.0% in 2000. This decrease was attributable to a $291,000
reduction in selling expenses and a $466,000 reduction in general and
administrative expenses. The decrease in general and administrative expenses was
primarily due to continued cost cutting efforts in 2000 and to certain expenses
we incurred in 1999 that we did not incur in 2000, such as a $452,000 expense
related to the establishment of a reserve for a note receivable, a $522,000
charge related to our investor relations efforts and a $193,000 charge related
to a contingent stock agreement. However, we incurred certain general and
administrative expenses in 2000 that we did not incur in 1999, including
approximately $187,000 of legal and accounting fees that we incurred in
connection with a securities registration statement and amendments to various
prior periodic reports.

         ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The
majority of this reduction resulted from our elimination of our test instruments
engineering function in Fremont, California and our concentration of our
engineering efforts in our St. Charles, Illinois facility, and the transfer of
transmission and network access product engineering to our French subsidiary
without adding staffing in France.

                                       33




<PAGE>

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

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

     DISCONTINUED OPERATIONS

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

         During 2001, 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, 2001, we had
working capital of $3,686,000, an accumulated deficit of $18,459,000 and an
accumulated other comprehensive loss of $1,043,000. As of December 31, 2001, we
had $604,000 in cash and cash equivalents and $5,627,000 of accounts receivable.
As of December 31, 2000, we had working capital of $2,780,000, an accumulated
deficit of $18,775,000, $756,000 in cash and cash equivalents and $7,440,000 of
accounts receivable.

         Cash used in our operating activities totaled $100,000 for 2001 as
compared to $201,000 in 2000. This decrease in cash used in operations during
2001 primarily resulted from collections of accounts receivable in excess of
payments of various liabilities.

         Cash used in our investing activities totaled $38,000 for 2001 as
compared to cash provided by our investing activities of $909,000 for 2000. We
have acquired computer hardware and software to implement an enterprise resource
planning system designed to improve efficiencies at an aggregate cost of
$175,000, of which $134,000 was acquired in 2001 under capital leases.
Included in the 2000 results are cash inflows of $520,000 from the sale of
shares of common stock we held in Digital Transmission Systems, Inc. and
$918,000 from the sale of shares of common stock we held in Wi-LAN, Inc. and
usages of $592,000 and $82,000 for the purchases of the Belix Ltd. companies in
the U.K. and T-Com in California, respectively.

                                       34




<PAGE>

         Cash provided by financing activities totaled $342,000 for 2001, as
compared to $73,000 for 2000, primarily due to increased borrowings by XCL in
the U.K. to finance XCL's increased business volume.

         On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation,
together with MicroTel acting as guarantor, obtained a credit facility from
Wells Fargo Business Credit, Inc. The facility provides for a revolving loan of
up to $3,000,000 secured by our inventory and accounts receivable and a term
loan in the amount of $687,000 secured by our machinery and equipment. On
December 31, 2001, the interest rate was the prime rate (then 4.75%) plus 1%,
subject to a minimum interest charge of $13,500 per month. Due to the minimum
interest charge, the effective interest rate we paid during 2001 was 13.2%.
Effective April 1, 2001, the annual interest rate was reduced from the prime
rate plus 2% and the minimum interest charge was reduced from $15,000 per month
because we met or exceeded certain performance-based goals for 2000. The balance
outstanding at December 31, 2001 was $1,420,000 on the revolving loan and
$232,000 on the term loan, and we had available to us $91,000 of additional
borrowings. The credit facility contains restrictive financial covenants that
are set by mutual agreement of us and our lender each year. At December 31,
2001, we were out of compliance with a financial covenant and had obtained a
waiver from our lender. As of February 25, 2002, the covenants for 2002 had not
yet been set. The credit facility expires August 16, 2003.

         Our foreign subsidiaries have credit facilities with Lloyds Bank in
England, Banc National du Paris, Societe General and Banque Hervet in France and
Johan Tokyo Credit Bank in Japan. The balances outstanding under our U.K.,
France and Japan credit facilities were $1,665,000, $533,000 and $5,000,
respectively, on December 31, 2001. Our U.K. subsidiary was out of compliance
with a financial covenant at December 31, 2001. The lender has indicated its
intention to issue a waiver for any covenant breach. However, if the waiver is
not issued, the lender may pursue any and all available remedies, including
acceleration of the maturity date of the loan.

         Our backlog is substantial and had increased to $14,385,000 as of
December 31, 2001, an increase of 15.1%, as compared to $12,500,000 as of
December 31, 2000. Our backlog as of December 31, 2001 is related approximately
95% 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 5% to our telecommunications 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 2001, 53.9% of our sales were to customers in the
telecommunications industry. We experienced a 5.6% decline in our
telecommunications segment sales in 2001, particularly during the latter part of
the year. We believe this decline primarily was due to a general decline in
sales made by many of our telecommunications customers. We anticipate a further
decline in our telecommunications segment sales in the first two quarters of
2002 as compared to recent quarters. Although the decline in our
telecommunications segment sales for 2001 was relatively modest, 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.

                                       35




<PAGE>

         We took various actions to reduce costs in 2001 and are reducing costs
further through staff reductions in the first half of 2002. These actions are
intended to reduce the cash outlays of our telecommunications segment to match
its revenue rate. If these actions are not sufficient to reduce cash outlays
below revenue levels, then we may restructure or divest all or part of our
telecommunications operations.

         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:

<TABLE>
                                               PAYMENTS DUE BY PERIOD
                                               ----------------------
                                                   (IN THOUSANDS)
<CAPTION>

CONTRACTUAL OBLIGATIONS       2002      2003      2004       2005      2006     THEREAFTER    TOTAL
 AT DECEMBER 31, 2001         ----      ----      ----       ----      ----     -----------   -----
 --------------------
<S>                           <C>       <C>       <C>        <C>       <C>      <C>          <C>
Line of Credit (Domestic)     $  1,420  $         $          $         $        $            $  1,420

Line of Credit (U.K.)            1,665                                                          1,665

Overdraft (France)                 533                                                            533

Term Loan (Domestic)               137        95                                                  232

Term Loan (U.K.)                   146       146       146        146         81                  665

Term Loan (France)                  30        30        30                                         90

Term Loan (Japan)                    5                                                              5

Capitalized Lease Obligations       83        56        33                                        172

Other Promissory Notes             149                                                            149

Operating Leases                   785       158        97          1                           1,041
                              --------- --------- ---------- --------- ---------- ---------- --------

                              $  4,953  $    485  $    306   $    147  $      81  $          $  5,972
                              ========= ========= ========== ========= ========== ========== ========
</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 and the effects of ongoing
military actions against terrorists 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 us or our operating
subsidiaries.

                                       36




<PAGE>

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board, or the FASB,
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that we recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that we reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
141.

         SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purpose
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test six months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.

         Our previous business combinations were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount of goodwill
was $2,389,000. Amortization expense related to goodwill during 2001 was
$345,000. Currently, we are assessing but have not yet determined how the
adoption of SFAS 141 and SFAS 142 will impact our financial position and 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 144. SFAS No. 144
requires that those 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
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.

EURO CONVERSION

         Our operating subsidiaries located in France and the U.K. have combined
net sales from operations approximating 50.6% of our total net sales for the
year ended December 31, 2001. Net sales from the French subsidiary participating
in the euro conversion were 28.6% of our net sales for the year ended December
31, 2001. 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.

                                       37




<PAGE>

RISK FACTORS

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

     THE ECONOMIC DOWNTURN IN THE TELECOMMUNICATIONS EQUIPMENT MARKET CONTINUES
     TO NEGATIVELY AFFECT OUR TELECOMMUNICATIONS SEGMENT SALES, WHICH SALES
     ACCOUNTED FOR A MAJORITY OF OUR REVENUES IN 2001.

         During 2001, 53.9% of our sales were to customers in the
telecommunications industry. We experienced a 5.6% decline in our
telecommunications segment sales in 2001, particularly during the latter part of
the year. We believe this decline primarily was due to a general decline in
sales made by many of our telecommunications customers. We anticipate a decline
in our telecommunications segment sales in 2002 as compared to 2001. Although
the decline in our telecommunications segment sales for 2001 was relatively
modest, 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 staff reductions, to reduce cash outlays
of our telecommunications segment. However, if the downturn is long-lasting and
severe, we may need to continue to downsize or to restructure, sell or
discontinue all or part of our telecommunications operations, which would
negatively impact our business, prospects, financial condition, results of
operations and cash flows.

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

         During the year ended December 31, 2001, the sale of telecommunications
equipment and related services accounted for 53.9% of our total sales and the
sale of electronic components accounted for 46.1% of our total sales. In many
cases we have long-term contracts with our telecommunications and electronic
components customers that cover the general terms and conditions of our
relationships with them but that do not include long-term purchase orders or
commitments. Rather, our customers issue purchase orders requesting the
quantities of telecommunications equipment they desire to purchase from us, and
if we are able and willing to fill those orders, then we fill them under the
terms of the contracts. Accordingly, we cannot rely on long-term purchase orders
or commitments to protect us from the negative financial effects of a reduced
demand for our products that could result from a general economic downturn, from
changes in the telecommunications and electronic components industries,
including the entry of new competitors into the market, from the introduction by
others of new or improved technology, from an unanticipated shift in the needs
of our customers, or from other causes.

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

         The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on

                                       38




<PAGE>

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 the terrorist attacks in the United
States on September 11, 2001 and further enhanced security measures in response
to the 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 have a
material adverse effect on our results of operations because our products
compete on price, and therefore we may not be able to adjust product pricing to
reflect the increases in component costs. Also, an extended interruption in the
supply of components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations by
impairing our ability to timely deliver quality products to our customers.
Delays in deliveries due to shortages of components or other factors may result
in cancellation by our customers of all or part of their orders. Although
customers who purchase from us products, such as many of our digital switches
and all of our custom power supplies, that are not readily available from other
sources would be less likely than other customers of ours to cancel their orders
due to production delays, we cannot assure you that cancellations will not
occur.

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

         Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, 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 over
two years ago, 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 have a material adverse effect on 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
     TELECOMMUNICATIONS INDUSTRIES.

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

                                       39




<PAGE>

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

     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 AND CASH FLOWS WILL SUFFER.

         As of December 31, 2001, we had $14,385,000 in backlog orders for our
products, which orders were due in large part to the long lead times associated
with our electronic components products. The amount of backlog orders represents
revenue that we anticipate recognizing in the future, as evidenced by purchase
orders and other purchase commitments received from customers, but on which work
has not yet been initiated or with respect to which work is currently in
progress. However, we cannot assure you that we will be successful in fulfilling
orders and commitments in a timely manner or that we will ultimately recognize
as revenue the amounts reflected as backlog.

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

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

of our products and services to customers located outside of the United States
accounted for approximately 55% of our net sales for the year ended December 31,
2001. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2002. 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 OEM 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.

                                       40




<PAGE>

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

         The market prices of securities of technology-based companies,
especially telecommunications electronics companies, currently are highly
volatile. The market price of our common stock has fluctuated significantly in
the past. In fact, during the quarter ended December 31, 2001, the high and low
closing bid prices of a share of our common stock were $0.40 and $0.23,
respectively. The market price of our common stock may continue to exhibit
significant fluctuations in response to the following factors, many of which are
beyond our control:

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

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

     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, causes 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 a significant impact on our quarterly operating results.
RBOCs generally obtain approval for their annual budgets during the first
quarter of each calendar year. If an RBOC's annual budget is not approved early
in the calendar year or is insufficient to cover its desired purchases for the
entire calendar year, we are unable to sell products to the RBOC during the
period of the delay or shortfall.

                                       41




<PAGE>

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

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

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

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

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

                                       42




<PAGE>

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

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

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

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

     WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM
     AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE
     PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, RESULTS OF
     OPERATIONS AND CASH FLOWS.

         The recent terrorist attacks in the United States, which have brought
devastation to many people and shaken consumer confidence, have disrupted
commerce throughout the world. The continuing threat of terrorism in the United
States and other countries and heightened security measures, as well as current
and any future military action in response to such threat, may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a general decrease in spending that could
decrease demand for our current and planned products and services, in our
inability to effectively market, manufacture or ship our products and services,
or in financial or operational difficulties for various vendors on which we
rely, our business and results of operations could be materially and adversely
affected. We are unable to predict whether the continuing threat of terrorism or
the responses to such threat will result in any long-term commercial disruptions
or whether such terrorist activities or responses will have any long-term
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.

     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

                                       43




<PAGE>

otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and,
if the broker-dealer is the sole market maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market, and monthly
account statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.

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

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

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

         As of March 18, 2002, we had outstanding 20,670,703 shares of common
stock, 20,570,703 of which shares were either unrestricted, registered for
resale under the Securities Act of 1933, or eligible for resale without
registration under Rule 144 of the Securities Act of 1933. As of March 18, 2002,
we also had outstanding options, warrants and preferred stock that were
exercisable for or convertible into 6,453,955 shares of common stock, nearly all
of which shares of common stock were registered for resale by the holders of the
options, warrants and preferred stock. Sales of a substantial number of shares
of our common stock in the public market, or the perception that sales could
occur, could adversely affect the market price for our common stock. Any adverse
effect on the market price for our common stock could make it difficult for us
to sell equity securities at a time and at a price that we deem appropriate.

                                       44




<PAGE>

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

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

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

         Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 200 have been designated as
Series A Preferred, of which 25 were outstanding as of March 18, 2002. In
addition, 150,000 shares have been designated as Series B Preferred Stock, all
of which are currently outstanding. The rights of the holders of our common
stock are subject to the rights of the holders of our currently outstanding
preferred stock and will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that we may issue in the future.
The issuance of preferred stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, which would delay, defer or prevent a change in
control of MicroTel. Furthermore, preferred stock may have other rights,
including economic rights senior to the common stock, and, as a result, the
issuance of preferred stock could adversely affect the market value of our
common stock.

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

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

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

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

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

                                       45




<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 lender's
base rate. The symbol "E" represents Euribor plus a variable margin. Balances
are as of December 31, 2001.

<TABLE>
<CAPTION>
                                                                                                            FAIR
                                                                                                            VALUE
      LIABILITIES           2002     2003      2004      2005      2006       THEREAFTER       TOTAL      12/31/01
      -----------           ----     ----      ----      ----      ----       ----------       -----      --------
<S>                         <C>      <C>       <C>       <C>       <C>        <C>              <C>         <C>
Line of Credit
(Domestic)                  $1,420                                                             $1,420      $1,420

Average Interest Rate       P+ 1%

Line of Credit (U.K.)       $1,665                                                             $1,665      $1,665

Average Interest Rate       B+ 2.5%

Overdraft (France)          $  533                                                             $ 533       $  533

Average Interest Rate       E

Term Loan (Domestic)        $  137   $  95                                                     $  232      $  232

Average Interest Rate       P+ 1%    P+ 1%

Term Loan (U.K.)            $  146   $ 146     $ 146     $ 146     $  81                       $  665      $  665

Average Interest Rate       B+ 2.5%  B+ 2.5%   B+ 2.5%   B+ 2.5%   B+ 2.5%

Term Loan (France)          $   30   $  30     $  30                                           $   90      $   90

Average Interest Rate       7.25%

</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

         None.

                                       46




<PAGE>

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

         The names, ages and positions held by our directors and executive
officers as of March 18, 2002 are as follows:

<TABLE>
<CAPTION>

        NAME                               AGE                         TITLES
        ----                               ---                         ------
<S>                                        <C>                    <C>
Carmine T. Oliva                           59                     Chairman of the Board, President,
                                                                     Chief Executive Officer and Director

Graham Jefferies                           44                     Executive Vice President and Chief
                                                                     Operating Officer of our Telecommu-
                                                                     nications Group and Managing Director of
                                                                     various subsidiaries

Randolph D. Foote                          53                     Senior Vice President, Chief Financial
                                                                     Officer and Assistant Secretary

Robert B. Runyon (1)(2)                    76                     Secretary and Director

Laurence P. Finnegan, Jr. (1)(3)           64                     Director
-----------
(1)   Member of the executive compensation and management development committee.
(2)   Member of the nominating committee.
(3)   Member of the audit committee.

</TABLE>

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

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

                                       47




<PAGE>

         RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief
Financial Officer on October 4, 1999 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, S.A., since February 2000. Mr. Foote was the Corporate
Controller of Unit Instruments, Inc., a publicly traded semiconductor equipment
manufacturer, from October 1995 to May 1999. From March 1985 to October 1995,
Mr. Foote was the Director of Tax and Financial Reporting at Optical Radiation
Corporation, a publicly traded company that designed and manufactured products
using advanced optical technology. Prior to 1985, Mr. Foote held positions with
Western Gear Corporation and Bucyrus Erie Company, which were both publicly
traded companies. Mr. Foote earned a B.S. degree in Business Management from
California State Polytechnic University, Pomona 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 December 1987. He has acted as Senior Vice President of Sub Hydro
Dynamics Inc., a privately held marine services company based in Hilton Head,
South Carolina, since September 1995. Prior to our merger with XET Corporation,
Mr. Runyon served XET Corporation both as a director since August 1983 and as a
consultant in the areas of strategy development and business planning,
organization, human resources and administrative systems. He also consults for
companies in environmental products, marine propulsion systems and architectural
services sectors in these same areas. From 1970 to 1978, Mr. Runyon held various
executive positions with ITT Corporation, including Vice President,
Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to
1970, Mr. Runyon held executive positions at BP Oil including Vice President,
Corporate Planning and Administration of BP Oil Corporation, and director,
organization and personnel for its predecessor, Sinclair Oil Corporation. Mr.
Runyon was Executive Vice President, Human Resources at the Great Atlantic &
Pacific Tea Company from 1978 to 1980. Mr. Runyon earned a B.S. degree in
Economics/Industrial Management from University of Pennsylvania.

         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.

         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 2002. Officers
are appointed by, and serve at the discretion of, our board of directors.

                                       48




<PAGE>

COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES

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

         Based solely upon a review of copies of the reports furnished to us
during our fiscal year ended December 31, 2001 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 2001, 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, 2001, 2000 and 1999
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 2001:

<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..................   2001       $250,010        $40,000           100,000           $4,821 (1)
  President and Chief Executive      2000       $207,395        $80,000             --              $4,821 (1)
  Officer                            1999       $198,872             --             --              $4,821 (1)

Graham Jefferies..................
  Executive Vice President and
Chief                                2001       $142,639        $20,000             --              $7,697 (3)
  Operating Officer of Telecommuni-  2000       $128,775        $35,000             --              $6,869 (3)
  cations Group (2)                  1999       $114,192             --           60,000            $5,116 (3)

Randolph D. Foote.................   2001       $130,005        $15,000             --                 --
  Senior Vice President, Chief       2000       $103,754        $20,000             --                 --
  Financial Officer (4)              1999       $ 23,267             --           50,000               --

</TABLE>

---------------

(1)  Represents the dollar value of insurance premiums we paid with respect to
     term life insurance for the benefit of Mr. Oliva's spouse.
(2)  Mr. Jefferies was appointed Executive Vice President and Chief Operating
     Officer of our worldwide Telecommunications Group on October 21, 1999. Mr.
     Jefferies is based in the United Kingdom and receives his remuneration in
     British pounds. The compensation amounts listed for Mr. Jefferies are shown
     in United States dollars, converted from British pounds using the average
     conversion rates in effect during the time periods of compensation.
(3)  Represents contributions to Mr. Jefferies' retirement plan.
(4)  Randolph D. Foote was appointed Senior Vice President and Chief Financial
     Officer on October 4, 1999 and Assistant Secretary on February 21, 2001.

                                       49




<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides information regarding options granted in
the year ended December 31, 2001 to the executive officers named in the summary
compensation table. We did not grant any stock appreciation rights in the year
ended December 31, 2001. This information includes hypothetical potential gains
from stock options granted in 2001. These hypothetical gains are based entirely
on assumed annual growth rates of 5% and 10% in the value of our common stock
price over the ten-year life of the stock options granted in 2001. These assumed
rates of growth were selected by the Securities and Exchange Commission for
illustrative purposes only and are not intended to predict future stock prices,
which will depend upon market conditions and our future performance and
prospects.

<TABLE>
<CAPTION>

                                                                                                    POTENTIAL
                                                                                                REALIZABLE VALUE
                                                    PERCENTAGE                                  AT ASSUMED RATES
                                      NUMBER OF      OF TOTAL                                    OF STOCK PRICE
                                      SECURITIES     OPTIONS                                    APPRECIATION FOR
                                      UNDERLYING    GRANTED TO      EXERCISE                     OPTION TERM(3)
                            GRANT      OPTIONS     EMPLOYEES IN      PRICE       EXPIRATION     -----------------
     NAMED OFFICER          DATE      GRANTED(1)  FISCAL YEAR(2)   PER SHARE        DATE          5%         10%
     -------------          ----     -----------      -------      ---------    ------------     ----      -----
<S>                       <C>          <C>             <C>           <C>          <C>           <C>        <C>
Carmine T. Oliva......    02/01/01     100,000         29.0%         $0.50        01/31/11      $28,495    $72,212
Randolph D. Foote.....       --          --             --            --             --           --            --
Graham Jefferies......       --          --             --            --             --           --            --
-------------------------
(1)  Options vested in two equal semi-annual installments on July 31, 2001 and
     January 31, 2002.
(2)  Based on options to purchase 345,000 shares granted to our employees during
     the year ended December 31, 2001.
(3)  Calculated using the potential realizable value of each grant.

</TABLE>

                   OPTION EXERCISES AND FISCAL YEAR-END VALUES

         The following table provides information regarding option exercises in
the year ended December 31, 2001 by the named executive officers and the value
of unexercised options held by the named executive officers as of December 31,
2001. None of the named executives acquired shares through the exercise of
options during 2001.

<TABLE>
<CAPTION>
                                     NUMBER OF
                               SECURITIES UNDERLYING               VALUE ($) OF UNEXERCISED
                               UNEXERCISED OPTIONS AT              IN-THE-MONEY OPTIONS AT
                                 DECEMBER 31, 2001                   DECEMBER 31, 2001(1)
                                 -----------------                   --------------------
             NAME         EXERCISABLE       UNEXERCISABLE        EXERCISABLE      UNEXERCISABLE
             ----         -----------       -------------        -----------      -------------
<S>                        <C>                  <C>                <C>                 <C>
Carmine T. Oliva.....      180,633              50,000              --                 --
Randolph D. Foote....       50,000               --                5,500               --
Graham Jefferies.....      126,287               --                6,600               --
--------------
(1)  Based on the last reported sale price of our common stock of $0.31 on
     December 31, 2001 (the last trading day during fiscal 2001) as reported on
     the OTB Bulletin Board, less the exercise price of the options.

</TABLE>

                                       50




<PAGE>

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.

         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

                                       51




<PAGE>

shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:

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

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

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

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

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

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

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

         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.

                                       52




<PAGE>

Oliva provided in favor of us, as required by various corporate lenders. This
benefit is also intended to enable Mr. Oliva's estate to exercise all warrants
and options to purchase shares of our common stock.

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

RANDOLPH D. FOOTE

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

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

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

         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;

                                       53




<PAGE>

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

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

GRAHAM JEFFERIES

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

                                       54




<PAGE>

shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:

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

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

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

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

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

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

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.

                                       55




<PAGE>

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

COMPENSATION OF DIRECTORS

         Beginning January 1, 2001, each non-employee director has been entitled
to receive $12,000 per year as compensation for their services. We reimburse all
directors for out-of-pocket expenses incurred in connection with attendance at
board and committee meetings. We may periodically award options or warrants to
our directors under our existing option and incentive plans.

         Mr. Runyon acts as a consultant to MicroTel in the areas of strategy
development, business and organization planning, human resources recruiting and
development and administrative systems. For 2001, Mr. Runyon became entitled to
receive $28,574 in consulting fees and reimbursement of expenses. During 2001,
we also paid premiums of $3,656 for Mr. Runyon's health insurance.

         On February 1, 2001, Mr. Oliva received an option to purchase 100,000
shares of common stock at $0.50 per share under our 1997 Stock Incentive Plan,
which option vested in two equal semi-annual installments on July 31, 2001 and
January 31, 2002 and expires on January 31, 2011.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

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

         As of March 18, 2002, a total of 20,670,703 shares of our common stock
were outstanding. The following table sets forth information as of March 18,
2002 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 shareholder possesses sole voting and investment power
with respect to all of the shares of common stock owned by that shareholder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options or warrants held by that
person that are currently exercisable or are exercisable within 60 days after
the date of the table are deemed outstanding. Those shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person or group.

                                       56




<PAGE>
<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)             14.59%
Carmine T. Oliva............................         Common              1,547,438 (3)              7.33%
Fortune Fund Ltd. Seeker III................         Common              1,260,600 (4)              5.75%
Robert B. Runyon............................         Common                338,206 (5)              1.62%
Laurence P. Finnegan, Jr....................         Common                202,231 (6)              *
Graham Jefferies............................         Common                129,563 (7)              *
Randolph D. Foote...........................         Common                 55,000 (8)              *
All executive officers and directors
   as a group (5 persons)...................         Common              2,272,438 (9)             10.52%
---------------
</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, 162,500 shares
     of common stock underlying warrants and 50,530 shares of common stock
     underlying Series A Preferred Stock.
(4)  Includes 250,000 shares of common stock underlying warrants and 1,010,600
     shares of common stock underlying Series A Preferred Stock. Patrick
     Siaretta, as fund manager, and Greg Fenlon, as fund administrator, each
     have voting power and investment power over the shares of common stock
     beneficially owned by Fortune Fund Ltd. Seeker III. The address for Mr.
     Siaretta is Avenida Republica do Libano, 331, 04501-000, Sao Paulo, SP
     Brazil. The address for Mr. Fenlon is Kaya Flamboyan #9, Willenstad,
     Curacao, Netherlands Antilles.
(5)  Includes 158,060 shares of common stock underlying options.
(6)  Includes 158,060 shares of common stock underlying options.
(7)  Includes 126,287 shares of common stock underlying options.
(8)  Includes 50,000 shares of common stock underlying options.
(9)  Includes 162,500 shares of common stock underlying warrants, 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.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS

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

                                       57




<PAGE>

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

         The November 3, 1998 agreement provided that we would revise the
certificate of designations relating to the Series A Preferred Stock to provide
that: (i) the conversion price would be fixed at $10,000 divided by $0.50 for so
long as our common stock continued to be traded on the Nasdaq SmallCap Market
and we did not conduct a reverse split of our outstanding common stock; and (ii)
we would not exercise our redemption rights for the outstanding shares of Series
A Preferred Stock for six months. The agreement also provided that the existing
restriction on each Series A Original Holder's right to convert more than 20% of
the aggregate number of shares of Series A Preferred Stock originally purchased
by such holder in any 30-day period would be eliminated. Also, the agreement
provided that we would replace the existing warrants, which warrants had an
exercise price of $1.25 per share, with warrants that had an exercise price of
$0.75 per share.

         We inadvertently failed to obtain the required approval of our common
stockholders and to file an amended certificate of designations to effectuate
the amendments to the certificate of designations that were contained in the
November 3, 1998 agreement. However, between November 18, 1998 and March 26,
1999, the Series A Original Holders converted shares of Series A Preferred Stock
into shares of common stock at the rate of 20,000 shares of common stock per
share of Series A Preferred Stock, as agreed to in the November 3, 1998
agreement. Use of the $10,000 divided by $0.50 conversion price in four of the
conversions resulted in the Series A Original Holders receiving an aggregate of
46,437 more shares of common stock than they would have received under the
original conversion price formula that was contained in the certificate of
designations. We have determined, however, that the excess shares were in fact
validly issued under Delaware law.

         In May 1999, our common stock was delisted from the Nasdaq SmallCap
Market due to a failure to meet Nasdaq's minimum closing bid price listing
requirement, and our common stock began trading on the OTC Electronic Bulletin
Board. Based upon the terms of the November 3, 1998 agreement, the conversion
price of the Series A Preferred Stock reverted back to the floating conversion
price shown in the certificate of designation, which conversion price was
$10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the
three lowest closing bid prices over the 40 trading days prior to a conversion.

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

         Fortune Fund had informally indicated to us its willingness to
establish a fixed conversion price and to hold its shares of Series A Preferred
Stock as a long-term investment. On December 15, 1999, we entered into an
agreement with Fortune Fund. Under the agreement, we and Fortune Fund agreed to

                                       58




<PAGE>

the establishment of a fixed conversion price of $10,000 divided by $0.20 for
the 20 shares of Series A Preferred Stock held by Fortune Fund. On December 15,
1999, the floating conversion price would have been $10,000 divided by $0.19
under the terms of the certificate of designation that was then in effect.

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

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

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

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

         We filed an amended certificate of designation with the Delaware
Secretary of State to give effect to the December 1999 agreements by fixing the
conversion price of the Series A Preferred Stock at $10,000 divided by $0.1979.
However, because we inadvertently failed to obtain approval of our common
stockholders for the amendment to the certificate of designation, the amendment
was invalid under the Delaware General Corporation Law. However, on June 30,
2000, Orbit converted 34.5 shares of Series A Preferred Stock into 1,743,285
shares of common stock based upon the $10,000 divided by $0.1979 per share
conversion price that we, Orbit and the other present and former holders of
Series A Preferred Stock believed to be in effect. This conversion resulted in
the issuance of 1,048,654 more shares of common stock than would otherwise have
been issued upon conversion of the 34.5 shares of Series A Preferred Stock under
the certificate of designation that was then in effect. We have determined,
however, that the excess shares were in fact validly issued under Delaware law.

                                       59




<PAGE>

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

OTHER TRANSACTIONS

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

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

                                       60




<PAGE>

                                     PART IV

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

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

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

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

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

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

         None.

                                       61




<PAGE>

<TABLE>

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

                                                                                                Page
                                                                                                ----

Financial Statements
--------------------

<S>                                                                                              <C>
Report of Independent Certified Public Accountants............................................   F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000..................................   F-3

Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ...   F-4

Consolidated Statements of Comprehensive Income for the years ended December 31, 2001,
    2000 and 1999 ............................................................................   F-5

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001,
    2000 and 1999 ............................................................................   F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000
    and 1999 .................................................................................   F-7

Notes to Consolidated Financial Statements for years ended December 31, 2001, 2000
    and 1999..................................................................................   F-9

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

Consolidated Schedule II Valuation and Qualifying Accounts for the years ended
    December 31, 2001, 2000 and 1999..........................................................   F-40
</TABLE>

                                      F-1




<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
MicroTel International, Inc.

         We have audited the accompanying consolidated balance sheets of
MicroTel International, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2001. We have also audited the information for each of the years in
the three-year period ended December 31, 2001 in the consolidated financial
statement schedule listed in the accompanying index. These consolidated
financial statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTel
International, Inc. at December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the three-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 schedule
referred to above presents fairly, in all material respects, the information set
forth therein.

/S/ BDO Seidman, LLP
BDO Seidman, LLP

Orange County, California
February 25, 2002

                                      F-2




<PAGE>
<TABLE>

                              MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                       CONSOLIDATED BALANCE SHEETS
                                       DECEMBER 31, 2001 AND 2000
                           (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

ASSETS (NOTES 7 AND 8)                                                              2001           2000
                                                                                    ----           ----
<S>                                                                              <C>            <C>
Current assets:
   Cash and cash equivalents                                                     $    604       $    756
   Accounts receivable, net of allowance for doubtful accounts of  $226
     and $111, respectively                                                         5,627          7,440
   Notes Receivable (Note 3)                                                           48            130
   Inventories (Note 4)                                                             7,433          6,298
   Prepaid and other current assets                                                   396            750
                                                                                 ---------      ---------
Total current assets                                                               14,108         15,374
Property, plant and equipment, net (Note 5)                                           758            809
Goodwill, net of accumulated amortization of $1,060 and $715,
   respectively (Notes 2 and 3)                                                     2,389          2,737
Other assets                                                                          433            564
                                                                                 ---------      ---------
                                                                                 $ 17,688       $ 19,484
                                                                                 =========      =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable (Note 7)                                                        $  3,618       $  3,661
   Current portion of long-term debt (Note 8)                                         550            614
   Accounts payable                                                                 3,783          5,222
   Accrued expenses                                                                 2,471          3,082
   Net liabilities of discontinued operations (Note 15)                                --             15
                                                                                 ---------      ---------
Total current liabilities                                                          10,422         12,594
Long-term debt, less current portion (Note 8)                                         763            282
Other liabilities                                                                     371            542
                                                                                 ---------      ---------
Total liabilities                                                                  11,556         13,418

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)                                           270            259

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 150,000 shares (aggregate liquidation preference
       of $960)                                                                       938            938
   Common stock, $0.0033 par value. Authorized 50,000,000 shares;
     issued and outstanding 20,671,000 and 20,570,000 shares in 2001
     and 2000, respectively                                                            68             68
   Additional paid-in capital                                                      24,358         24,307
   Accumulated deficit                                                            (18,459)       (18,775)
   Accumulated other comprehensive loss                                            (1,043)          (731)
                                                                                 ---------      ---------
Total stockholders' equity                                                          5,862          5,807
                                                                                 ---------      ---------
                                                                                 $ 17,688       $ 19,484
                                                                                 =========      =========

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

                                                   F-3




<PAGE>
<TABLE>

                                MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>

                                                                      2001           2000           1999
                                                                      ----           ----           ----
<S>                                                                 <C>            <C>            <C>
Net sales (Note 14)                                                 $ 27,423       $ 28,050       $ 25,913
Cost of sales                                                         15,456         15,529         17,066
                                                                    ---------      ---------      ---------
Gross profit                                                          11,967         12,521          8,847
Operating expenses:
   Selling, general and administrative                                10,129          9,827         10,584
   Engineering and product development                                 1,076          1,167          1,841
                                                                    ---------      ---------      ---------
Income (loss) from operations                                            762          1,527         (3,578)
Other income (expense):
   Interest expense                                                     (396)          (424)          (411)
   Gain (loss) on sale of subsidiary/investment,
     net (Notes 3 and 6)                                                  --            197            (90)
   Other, net (Note 3)                                                   (18)           434              9
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations before income
   taxes                                                                 348          1,734         (4,070)
Income taxes (Note 11)                                                    77             31            128
                                                                    ---------      ---------      ---------
Income (loss) from continuing operations                                 271          1,703         (4,198)
                                                                    ---------      ---------      ---------
Discontinued operations (Note 15):
   Income (loss) from discontinued operations                             56           (212)          (847)
   Gain (loss) on disposal of discontinued operations,
     including provision for phase out period of $122
     in 2000                                                              --           (487)           449
                                                                    ---------      ---------      ---------
Income (loss) from discontinued operations                                56           (699)          (398)
                                                                    ---------      ---------      ---------
Net income (loss)                                                   $    327       $  1,004       $ (4,596)
                                                                    =========      =========      =========

Basic earnings (loss) per share from continuing
   operations                                                       $   0.01       $   0.09       $  (0.26)
                                                                    =========      =========      =========
Diluted earnings (loss) per share from continuing
   operations                                                       $   0.01       $   0.07       $  (0.26)
                                                                    =========      =========      =========
Basic earnings (loss) per share from discontinued
   operations                                                       $   0.00       $  (0.04)      $  (0.02)
                                                                    =========      =========      =========
Diluted earnings (loss) per share from discontinued
   operations                                                       $   0.00       $  (0.03)      $  (0.02)
                                                                    =========      =========      =========
Basic earnings (loss) per share (Note 12)                           $   0.02       $   0.05       $  (0.28)
                                                                    =========      =========      =========
Diluted earnings (loss) per share (Note 12)                         $   0.01       $   0.04       $  (0.28)
                                                                    =========      =========      =========

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

                                                     F-4




<PAGE>
<TABLE>

                      MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                      YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                     (IN THOUSANDS)
<CAPTION>

                                                      2001         2000          1999
                                                      ----         ----          ----

<S>                                                <C>           <C>           <C>
Net income (loss)                                  $   327       $ 1,004       $(4,596)
Other comprehensive income (loss) net of tax:
   Foreign currency translation adjustment            (312)         (505)         (325)
                                                   --------      --------      --------
Comprehensive Income (loss)                        $    15       $   499       $(4,921)
                                                   ========      ========      ========
</TABLE>

              See accompanying notes to consolidated financial statements.

                                           F-5




<PAGE>
<TABLE>

                                         MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                          YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                                         (IN THOUSANDS)
<CAPTION>
                                                     Series B
                                                    Convertible                                          Accumulated
                                                  Preferred Stock  Common Stock  Additional                 Other
                                                  ---------------  ------------    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, 1998                         --  $  --    12,622    $ 42  $  20,463  $ (15,122)  $     99      $  5,482
Stock issued upon conversion of redeemable
  preferred  stock (Note 9)                          --     --     2,659       9        960         --         --           969
Stock issued in connection with acquisition
  (Note 3)                                           --     --     1,000       3        997         --         --         1,000
Stock issued as compensation                         --     --     1,716       6      1,077         --         --         1,083
Stock and warrants issued in connection with
  settlement of dispute (Note 13)                    --     --       150      --         73         --         --            73
Stock issued under stock purchase plan               --     --         5      --          2         --         --             2
Warrants issued for services                         --     --        --      --         63         --         --            63
Repricing of warrants issued in connection with
  issuance of redeemable preferred stock
  (Note 9)                                           --     --        --      --         91         --         --            91
Foreign currency translation adjustment              --     --        --      --         --         --       (325)         (325)
Accretion of redeemable preferred stock              --     --        --      --         --        (41)        --           (41)
Net loss                                             --     --        --      --         --     (4,596)        --        (4,596)
                                                  ------------------------------------------------------------------------------
Balance at December 31, 1999                         --     --    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
                                                  ==============================================================================

                                  See accompanying notes to consolidated financial statements.
</TABLE>
                                                              F-6




<PAGE>

<TABLE>
                                   MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                                   (IN THOUSANDS)
<CAPTION>

                                                                            2001            2000           1999
                                                                            ----            ----           ----
<S>                                                                      <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                        $   327         $ 1,004        $(4,596)
   Adjustments to reconcile net loss to cash provided by (used in)
     operating activities:
       Depreciation and amortization                                         345             431            241
       Amortization of intangible assets                                     370             352            540
       Provision for doubtful accounts                                       216              47             42
       Provision for inventory obsolescence                                  659             893          1,144
       Gain on sale of fixed assets                                           --             (43)            --
       Gain on sale of stock                                                  --            (197)            --
       Write off of uncollectible note receivable                             --              --            452
       Reversal of previously estimated accruals                              --            (399)            --
       Provision for impairment of investment                                 --              --            419
       Equity in earnings of unconsolidated investments                       --              --           (653)
       Loss on the sale of subsidiary/investment                              --              --             90
       Stock and warrants issued for services                                 51              25          1,146
       Repricing of warrants                                                  --              65             91
       Gain (loss) on disposal of discontinued operations                     --             487           (449)
       Net change in operating assets of discontinued operations             (15)            401            167
   Changes in operating assets and liabilities net of businesses acquired:
     Accounts receivable                                                   1,609            (428)           294
     Inventories                                                          (1,755)         (1,468)           791
     Prepaids and other assets                                               458             274            567
     Note receivable                                                          --            (130)           125
     Accounts payable                                                     (1,439)         (1,120)           651
     Accrued expenses and other liabilities                                 (926)           (395)          (333)
                                                                       -------------------------------------------
Cash provided by (used in) operating activities                             (100)           (201)           729
                                                                       -------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property, plant and equipment                           (120)           (158)          (121)
   Cash received on sale of subsidiary/investment                             --              --            118
   Cash received from sale of stock - (DTS)                                   --             520             --
   Cash received from sale of stock - (Wi-Lan)                                --             918             --
   Cash received from sale of discontinued operations                         --             260            750
   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                                         82              --              9
                                                                       -------------------------------------------
Cash (used in) provided by investing activities                              (38)            909            756
                                                                       -------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (repayments) of notes payable                              (34)          1,131           (970)
   Net proceeds (repayments) of long-term debt                               392              --           (162)
   Repayment of notes payable                                                 --          (1,146)            --
   Proceeds from sale of common stock                                         --              88              2
                                                                       -------------------------------------------
Cash provided by (used in) financing activities                              358              73         (1,130)
                                                                       -------------------------------------------
Effect of exchange rate changes on cash                                     (372)           (505)          (325)
Net (decrease) increase in cash and cash equivalents                        (152)            276             30
Cash and cash equivalents at beginning of year                               756             480            450
                                                                       -------------------------------------------
Cash and cash equivalents at end of year                                 $   604         $   756        $   480
                                                                       ===========================================

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

                                                        F-7




<PAGE>

<TABLE>
                                   MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                                  (IN THOUSANDS)
<CAPTION>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                        2001             2000           1999
                                                                          ----             ----           ----
<S>                                                                      <C>             <C>           <C>
   Cash paid during the year for:
     Interest                                                            $   400         $  372        $    443
                                                                    =============================================
     Income taxes                                                        $    45         $   13        $    124
                                                                    =============================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
   Equipment acquired under capital lease                                $   150         $   --        $     --
                                                                    =============================================
   Common stock issued upon conversion of redeemable preferred
     stock                                                               $    --         $  349        $    969
                                                                    =============================================
   Accretion of redeemable preferred stock                               $    11         $   20        $     41
                                                                    =============================================
   Issuance of common stock and warrants in connection with
     settlement of dispute                                               $    --         $   --        $     73
                                                                    =============================================
   Issuance of common stock in connection with acquisitions              $    --         $   --        $  1,000
                                                                    =============================================
   Issuance of preferred stock in connection with acquisition            $    --         $  938        $     --
                                                                    =============================================
   Issuance of warrants in connection with acquisition                   $    --         $   62        $     --
                                                                    =============================================

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

                                                        F-8




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

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

         In October 2000, the Company decided to discontinue its circuits
segment 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) and its 50% investment in a real estate
partnership (Note 6) were accounted for using the equity method.

REVENUE RECOGNITION

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

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-9




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

PROPERTY, PLANT AND EQUIPMENT

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

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

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

LONG-LIVED ASSETS AND GOODWILL

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

SOFTWARE DEVELOPMENT COSTS

         Software development costs, including purchased technology, are
capitalized beginning when technological feasibility has been established or
when purchased from third parties and continuing through the date of commercial
release. Amortization commences upon commercial release of the product and is
calculated using the greater of the straight-line method over three years or the
ratio of the products' current revenues divided by the anticipated total product
revenues. The carrying value of capitalized software development costs
aggregates $17,000 and $45,000 (net of accumulated amortization of $858,000 and
$833,000) at December 31, 2001 and 2000, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $25,000, $70,000 and $346,000 was charged to cost of
sales during 2001, 2000 and 1999, respectively.

         The Company reviews the carrying value of its capitalized software
development costs for possible impairment at the end of each fiscal quarter by
comparing the unamortized capitalized software development costs to the net
realizable value of that asset. The Company has not recorded any significant
impairment loss related to capitalized software costs during 2001, 2000 or 1999.

DEBT ISSUANCE COSTS

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

                                      F-10




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

PRODUCT WARRANTIES

         Estimated warranty costs are recognized at the time of the sale. The
Company's electronic components carry a one-year limited parts and labor
warranty and the Company's telecommunications products carry a two-year limited
parts and labor warranty. The Company's telecommunications products may be
returned within 30 days of purchase if a new order is received, and the new
order will be credited with 80% of the selling price of the returned item.
Products returned under warranty typically are tested and repaired or replaced
at the Company's option. Historically, the Company has not experienced
significant warranty costs or returns. During the 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, which was sold in March
1999 (see Note 3), for less than the amount originally accrued. Accordingly, the
Company reversed warranty accruals totaling $137,000 that were no longer deemed
to be necessary.

INCOME TAXES

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

STOCK-BASED COMPENSATION

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

EARNINGS (LOSS) PER SHARE

         Earnings (loss) per share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings
(loss) per share includes no dilution and is computed by dividing net income
(loss) available to common 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, 2001 and 2000, the fair value of all
financial instruments approximated carrying value.

                                      F-11




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

USE OF ESTIMATES

         The preparation of financial statements in conformity with 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. These amounts are included in other, net in the accompanying
2000 consolidated statement of operations.

CONCENTRATION OF CREDIT RISK

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

         The Company's accounts receivable results from sales to a broad
customer base. The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations. Sales to various BAE Systems companies in the U.S. and Europe
represented approximately ten percent of the Company's total revenues during
2001. At December 31, 2000, one customer accounted for ten percent of net
accounts receivable.

FOREIGN CURRENCY TRANSLATION

         The accounts of foreign subsidiaries have been translated using the
local currency as the functional currency. Accordingly, foreign currency
denominated assets and liabilities have been translated to U.S. dollars at the
current rate of exchange on the balance sheet date. The effects of translation
are recorded as a separate component of stockholders' equity in accumulated
other comprehensive income (loss). Exchange gains and losses arising from

                                      F-12




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

transactions denominated in foreign currencies are translated at average
exchange rates and included in operations. Such amounts are not material to the
accompanying consolidated financial statements.

COMPREHENSIVE INCOME

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

REPORTABLE SEGMENTS

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

RECLASSIFICATIONS

         Certain reclassifications have been made to the 1999 financial
statements to be consistent with the 2000 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 value of the common stock
outstanding of the Company at the date of the merger of $5,011,000 plus the
direct costs of the acquisition of $730,000, and the acquired assets and
liabilities of MicroTel were recorded at their estimated fair values at the date
of the merger. The excess of $4,998,000 of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and thereafter was
amortized on a straight-line basis over 15 years.

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

                                      F-13




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(3)      ACQUISITIONS AND DISPOSITIONS OF BUSINESSES

HYCOMP

         On July 6, 1994, the Company acquired 84.6% of the common shares
outstanding of HyComp, Inc. ("HyComp"), a public company, by means of an
exchange of the Company's common stock for HyComp common stock held by Metraplex
Corporation and various other officers and directors of HyComp. HyComp is a
manufacturer of thin film hybrid circuits for industrial, medical and military
customers. In May 1996, the Company acquired additional common shares of HyComp,
which increased the Company's ownership percentage to 90.7%. Also in May 1996,
the Company acquired 96.1% of the preferred shares outstanding of HyComp. Each
of these transactions was an exchange of the Company's common stock for the
respective HyComp stock at recorded amounts that approximate fair value. As the
result of the exercise of certain HyComp stock options in 1997, the Company's
ownership of the common shares outstanding of HyComp was reduced to 88.5%.

         On March 31, 1999, the Company sold substantially all of the assets and
liabilities of its HyComp, Inc. subsidiary in exchange for $750,000 in cash and
a royalty on 1999 revenues generated from HyComp's existing customer base in
excess of a specified amount. The transaction resulted in a gain of $331,000.
(See Note 15.)

         In October 1999, the Company sold its interest in the outstanding
common and preferred stock of HyComp in exchange for $118,000. A gain in the
same amount was recorded in 1999 as HyComp, subsequent to the asset sale noted
above, was essentially a shell company with no significant assets or
liabilities.
(See Note 15.)

XCEL ARNOLD CIRCUITS

         On January 9, 1998, the Company entered into a definitive agreement to
sell certain of the assets of its XCEL Arnold Circuits, Inc. subsidiary
("XACI"), a manufacturer of multi-layer bare printed circuit boards, to Arnold
Circuits, Inc., a company wholly owned by Robert Bertrand. Mr. Bertrand, the
Trustee of The Bertrand Family Trust, was a beneficial owner of more than five
percent (5%) of the Company's outstanding common stock as of December 31, 1998.
On April 9, 1998, the Company completed the sale and received $1,350,000 in cash
and a note receivable ("Note") aggregating $650,000, which was payable over
three years. As security for the Note, XCEL Arnold Circuits, Inc. was granted a
second lien on substantially all the assets of Arnold Circuits, Inc. As further
security for the Note, XACI was granted a security interest in 250,000 warrants
to purchase the Company's common stock, which were held by Mr. Bertrand. Payment
of the Note was guaranteed by Mr. Bertrand and a related entity. The sale
resulted in a gain of $580,000. (See Note 15.)

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

                                      F-14




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

DIGITAL TRANSMISSION SYSTEMS

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

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

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

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

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

                                      F-15




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         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 has accrued an additional estimate of $49,000 for certain severance
and relocation costs related to Belix. The severance and relocation affected
various manufacturing, administrative and accounting personnel and was
substantially completed as of December 31, 2000. The Company also incurred
approximately $107,000 of legal and other expenses related to the acquisition.
The Company has included the expenses and accrual in the calculation of the cost
of the acquisition. Subsequent to the closing date, the purchase price was
reduced by $181,000 due to a shortfall in net assets per the purchase agreement.
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
                                                                     ===========

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

                                      F-16




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         The acquisition of Belix has been accounted for as a purchase by the
Company and resulted in approximately $1.2 million of goodwill which is being
amortized on a straight-line basis over ten years. Belix is located in England,
U. K. and is in the business of manufacturing power supplies for various
applications. Belix has been integrated into the Company's existing power supply
producer, XCEL Power Systems, Ltd. Belix's assets consist mostly of accounts
receivable, inventories and fixed assets. All dollar amounts indicated in this
paragraph are derived from the conversion of British pounds into U. S. dollars
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
                                                                     ===========

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

                                      F-17




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

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

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

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

         Unaudited pro forma results of operations for the years ended December
31, 2000 and 1999, as if T-Com and the Company had been combined as of the
beginning of the year, follow. The pro forma results include estimates and
assumptions which management believes are reasonable. However, pro forma results
do not include any anticipated cost savings or other effects of the planned
integration of T-Com and the Company, and are not necessarily indicative of the
results 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, 2001, 2000 AND 1999

                                                         PRO FORMA YEAR
                                                       ENDED DECEMBER 31
(thousands except per share data)                  2000                  1999
--------------------------------------------------------------------------------
Net sales.....................................    $29,680              $29,152
Income (loss) from continuing operations......      1,255               (8,734)
Net income (loss).............................        556               (9,132)
Net income per common share
   Basic......................................      0.03                (0.55)
   Diluted....................................      0.02                (0.55)
--------------------------------------------------------------------------------

XCEL ETCH TEK

         On November 15, 2000, the Company sold substantially all of the assets
of XCEL Etch Tek ("Etch Tek"), a wholly owned subsidiary of XET, to a former
employee in exchange for $260,000 in cash, a $50,000 note receivable and the
assumption of $75,000 of liabilities. The note receivable bears interest at 8%
per annum, and all principal and interest was due in November 2001. The balance
due under the note receivable was approximately $34,000 and $50,000 at December
31, 2001 and 2000, 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 2002. 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:

                                                      2001             2000
                                                      ----             ----
Raw materials.................................     $2,806,000        $2,777,000
Work-in-process...............................      2,879,000         1,914,000
Finished goods................................      1,748,000         1,607,000
                                                   -----------       -----------
                                                   $7,433,000        $6,298,000
                                                   ===========       ===========

         Included in the amounts above is an allowance for inventory
obsolescence of $1,152,000 and $1,169,000 at December 31, 2001 and 2000,
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. During the fourth quarter of 2001, the Company
evaluated its inventory reserves and reduced the reserves by $175,000.

                                      F-19




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(5)      PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

                                                      2001               2000
                                                      ----               ----
Land and buildings...........................    $   266,000        $   279,000
Machinery, equipment and fixtures............      3,508,000          3,223,000
Leasehold improvements.......................        449,000            451,000
                                                 ------------       ------------
                                                   4,223,000          3,953,000
Accumulated depreciation.....................     (3,465,000)        (3,144,000)
                                                  -----------       ------------
                                                 $   758,000        $   809,000
                                                 ============       ============

(6)      INVESTMENT IN PARTNERSHIP

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

         In August 1999, the Company sold its interest in the partnership and
the note receivable to an unrelated party in exchange for $75,000. In connection
with this agreement, all associated liabilities were assumed by the purchaser
and all of the Company's unpaid rent in the amount of approximately $152,000 was
forgiven. Additionally, the Company's obligation under the long-term lease was
terminated. In connection with the sale of its investment in partnership, the
Company recognized a loss of $90,000, which is included in gain (loss) on sale
of subsidiary/investment in the accompanying 1999 consolidated statement of
operations.

(7)      NOTES PAYABLE

         A summary of notes payable is as follows:

                                                      2001             2000
                                                      ----             ----
Line of credit with a U.S. commercial lender...   $1,420,000        $1,798,000
Lines of credit with foreign banks.............    2,198,000         1,863,000
                                                  ----------        -----------
                                                  $3,618,000        $3,661,000
                                                  ===========       ===========

         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

                                      F-20




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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
Corporation, together with MicroTel acting as guarantor, obtained a credit
facility from Wells Fargo Business Credit, Inc. This facility provides for a
revolving loan of up to $3,000,000 secured by the Company's inventory and
accounts receivable and a term loan in the amount of $687,000 secured by the
Company's machinery and equipment. The Company's President and CEO provided a
limited personal guarantee on these loans. As consideration for this guarantee,
the President and CEO received a guarantee fee, approved by the board of
directors, in the amount of $35,000. On January 26, 2001, Wells Fargo Business
Credit Inc. released the guarantee. No further amounts are due in connection
with this guarantee. The annual interest rate on both portions of the credit
facility is the prime rate (4.75% at December 31, 2001) 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 during 2001 was 13.2%.
Effective April 1, 2001, the annual interest rate was reduced from the prime
rate plus 2% to the prime rate plus 1%, and the minimum interest charge was
reduced from $15,000 per month to $13,500 per month because the Company met or
exceeded certain performance-based goals for 2000. On December 31, 2001, the
balance outstanding under the revolving loan was $1,420,000, and there was
$91,000 of additional borrowings available under the revolving loan. The credit
facility contains restrictive financial covenants that are set by mutual
agreement of the Company and its lender each year. At December 31, 2001, the
Company was out of compliance with a financial covenant and had obtained a
waiver from its lender. As of February 25, 2002, the covenants for 2002 had not
yet been set. The credit facility expires August 16, 2003.

         The Company's foreign subsidiaries have obtained credit facilities with
Lloyds Bank in England, Banc National de Paris, Societe Generale and Banque
Hervet in France and Johan Tokyo Credit Bank in Japan. The Company's U.K.
subsidiary has a bank line of credit expiring March 31, 2002, with totals of
$1,665,000 and $1,377,000 outstanding at December 31, 2001 and 2000,
respectively. Borrowings under the related agreement bear interest at the bank's
base rate (4% at December 31, 2001) plus 2.5% and are based on eligible accounts
receivable. No additional borrowings were available under the line at December
31, 2001. The Company's U.K. subsidiary was out of compliance with a financial
covenant at December 31, 2001. The lender has indicated its intention to issue a
waiver for any covenant breach and, accordingly, the long-term portion of the
debt has not been reclassified as a current liability. However, if the waiver is
not issued, the lender may pursue any and all available remedies, including
acceleration of the maturity date of the loan.

         The Company's French subsidiary has four bank lines of credit with
totals of $533,000 and $486,000 outstanding at December 31, 2001 and 2000,
respectively. Borrowings under the related agreements bear interest at 5.9% to
8.9% at December 31, 2001 and are based on eligible accounts receivable.
Approximately $542,000 of borrowings were available under the lines of credit at
December 31, 2001. These lines of credit have no maturity date but are subject
to cancellation upon 30 days' notice by the lenders.

         The Company borrowed $250,000 from a third party on a short-term basis
on December 31, 1998. This loan bore interest at 10% and was repaid in 1999. In
addition, the Company had an outstanding note with a balance of $250,000 at
December 31, 1998 in connection with the sale of its XCEL Arnold Circuits, Inc.
subsidiary (Note 3). This loan bore no interest and was payable on demand.
During 1999, the balance of the outstanding note payable was offset against the
note receivable received in connection with the sale of XCEL Arnold Circuits
(Note 3). The note payable and note receivable related to XCEL Arnold Circuits
were entered into with an individual who beneficially owned approximately 5% of
the Company's common stock.

                                      F-21




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(8)      LONG-TERM DEBT

         A summary of long-term debt follows:

                                                       2001             2000
                                                       ----             ----
Term notes payable to commercial lender (a).....    $ 232,000          $370,000
Term notes payable to foreign banks (b).........      760,000            41,000
Capitalized lease obligations (c)...............      172,000           129,000
Other promissory notes..........................      149,000           356,000
                                                    ----------         ---------
                                                    1,313,000           896,000
Current portion.................................     (550,000)         (614,000)
                                                    ----------         ---------
                                                    $ 763,000          $282,000
                                                    ==========         =========
---------------
         (a)      Two term notes payable to Wells Fargo Business Credit, Inc.
                  bearing interest at the lender's prime rate (4.75% at December
                  31, 2001) 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, 2003.

         (b)      The Company has agreements with several foreign banks that
                  include term borrowings that mature at various dates from 2002
                  through 2006. Interest rates on the borrowings bear interest
                  at rates ranging from 2.9% to 8.9% and are payable in monthly
                  installments. Included in the term notes payable to foreign
                  banks is a $101,000 note with a balance of $5,000 at December
                  31, 2001, which note is guaranteed by Tokyo Credit Guarantee
                  Corporation on behalf of the Company's Japanese subsidiary.
                  The term borrowings are collateralized by the assets of the
                  respective subsidiary. The Company's U.K. subsidiary was out
                  of compliance with a financial covenant at December 31, 2001.
                  The lender has indicated its intention to issue a waiver for
                  any covenant breach and, accordingly, the long-term portion of
                  the debt has not been reclassified as a current liability.
                  However, if the waiver is not issued, the lender may pursue
                  any and all available remedies, including acceleration of the
                  maturity date of the loan.

         (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 through 2004.

                                      F-22




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         Principal maturities related to long-term debt as of December 31, 2001
are as follows:

                   Year Ending December 31,                      Amount
                   ------------------------                      ------
                             2002                             $    550,000
                             2003                                  327,000
                             2004                                  207,000
                             2005                                  146,000
                             2006                                   83,000
                                                              -------------
                                                              $  1,313,000
                                                              =============

(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
and expiring May 22, 2001. The Company has ascribed an estimated fair value to
these warrants (based upon a Black-Scholes pricing model with the following
assumptions: no dividend yield; expected volatility of 28%; risk-free interest
rate of 5.1%; and an expected life of 3 years) aggregating $163,000 and
accordingly has reduced the convertible redeemable preferred stock balance as of
the date of issuance.

         The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. Under the
original certificate of designation, the 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

                                      F-23




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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.

         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.

                                      F-24




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         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.

         The following table reflects the convertible redeemable preferred stock
activity:

                                                 Number
                                                of Shares          Amount
                                                ---------          ------
Balance at December 31, 1998                       161.0      $  1,516,000
Conversion to common stock                        (101.5)         (969,000)
Accretion of preferred stock                          --            41,000
                                               ----------     -------------
Balance at December 31, 1999                        59.5           588,000
Conversion to common stock                         (34.5)         (349,000)
Accretion of preferred stock                          --            20,000
                                               ----------     -------------
Balance at December 31, 2000                        25.0           259,000
Conversion to common stock                            --                --
Accretion of preferred stock                          --            11,000
                                               ----------     -------------
Balance at December 31, 2001                        25.0      $    270,000
                                               ==========     =============

(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.

                                      F-25




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

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

         The following table shows activity in the outstanding options for the
years ended December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                    2001        Average Exercise     2000               1999
                                                   Shares            Price          Shares             Shares
                                                   ------            -----          ------             ------
<S>                                              <C>                  <C>          <C>                <C>
Outstanding at beginning of year                 1,454,000            $1.34        1,602,000          2,069,000
Granted                                            345,000             0.41          235,000            430,000
Exercised                                               --               --          (90,000)                --
Canceled                                           (81,000)            0.64         (293,000)          (897,000)
                                              -------------------------------------------------------------------
Outstanding at end of year                       1,718,000            $1.18        1,454,000          1,602,000
                                              ===================================================================
</TABLE>

                                      F-26




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         The following table summarizes information with respect to stock
options at December 31, 2001:

<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                2001                 (Years)                Price              2001            Price
    -----------       ----------------   -----------------------     -----------     ----------------   --------
<C>                       <C>                      <C>                    <C>            <C>                 <C>
$0.20 to $1.00              835,000                8.6                    $0.35            625,000           $0.34
$1.01 to $2.00              761,000                3.5                    $1.80            761,000           $1.80
$2.01 to $3.00               35,000                3.8                    $2.79             35,000           $2.79
$3.01 to $4.00               87,000                3.2                    $3.16             87,000           $3.16
                      ------------------                                             -----------------
$0.20 to $4.00            1,718,000                6.0                    $1.18          1,508,000           $1.20
                      ==================                                             =================
</TABLE>

         The fair value of options granted during 2001 was $115,000, at a
weighted average value of $0.41 per share. The fair value of options granted
during the years ended December 31, 2000 and 1999 were $113,000 and $63,000, at
weighted average prices of $0.48 and $0.15 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 2001, 2000 and 1999 has been estimated
based on a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 89% to 95% in 2001, 101% in 2000 and 85%
in 1999, based on historical results; risk-free interest rate of 5.0% to 6.0%;
and average expected lives of approximately seven to ten years.

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

<TABLE>
<CAPTION>
                                                      2001              2000               1999
                                                      ----              ----               ----
<S>                                               <C>                 <C>               <C>
NET INCOME (LOSS)
       As reported                                $     327           $ 1,004           $ (4,596)
       Pro forma                                  $     211           $   909           $ (4,628)

NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS
       As reported                                $     316           $   984           $ (4,637)
       Pro forma                                  $     200           $   889           $ (4,669)

BASIC EARNINGS (LOSS) PER SHARE
       As reported                                $    0.02           $  0.05          $   (0.28)
       Pro forma                                  $    0.01           $  0.05          $   (0.28)

DILUTED EARNINGS (LOSS) PER SHARE
       As Reported                                $    0.01           $  0.04          $   (0.28)
       Pro forma                                  $    0.01           $  0.04          $   (0.28)
</TABLE>

         Additional incremental compensation expense includes the excess of fair
values of options granted during the year over any compensation amounts recorded
for options whose exercise prices were less than market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification

                                      F-27




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. The
above calculations include the effects of all grants in the years presented.
Because options often vest over several years and additional awards are made
each year, the results shown above may not be representative of the effects on
net income (loss) in future years.

         The Board of Directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key employees
and other parties as follows:
<TABLE>
<CAPTION>
                                                                            Warrant Price
                                                     Number        --------------------------------
                                                    of Shares         Per Share           Total
                                                    ---------         ---------           -----
<S>                                                <C>             <C>                 <C>
Balance outstanding, December 31, 1998              4,542,000      $0.66 to 3.79       $9,511,000
Warrants issued                                     2,865,000       0.25 to 1.38        2,199,000
Warrants expired/cancelled                         (1,925,000)      0.60 to 2.50       (2,015,000)
                                                 -------------------------------------------------
Balance outstanding at December 31, 1999            5,482,000       0.25 to 3.79        9,695,000
Warrants issued                                     1,784,000       0.61 to 1.90        2,023,000
Warrants expired/cancelled                         (4,317,000)      0.61 to 3.79       (9,602,000)
Warrants exercised                                   (777,000)      0.25 to 0.69         (413,000)
                                                 -------------------------------------------------
Balance outstanding at December 31, 2000            2,172,000       0.25 to 2.50        1,703,000
Warrants issued                                       100,000       0.25 to 0.39           33,000
Warrants expired/cancelled                           (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
                                                 =================================================
</TABLE>

         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 a 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).

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

                                      F-28




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         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, 2000 and 1999, 900,
1,000 and 5,000 shares, respectively, were issued pursuant to the plan. The
Company terminated this plan effective as of July 1, 2001.

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

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

         As of December 31, 2001, the Company was authorized to issue 50,000,000
shares of common stock. As of that date, the Company had 20,670,703 shares of
common stock outstanding and 6,453,955 shares of common stock that could become
issuable pursuant to the exercise of outstanding stock options and warrants and
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 its 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.

NASDAQ DELISTING

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

                                      F-29




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(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.

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

                                  2001              2000              1999
                                  ----              ----              ----
Domestic                      $718,000         $2,658,000      $(3,556,000)
Foreign                       (370,000)          (924,000)        (514,000)
                          ----------------------------------------------------
Total                         $348,000         $1,734,000      $(4,070,000)
                          ====================================================

         Income tax expense consists of the following:

                                  2001              2000               1999
                                  ----              ----               ----
Current
    Federal                   $  5,000           $ 20,000          $     --
    State                        5,000              3,000            30,000
    Foreign                     67,000              8,000            98,000
                          ----------------------------------------------------
                              $ 77,000           $ 31,000          $128,000
                          ====================================================

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

<TABLE>
<CAPTION>
                                                              2001                 2000                  1999
                                                              ----                 ----                  ----
<S>                                                     <C>                    <C>               <C>
Tax at U.S. federal statutory rate                      $  118,000             $ 590,000         $ (1,384,000)
State taxes, net of federal income tax benefit               5,000                 3,000               30,000
Foreign income taxes                                        67,000                 8,000               98,000
Losses with no current benefit                                  --                    --            1,314,000
Permanent differences                                       54,000                88,000               70,000
Utilization of net operating losses                       (167,000)             (658,000)                  --
                                                      --------------------------------------------------------------
                                                        $   77,000             $  31,000         $    128,000
                                                      ==============================================================
</TABLE>

                                      F-30




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         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>
                                                             2001                 2000
                                                             ----                 ----
<S>                                                     <C>                   <C>
Deferred tax assets:
    Allowance for doubtful accounts                     $      60,000         $     14,000
    Inventory reserves and uniform capitalization             213,000              312,000
    Other accrued liabilities                                 453,000              387,000
    Deferred compensation                                     182,000              241,000
    Research credit carryforwards                             224,000              256,000
    Alternative Minimum Tax credit carryforwards              135,000              154,000
    Net operating loss carryforwards                       10,732,000           14,957,000
                                                        ------------------------------------
Total deferred tax assets                                  11,999,000           16,321,000
Valuation allowance for deferred tax assets               (11,999,000)         (16,321,000)
                                                        ------------------------------------
Net deferred tax assets                                 $          --         $         --
                                                        ====================================
</TABLE>

         As of December 31, 2001, the Company had a federal net operating loss
carryforward of approximately $31,000,000 which expires at various dates through
2021 and a state net operating loss carryforward of approximately $3,000,000
which expires at various dates through 2004.

         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.

                                      F-31




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(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>
                                                                        2001             2000              1999
                                                                        ----             ----              ----
<S>                                                               <C>               <C>              <C>
NUMERATOR:
Net income (loss)                                                 $     327,000     $   1,004,000    $  (4,596,000)
     Less: accretion of the excess of the redemption value over
     the carrying value of redeemable preferred stock                    11,000            20,000           41,000
                                                                  --------------------------------------------------
Income (loss) attributable to common stockholders                 $     316,000     $     984,000    $  (4,637,000)
                                                                  ==================================================
DENOMINATOR:
Weighted average number of common shares outstanding during the
   period                                                            20,594,000        19,504,000       16,638,000
Incremental shares from assumed conversions of warrants,
   options and preferred stock                                        3,188,000         3,523,000               --
                                                                  --------------------------------------------------
Adjusted weighted average shares                                     23,782,000        23,027,000       16,638,000
                                                                  ==================================================
Basic earnings (loss) per share                                   $        0.02     $        0.05    $       (0.28)
                                                                  ==================================================
Diluted earnings (loss) per share                                 $        0.01     $        0.04    $       (0.28)
                                                                  ==================================================
</TABLE>

         The following table shows the common stock equivalents that were
outstanding as of December 31, 2001 and 2000 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, or the effect of the
conversion would be anti-dilutive:

                                              Number of         Exercise Price
                                                Shares             Per Share
                                                ------             ---------
Anti-dilutive common stock options:
    As of December 31, 2001                   1,243,324       $0.4600 to $3.4375
    As of December 31, 2000                     888,924       $1.1250 to $3.4375
Anti-dilutive common stock warrants:
    As of December 31, 2001                   1,149,881       $0.6250 to $2.5000
    As of December 31, 2000                   1,171,875       $0.7500 to $2.5000

         The computation of diluted loss per share for 1999 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 2005. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2001, 2000 and 1999, was approximately $1,091,000, $956,000
and $1,454,000, respectively.

                                      F-32




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

         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
                        ------------------------                 ----------
                                  2002                           $  785,000
                                  2003                              158,000
                                  2004                               97,000
                                  2005                                1,000
                                                                 -----------
                                                                 $1,041,000
                                                                 ===========
LITIGATION

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

   SCHEINFELD v. MICROTEL INTERNATIONAL, INC.

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

         During the third quarter of 1999, the Company entered into a settlement
agreement with David Scheinfeld. The Company agreed to pay $75,000 payable in an
initial payment of $6,250 and eleven monthly payments of $6,250 thereafter
without interest. The unpaid amount due as of December 31, 1999, aggregating
$50,000, was paid in full in 2000.

                                      F-33




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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 $16,000, $21,000 and
$31,000 to the 401(k) Plan for the calendar years ended December 31, 2001, 2000
and 1999, 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.

         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.

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

         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 $127,000, $173,000 and $167,000 for the years ended
December 31, 2001, 2000 and 1999, 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.

                                      F-34




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

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

<TABLE>
<CAPTION>
                                            2001             2000             1999
                                            ----             ----             ----
<S>                                    <C>             <C>                 <C>
SALES TO EXTERNAL CUSTOMERS:
     Telecommunications                $  14,777,000   $  15,658,000       $  15,666,000
     Electronic Components                12,646,000      12,392,000          10,247,000
                                       --------------------------------------------------
                                       $  27,423,000   $  28,050,000       $  25,913,000
                                       ==================================================
INTERSEGMENT SALES:
     Telecommunications                $          --   $          --       $          --
     Electronic Components                        --              --             279,000
                                       --------------------------------------------------
                                       $          --   $          --       $     279,000
                                       ==================================================
INTEREST EXPENSE:
     Telecommunications                $     158,000   $     131,000       $     110,000
     Electronic Components                   228,000         216,000              75,000
                                       --------------------------------------------------
                                       $     386,000   $     347,000       $     185,000
                                       ==================================================
DEPRECIATION AND AMORTIZATION:
     Telecommunications                $     322,000   $     528,000       $     490,000
     Electronic Components                   279,000         173,000             101,000
                                       --------------------------------------------------
                                       $     601,000   $     701,000       $     591,000
                                       ==================================================
SEGMENT PROFITS (LOSSES):
     Telecommunications                $     450,000   $     344,000       $  (1,739,000)
     Electronic Components                 2,882,000       3,365,000           1,168,000
                                       --------------------------------------------------
                                       $   3,332,000   $   3,709,000       $    (571,000)
                                       ==================================================
SEGMENT ASSETS:
     Telecommunications                $   8,317,000   $   9,901,000       $   7,960,000
     Electronic Components                 9,060,000       8,876,000           5,327,000
                                       --------------------------------------------------
                                       $  17,377,000   $  18,777,000       $  13,287,000
                                       ==================================================
</TABLE>

                                      F-35




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                                        2001             2000              1999
                                                                        ----             ----              ----
<S>                                                                 <C>              <C>              <C>
Net Sales
---------
   Total sales for reportable segments                              $27,423,000      $ 28,050,000     $ 26,192,000
   Elimination of intersegment sales                                         --                --         (279,000)
                                                                  --------------------------------------------------
Total consolidated revenues                                         $27,423,000      $ 28,050,000     $ 25,913,000
                                                                  ==================================================

Profit (loss) from continuing operations
----------------------------------------
   before income taxes
   -------------------
     Total profit (loss) for reportable segments                    $ 3,332,000      $  3,709,000     $   (571,000)
     Unallocated amounts:
       General corporate expenses                                   $(2,984,000)       (1,975,000)      (3,499,000)
                                                                  --------------------------------------------------
Consolidated income (loss) from continuing operations before
   income taxes                                                     $   348,000      $  1,734,000     $ (4,070,000)
                                                                  ==================================================

Assets
------
   Total assets for reportable segments                             $17,377,000      $ 18,777,000     $ 13,287,000
   Other assets                                                         311,000           707,000        3,202,000
                                                                  --------------------------------------------------
Total consolidated assets                                           $17,688,000      $ 19,484,000     $ 16,489,000
                                                                  ==================================================

Interest Expense
----------------
   Interest expense for reportable segments                         $   386,000      $    347,000     $    185,000
   Other interest expense                                                10,000            77,000          226,000
                                                                  --------------------------------------------------
Total interest expense                                              $   396,000      $    424,000     $    411,000
                                                                  ==================================================

Depreciation and Amortization
-----------------------------
Depreciation and amortization expense
   for reportable segments                                          $   601,000      $    701,000     $    591,000
   Other depreciation and amortization expense                          114,000            82,000          190,000
                                                                  --------------------------------------------------
Total depreciation and amortization                                 $   715,000      $    783,000     $    781,000
                                                                  ==================================================
</TABLE>

                                      F-36




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

                                   2001             2000              1999
                                   ----             ----              ----
Net sales:
----------
    United States              $12,461,000       $13,246,000      $ 9,490,000
    Japan                        1,085,000           941,000          658,000
    France                       7,848,000         9,118,000       10,958,000
    United Kingdom               6,029,000         4,745,000        4,807,000
                              -------------------------------------------------
                               $27,423,000       $28,050,000      $25,913,000
                              =================================================
Long-lived assets:
------------------
    United States              $   422,000       $   418,000      $   371,000
    Japan                           14,000            14,000           16,000
    France                         186,000           251,000          257,000
    United Kingdom                 136,000           237,000          190,000
                              -------------------------------------------------
                               $   758,000       $   920,000      $   834,000
                              =================================================

         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 more
than 10% 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 (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 $127,000, $173,000
and $167,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
XCD has been retained and is now included in the electronics components segment.
Accordingly, all current and prior financial information related to the circuits
segment operations (XCEL Etch Tek, HyComp and XCEL Arnold) has been presented as
discontinued operations in the accompanying consolidated financial statements.

         Summarized results of operations for the discontinued operations for
2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                      2001             2000            1999
                                                      ----             ----            ----
<S>                                                <C>             <C>            <C>
Net sales                                          $         --    $ 2,257,000    $ 2,388,000
                                                   =============================================
Operating income (loss)                            $     56,000    $  (212,000)   $  (847,000)
                                                   =============================================
Gain (loss) on sale of discontinued operations     $         --    $  (487,000)   $   449,000
                                                   =============================================
</TABLE>

                                      F-37




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

                                                   2001             2000
                                                   ----             ----
Accounts payable and accrued expenses                  --           15,000
                                               --------------------------------
Total liabilities                                      --           15,000
                                               ================================

Net liabilities of discontinued operations     $       --         $(15,000)
                                               ================================

(16)     NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board ("FASB")
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.

         SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

         The Company's previous business combinations were accounted for using
the purchase method. As of December 31, 2001, the net carrying amount of
goodwill was $2,389,000. Amortization expense related to goodwill during 2001
was $345,000. Currently, the Company is assessing but has not yet determined how
the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.

         In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144
requires that those 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
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.

                                      F-38




<PAGE>

                  MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(17)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a summary of the quarterly operations for the years
ended December 31, 2001 and 2000 (in thousands, except for per share data).

<TABLE>
<CAPTION>

                   2001                      Mar. 31     June 30     Sept. 30     Dec. 31
                   ----                      -------     -------     --------     -------
<S>                                           <C>         <C>         <C>          <C>
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

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

</TABLE>

                                      F-39




<PAGE>
<TABLE>
                            MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
                                      CONSOLIDATED SCHEDULE II
                                  VALUATION AND QUALIFYING ACCOUNTS
                            YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<CAPTION>

                                                              Additions
                                               Balance at     Charged to   Transfers to    Deductions
                                              Beginning of    Costs and    Discontinued   Write-offs of   Balance at
                Description                       Year         Expenses      Operations      Accounts    End of Year
                -----------                       ----         --------      ----------      --------    -----------

<S>                                            <C>             <C>         <C>              <C>            <C>
Allowance for doubtful accounts:
     Year ended December 31, 2001              $   111,000     $  216,000  $         --     $ (101,000)    $  226,000
     Year ended December 31, 2000                  191,000         47,000            --       (127,000)       111,000
     Year ended December 31, 1999                  258,000         36,000         6,000       (109,000)       191,000
                                               ===========     ==========  =============    ===========    ==========

Allowance for inventory obsolescence:
     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
     Year ended December 31, 1999                1,760,000      1,145,000        (1,000)    (1,523,000)     1,381,000
                                               ===========     ==========  =============    ===========    ==========
</TABLE>

                                                     F-40




<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)

                                       62




<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)

                                       63




<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)

                                       64




<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)

21.1     Subsidiaries of the Registrant (15)

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

                                       65




<PAGE>

---------------
(#)      Management contract or compensatory plan, contract or arrangement
         required to be filed as an exhibit.
(1)      Incorporated by reference to the Registrant's current report on Form
         8-K for January 6, 1997 filed January 21, 1997 (File No. 1-10346)
(2)      Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 1997 (File No. 1-10346)
(3)      Incorporated by reference to the Registrant's interim report on Form
         10-Q for the three months ended March 31, 1999 (File No. 1-10346)
(4)      Incorporated by reference to the Registrant's quarterly report on Form
         10-Q for the quarter ended June 30, 2000 (File No. 1-10346)
(5)      Incorporated by reference to the Registrant's quarterly report on Form
         10-Q for the quarter ended September 30, 2000 (File No. 1-10346)
(6)      Incorporated by reference to the Registrant's current report on Form
         8-K for November 15, 2000 (File No. 1-10346)
(7)      Incorporated by reference to the Registrant's annual report on Form
         10-K for the year ended December 31, 1999 (File No. 1-10346)
(8)      Incorporated by reference to the Registrant's interim report on Form
         10-Q for the six months ended June 30, 1998 (File No. 1-10346)
(9)      Incorporated by reference to the Registrant's registration statement on
         Form S-8 (Registration Statement No. 333-12567)
(10)     Incorporated by reference to the Registrant's definitive proxy
         statement for the annual meeting of stockholders to be held June 11,
         1998 (File No. 1-10346)
(11)     Incorporated by reference to the Registrant's definitive proxy
         statement for the special meeting of stockholders to be held January
         16, 2001 (File No. 1-10346)
(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)

                                       66




<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 1st day of
April, 2002.

                                          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,             April 1, 2002
------------------------------------           Chief Executive Officer (Principal
Carmine T. Oliva                               Executive Officer) and Director

/S/ Randolph D. Foote                          Chief Financial Officer                       April 1, 2002
------------------------------------           (Principal Accounting and
Randolph D. Foote                              Financial Officer),
                                               Senior Vice President and
                                               Assistant Secretary

/S/ Robert B. Runyon                           Secretary and Director                        April 1, 2002
------------------------------------
Robert B. Runyon

/S/ Laurence P. Finnegan, Jr.                  Director                                      April 1, 2002
------------------------------------
Laurence P. Finnegan, Jr.

</TABLE>

                                       67




<PAGE>

                         EXHIBITS FILED WITH THIS REPORT

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

23.1     Consent of Independent Certified Public Accountants

                                       68