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                UNITED STATES 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, 1998
                                       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: 001-12925
 
                         GENERAL INSTRUMENT CORPORATION
 
             (Exact name of registrant as specified in its charter)
 
                           --------------------------
 
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<S>                                                             <C>
                           DELAWARE                                                       36-4134221
(State or other jurisdiction of incorporation or organization)               (I.R.S. Employer Identification No.)
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<S>                                            <C>
 101 TOURNAMENT DRIVE, HORSHAM, PENNSYLVANIA     19044
  (Address of principal executive offices)       (Zip
                                                 Code)
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                                 (215) 323-1000
              (Registrant's telephone number, including area code)
 
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          Securities registered pursuant to Section 12(b) of the Act:
 
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Title of each class                                                                        Name of each exchange on which registered
<S>                                                                         <C>
Common Stock, par value $.01 per share                                                                       New York Stock Exchange
Preferred Stock Purchase Rights                                                                              New York Stock Exchange
</TABLE>
 
        Securities registered pursuant to Section 12(g) of the Act: NONE
 
                           --------------------------
 
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 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 / /   No /X/
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
 
The aggregate market value of the shares of Common Stock held by non-affiliates
of the registrant was approximately $4.5 billion as of March 15, 1999 (based on
the closing price for the Common Stock on the New York Stock Exchange on that
date). For purposes of this computation, shares held by affiliates and by
directors and officers of the registrant have been excluded. Such exclusion of
shares held by directors and officers is not intended, nor shall it be deemed,
to be an admission that such persons are affiliates of the registrant. As of
March 15, 1999 there were 177,153,291 shares of the registrant's Common Stock,
par value $0.01 per share, outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission, are
incorporated by reference in Part III hereof.
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                                     PART I
 
ITEM 1. BUSINESS
 
On July 25, 1997, the Company was spun off (the "Distribution") from its former
parent company, General Instrument Corporation (the "Distributing Company"),
under the name "NextLevel Systems, Inc.," through a distribution of the
Company's common stock, par value $.01 per share (the "Common Stock"), to the
stockholders of the Distributing Company. Immediately following the
Distribution, the Distributing Company changed its corporate name to "General
Semiconductor, Inc." ("General Semiconductor"). Effective February 2, 1998, the
Company changed its corporate name from "NextLevel Systems, Inc." to "General
Instrument Corporation." Unless the context otherwise requires, references to
the "Company" or "General Instrument" include General Instrument Corporation and
its direct or indirect subsidiaries and the business of the Company as conducted
by the Distributing Company prior to the Distribution.
 
OVERVIEW
 
The Company is a leading worldwide provider of integrated and interactive
broadband access solutions and, with its strategic partners and customers, is
advancing the convergence of the Internet, telecommunications and video
entertainment industries. The Company is the world's leading supplier of digital
and analog set-top terminals and systems for wired and wireless cable television
networks, as well as hybrid fiber/coaxial network transmission systems used by
cable television operators, and is a provider of digital satellite television
systems for programmers, direct-to-home ("DTH") satellite networks and private
networks for business communications. Through its limited partnership interest
in Next Level Communications L.P. (the "Partnership"), the Company provides
next-generation broadband access solutions for local telephone companies with
the Partnership's NLevel(3)-Registered Trademark-Switched Digital Access System
("NLevel(3)").
 
BUSINESS STRATEGY
 
The Company's strategy is to use its technological leadership in providing
secure broadband systems and equipment to enhance its leading position in its
traditional markets while expanding into new markets. This strategy is based on
the belief that (i) consumers in the United States and international markets
will continue to demonstrate an increasing demand for new information and
entertainment services, and (ii) content and service providers will continue to
create new bandwidth-intensive video, voice and data applications. The Company's
management believes that these factors will generate a continuing need for
systems and equipment with greater capacity for all networks and architectures.
 
  Since December 1997, the Company has entered into several strategic
relationships, including equity investments in the Company by large cable
television multiple systems operators ("MSOs"), which are expected to provide a
strong foundation for future business development and to reinforce the Company's
position as a leading provider of the next generation of broadband
communications equipment and systems.
 
   CABLE CUSTOMER EQUITY OWNERSHIP. The Company has issued warrants to purchase
approximately 29 million shares of Common Stock to leading North American cable
system operators. These warrants were issued in connection with definitive
agreements to supply approximately 15 million digital set-top terminals to such
operators. Included among the cable operators entitled to exercise the warrants
upon the purchase of set-top terminals from the Company are Tele-Communications,
Inc. ("TCI"), Time Warner Cable ("Time Warner"), MediaOne of Delaware, Inc.
("MediaOne"), Comcast Cable Communications, Inc. ("Comcast"), Cox
Communications, Inc. ("Cox"), Adelphia Communications Corporation ("Adelphia"),
Shaw Communications, Inc. ("Shaw"), Jones Intercable, Inc. ("Jones") and Charter
Communications, Inc. ("Charter"). See "- Broadband Network Systems - Digital
Network Systems" and Note 18 to the Consolidated Financial Statements.
 
   SET-TOP AUTHORIZATION SERVICES. The Company issued 21,356,000 shares of its
Common Stock to an affiliate of TCI in connection with the Company's acquisition
of the set-top authorization services business that controls the receipt of
cable programming services delivered to subscribers by TCI's Headend In The
Sky-Registered Trademark-. The Company now provides national authorization
services throughout the United States to cable operators, many with relatively
small individual systems that could not otherwise justify the initial capital
investment required to launch a local digital headend computer control system.
See "- Broadband Network Systems - Digital Network Systems" and Note 7 to the
Consolidated Financial Statements
 
   SONY CORPORATION. The Company has entered into a strategic alliance with Sony
Corporation of America ("Sony") to jointly develop digital television
technologies for cable television devices and high definition television
("HDTV") products. In addition, the Company plans to
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incorporate Sony's Home Network architecture into its advanced digital set-top
terminals. In connection with this strategic alliance, Sony purchased 7.5
million shares of Common Stock.
 
MARKET OVERVIEW
 
The Company has two reportable segments: Broadband Networks Systems (consisting
of digital and analog cable and wireless television systems and transmission
network systems) and Satellite and Broadcast Network Systems.
 
  For financial information about the Company's reportable segments and foreign
and domestic operations see Note 21 to the Consolidated Financial Statements.
 
  Worldwide broadband networks systems sales increased $277 million, or 21%, to
$1,569 million in 1998. For the years ended December 31, 1998 and 1997,
broadband networks systems sales in the U.S. were 84% and 69%, respectively,
combined U.S. and Canadian sales were 86% and 74%, respectively, and all other
international sales were 14% and 26%, respectively, of total worldwide broadband
networks systems sales. Worldwide broadband networks systems sales were $1,180
million in 1996, of which 33% related to international sales.
 
  Worldwide satellite and broadcast network systems sales of $418 million for
the year ended December 31, 1998, decreased $44 million, or 10%, from the
comparable 1997 period. For the years ended December 31, 1998 and 1997,
satellite sales in the U.S. were 86% and 76%, respectively, combined U.S. and
Canadian sales were 98% and 88%, respectively, and all other international sales
were 2% and 12%, respectively, of total worldwide satellite sales. Worldwide
satellite and broadcast network systems sales were $575 million in 1996, of
which 12% related to international sales.
 
BROADBAND NETWORKS SYSTEMS
 
The Company's Broadband Networks product lines are organized as follows within
the Broadband Networks Systems Segment: Digital Network Systems, Advanced
Network Systems, Transmission Network Systems and IP Network Systems.
 
   DIGITAL NETWORK SYSTEMS. The Company is the world's leading supplier of
secure interactive digital cable television delivery systems. The principal
products are: (i) individual network elements, including consumer set-top
terminals and various video, audio and data processing equipment used in cable
operators' headends; (ii) computer equipment, software and services that secure
programming content, download software applications to consumer set-top
terminals, authorize individual subscriber services, enable network management
and provide interfaces to cable operators' billing systems; and (iii) system
integration services for the custom assembly and testing of Company and
third-party hardware and software elements.
 
  North American cable operators began deploying commercial services using the
Company's interactive digital delivery systems in 1996. As of December 31, 1998,
the Company had shipped approximately 700 digital headend systems throughout
North America, passing approximately 34 million homes and over 2.7 million
digital cable and wireless set-top terminals. In addition, the Company's digital
business is beginning to expand into regions beyond North America such as
Europe, the Middle East, Asia/Pacific and Latin America.
 
  Digital compression technology typically allows cable operators to provide 6
to 12 times the number of programs per traditional channel slot than is possible
using analog technology. Initial cable operator demand for the Company's digital
products has resulted from: (i) the cable operators' ability to offer additional
pay-per-view and other programming choices enabled by such digital compression
technology; and (ii) the high quality of digital video/audio, electronic program
guides and the potential to offer a wide range of new interactive applications.
The Company's digital systems and set-top terminals enable Video-on-Demand
("VOD"), impulse Pay-Per-View, Internet access, e-mail, electronic yellow pages,
home shopping, interactive games and educational services. The Company's digital
products are designed with an open architecture so that new interactive software
applications, being developed by third parties, can be downloaded over the cable
network to set-top terminals already installed in consumer homes.
 
  All of the Company's digital cable set-top terminals utilize the digital
transport stream and decode video compliant with the Motion Picture Experts
Group 2 ("MPEG-2") international standard and demodulate
Quadrature-Amplitute-Modulated signals compliant with International
Telecommunications Union international standards. The Company's terminals and
delivery systems also use standards-based interactive communications protocols
and the Company's proprietary access
 
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control technology marketed under the DigiCipher-Registered Trademark- II and
MediaCipher-TM- brand names, as well as decode Dolby Digital-Registered
Trademark- audio. As of December 31, 1998, the Company's digital terminal
shipments have consisted of its DCT-1000, DCT-1200 and DCT-2000 model cable
terminals and DWT-1000 model wireless terminals. All of these set-top products
are two-way terminals capable of real-time, interactive operation using either a
built-in RF return modem or optional telephone return modem. Additionally, all
of these set-top products are compatible with the existing installed base of the
Company's set-top products. Such compatability enhances security, reduces
operating costs and improves bandwidth utilization.
 
  The Company expects to introduce new two-way interactive set-top terminal
models during 1999. The DCT-5000+ model is a high-end terminal that will
capitalize on a built-in Data-Over-Cable-Service/Interoperability Specification
("DOCSIS") compliant cable modem, Internet protocols and a unique triple tuner
architecture to enable consumers to watch television, surf the World Wide Web
and talk on a telephone simultaneously. The DVi-2000 and DVi-5000 models, which
include Digital Video Broadcast Standard ("DVB") compliant technologies such as
Musicam-Registered Trademark- audio decoding, target European and other
international cable operators.
 
  The Company has entered into definitive agreements with leading North American
cable operators to supply approximately 15 million digital set-top terminals,
consistent with the cable industry's OpenCable initiative, over a three to five
year period beginning in 1998, with an estimated value of $4.5 billion. The
Company has issued warrants to purchase approximately 29 million shares of the
Company's Common Stock to these cable operators in connection with such
agreements. Included among these cable operators entitled to purchase set-top
terminals from the Company are TCI, Time Warner, MediaOne, Comcast, Cox,
Adelphia, Shaw, Jones, Charter, Suburban Cable Company, Intermedia Cable and
Bresnan Communications Company, which cable operators have a collective
subscriber base of over 46 million.
 
  In July 1998, the Company completed its acquisition from TCI's affiliates of
certain physical assets and a license of associated intellectual property to
enable it to provide the set-top authorization services that control the receipt
of cable programming services delivered to subscribers by TCI's Headend In The
Sky and other programmers. The Company issued 21,356,000 shares of its Common
Stock to an affiliate of TCI in connection with this acquisition. The Company
now provides national authorization services throughout the United States to
MSOs, many with relatively small individual systems that could not otherwise
justify the initial capital investment required to launch a local digital
headend computer control system. The Company continues to supply its internally
developed DAC-6000 model controller for local and regional authorization systems
solutions for operators with larger individual system subscriber bases.
 
   ADVANCED NETWORK SYSTEMS. The Company is the world's leading provider of
addressable analog set-top systems which enable cable operator control and
subscriber access to a number of advanced entertainment services and features.
The principal products include consumer set-top terminals and the associated
central office headend computer and processing equipment. Use of these
addressable systems enables operators to provide a suite of service offerings,
including: pay-per-view, multiple tiers of programming services, and advanced
video, audio and data entertainment services.
 
  Beginning in early 1995, the Company began shipping its latest generation
Consumer Friendly Terminal system ("CFT"), the CFT2200 interactive advanced
analog system, adding a new level of service offering to the prior analog
platforms. The CFT2200 two-way interactive advanced analog terminal provides
cable operators with the most complete set of services available today over an
analog platform, including Internet access, interactive programming guides,
CD-quality music, near video-on-demand ("NVOD"), supplemental sports and
entertainment information and local information-on-demand. The Company shipped
approximately 2.8 million and 3.2 million CFT advanced analog terminals for the
years ended December 31, 1998 and December 31, 1997, respectively.
 
  The Company sells addressable analog set-top systems throughout the world, and
is the market leader in North and South America, Europe, and Asia with the CFT
advanced platform. The Company estimates that its market share in the U.S.
analog addressable market has exceeded 50% for the last several years, both in
the traditional and advanced product areas. While management expects that the
Company's advanced analog cable products will continue to satisfy cable and
wireless operator
 
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demands worldwide for several years, due to the anticipated increased
availability and use of digital cable products, the Company expects that demand
in North America for its analog cable products will continue to decline.
 
   TRANSMISSION NETWORK SYSTEMS. The Company's transmission products provide
end-to-end solutions that enable the transformation of the traditional cable
television network into a two-way, fiber-rich, high speed voice/ video/data
network. Transmission products include headend signal processing equipment,
distribution amplifiers, fiber optic transmission equipment and passive
components for wired television distribution systems.
 
  The Company's management expects cable television operators in the United
States and abroad to continue to upgrade their basic networks and invest in new
system capacity primarily to compete with other television programming sources,
such as DTH, as well as to capitalize on the rapid growth in demand for new
voice and data services, including high-speed Internet access. Further
opportunities exist internationally where cable penetration is low and demand
for both entertainment and high speed internet access is growing.
 
   IP NETWORK SYSTEMS. The Company's management believes Internet Protocol
("IP")-based high-speed data and telephony solutions over two-way cable networks
present significant growth opportunities for the Company. To best capitalize on
this market, the Company consolidated the management activities of its
high-speed cable modem business with the emerging IP-based telephony business.
The Company's family of Surfboard-Registered Trademark-high-speed cable modems
are capable of delivering information through a cable television network at
speeds significantly faster than a traditional telephony modem, while delivering
instructions and other information upstream from the consumer over either the
telephone lines in one-way systems or utilizing the cable network in two-way
systems. The Company has been a leading proponent of two-way cable modem
networks compliant with interoperable standards based upon DOCSIS and has
entered into a working relationship with Cisco Systems, Inc. ("Cisco") to
further the mass deployment of this technology.
 
  During 1998, the Company intensified its focus on local loop telephony
solutions leveraging the standards-based DOCSIS network infrastructure. AT&T
Corporation ("AT&T") has identified IP telephony as its solution of choice for
providing local telephony service over cable networks. With its relationship
with Cisco, the Company announced in January 1999 its intent to work with AT&T
to develop and bring to market a seamless, end-to-end IP telephony solution. The
Company is developing a broad portfolio of communication gateway products to
enable IP telephony, including an option for the DCT 5000+, a variant of the
Surfboard-Registered Trademark- high-speed data modem, and a point-of-entry
mounted broadband telecommunications interface unit, or "BTI."
 
SATELLITE AND BROADCAST NETWORK SYSTEMS.
 
The Company is a provider of digital satellite television systems for
programmers, DTH satellite network providers and private networks for business
communications and distance learning. The Company offers a broad product line of
digital compression and transmission systems including MPEG-2, DVB and Advanced
Television Systems Committee compliant solutions. The Company also sees an
emerging business opportunity for digital broadcast products related to the
delivery of high definition and standard definition digital video signals by the
cable and broadcast industries.
 
  The Company designs, manufactures and sells analog and digital satellite
uplink and downlink products for commercial and consumer use. Using the
Company's DigiCipher-Registered Trademark- II digital technology, commercial
customers are able to compress their video, audio and data transmissions
resulting in significant cost savings over traditional analog transmission. The
Company also offers state-of-the-art network management and access control
products and services that allow program packagers to efficiently and
cost-effectively manage customer transactions and securely transmit their
programming to only authorized end-users. The Company is the leading
manufacturer of access control and scrambling and descrambling equipment used by
television programmers for the satellite distribution of proprietary
programming. The Company is also a leading supplier of digital satellite systems
to private networks for business communications and distance learning.
 
  In 1998, in support of the government-mandated conversion to digital
terrestrial television, the Company delivered its first commercial high
definition television (HDTV)
 
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encoding and decoding equipment to the CBS Television Network and Home Box
Office (HBO), as well as local television stations in the U.S.
 
  The Company's analog satellite products are the exclusive systems for
distributing encrypted C-band (large dish) satellite-delivered programming to
cable television operators and large-diameter backyard satellite dish owners.
Sales of analog consumer descramblers have declined, as expected, to minimal
levels over the past two years and are expected to continue to decline because
of the availability of competing digital satellite video services. The Company
introduced its first digital descramblers for the backyard C-band market in
1997. This product, called 4DTV-Registered Trademark-, allows C-band dish owners
to take advantage of the wealth of digital programming now being transmitted by
satellite. There can be no assurance, however, as to the degree of market
acceptance of this product. To date, significant quantities of 4DTV have not
been shipped.
 
  The Company is currently the sole supplier of digital satellite receivers and
digital satellite encoders to PRIMESTAR, Inc. ("PRIMESTAR"), representing
approximately 11% of the Company's consolidated net sales for the year ended
December 31, 1998. PRIMESTAR, the second largest provider of satellite
television entertainment in the United States, currently operates a 160 channel
medium-power direct broadcast satellite ("DBS") service. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 21 to the Consolidated Financial Statements.
 
  On January 22, 1999, PRIMESTAR announced that it reached an agreement to sell
its medium-power DBS business and assets as well as its rights to acquire
high-power satellite assets to Hughes Electronics Corporation ("Hughes"). While
the announcement stated that Hughes' DIRECTV expects to operate PRIMESTAR's
medium-power business for a period of approximately two years, during which time
it intends to transition PRIMESTAR subscribers to the high-power DIRECTV
service, the Company is currently uncertain whether and to what extent PRIMESTAR
will continue to order and purchase medium power-equipment from the Company.
Further, the Company does not expect to supply any high-power equipment to
PRIMESTAR. The announcement stated that if the proposed transaction with Hughes
is not consummated for any reason, PRIMESTAR intends to continue its
medium-power business. The loss of PRIMESTAR as a continuing customer of the
Company will have a significant impact on the Company's satellite business.
 
NEXT LEVEL COMMUNICATIONS L.P.
 
The Partnership is a leading provider of next-generation integrated full service
digital loop carrier ("DLC") and fiber-to-the-curb ("FTTC") systems that deliver
telephony, video and data for local telephone companies, including Bell Atlantic
Corporation ("Bell Atlantic") and U S West Communications ("U S West"). The
Partnership's product, NLevel(3), is designed to permit the cost effective
delivery of a suite of standard and advanced telephony services over twisted
pair networks, including high-speed data/Internet, distance learning, video
services as well as basic telephone services, to the home from a single access
platform.
 
  In the fourth quarter of 1996, Next Level Communications ("NLC") entered into
an agreement with a subsidiary of NYNEX Corporation, now Bell Atlantic, pursuant
to which the Partnership will supply its NLevel(3) system for one million lines
of telephone service in metropolitan New York City and Boston. Initial
deployment for the greater Boston area began in the first quarter of 1997. Bell
Atlantic also has options to extend its deployment of the NLevel(3) system to up
to five million lines. In the third quarter of 1997, NLC entered into an
agreement with U S West, pursuant to which the Partnership will supply its
NLevel(3) system for 450,000 lines of broadband xDSL access. In addition, in
July 1998, U S West selected the Partnership to supply DLC and FTTC systems for
the delivery of broadband video, high-speed data/Internet, and basic telephone
services.
 
  In January 1998, the Company transferred the business of NLC, including its
net assets, principally technology, and its management and workforce to the
Partnership in exchange for approximately an 89% limited partnership interest
(subject to additional dilution). An entity controlled by Spencer Trask & Co.,
the operating general partner of the Partnership, acquired approximately an 11%
interest in the Partnership and has the potential to acquire up to an additional
11% in the future. Pursuant to an agreement entered into in July 1998, the
Company agreed to make an additional $50 million equity investment in the
Partnership, which will increase its limited partnership interest to more than
90%. Through
 
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December 31, 1998, the Company paid $16 million of the $50 million equity
investment. The remainder of this investment will be paid during the first half
of 1999. See Note 8 to the Consolidated Financial Statements. Pursuant to the
partnership agreement, the operating general partner controls the Partnership
and is responsible for developing the business plan and infrastructure necessary
to position the Partnership as a stand-alone company.
 
TECHNOLOGY AND LICENSING
 
The management of the Company believes that it is in the unique position of
currently producing the majority of the world's analog-addressable systems,
while also leading the deployment of the digital technology that will eventually
replace these systems. As a result, the Company will seek to build upon its core
enabling technologies, digital compression, encryption and conditional access
and control, in order to lead the transition of the market for broadband
communications networks from analog to digital systems.
 
  The Company has licensed a number of semiconductor manufacturers to allow for
broad deployment of the Company's MPEG-2 system. The Company has also licensed
its DigiCipher-Registered Trademark- II/MPEG-2 technology to other equipment
suppliers.
 
  The Company has also entered into other license agreements, both as licensor
and licensee, covering certain products and processes with various companies.
These license agreements require the payment of certain royalties which are not
expected to be material to the Company's financial statements.
 
RESEARCH AND DEVELOPMENT
 
The Company intends to continue the current policy of actively pursuing the
development of new technologies and applications. Research and development
expenditures for the year ended December 31, 1998 were $244 million (including a
$75 million charge to fully reserve the research and development advance made to
the Partnership, see Note 8 to the Consolidated Financial Statements) compared
to $208 million and $198 million for the years ended December 31, 1997 and 1996,
respectively. The Company's management expects research and development
expenditures to approximate $165 million in 1999. Research and development
expenditures reflect the continued development of the Company's digital set-top
terminals, broadband telephony, cable modems, advanced digital systems for cable
and satellite television distribution and product development through strategic
alliances.
 
SALES AND DISTRIBUTION
 
The Company's broadband communications products and services are marketed
primarily to cable television operators and telephone companies. The Company's
satellite communications products are marketed to satellite television
programmers and providers as well as cable television operators. Demand for the
Company's products will depend primarily on capital spending by cable television
operators, satellite programmers and telephone companies for constructing,
rebuilding or upgrading their systems. The amount of this capital spending and,
therefore, a majority of the Company's sales and profitability, will be affected
by a variety of factors, including general economic conditions, the continuing
trend of consolidation within the cable industry, the financial condition of
domestic cable television system operators and their access to financing,
competition from DTH, satellite, wireless television providers and telephone
companies offering video programming, technological developments and
standardization efforts that impact the deployment of new equipment and new
legislation and regulations affecting the equipment used by cable television
system operators and their customers. While the Company's management believes
that cable television capital spending is likely to increase as cable operators
upgrade their basic networks and move from basic analog to advanced analog and
digital systems, there can be no assurance that such increase from historical
levels will occur or that existing levels will be maintained.
 
  Broadband and satellite communications systems are sold primarily through the
efforts of sales personnel employed by the Company who are skilled in the
technology of the particular system.
 
  Although the domestic cable television industry is comprised of thousands of
cable systems, a small number of MSOs own a majority of cable television systems
and account for a significant portion of the capital expenditures made by cable
television system operators. The loss of business from a significant MSO could
have a material adverse effect on the business of the Company. TCI, including
its affiliates, accounted for 31% of the consolidated net sales of the Company
for the year ended
 
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December 31, 1998. See Note 19 to the Consolidated Financial Statements.
PRIMESTAR accounted for 11% of the consolidated net sales of the Company for the
year ended December 31, 1998. See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 21 to the Consolidated
Financial Statements.
 
PATENTS
 
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that the Company considers important to the
development of its business. Although the Company's management believes that its
patents provide a competitive advantage, the Company will rely equally on its
proprietary knowledge and ongoing technological innovation to develop and
maintain its competitive position.
 
BACKLOG
 
As of December 31, 1998 and December 31, 1997, the Company had a backlog of
approximately $636 million and $484 million, respectively. Backlog includes only
orders for products scheduled to be shipped within six months. Orders may be
revised or canceled, either pursuant to their terms or as a result of
negotiations; consequently, it is impossible to predict accurately the amount of
backlog orders that will result in sales.
 
COMPETITION
 
The Company's products will compete with those of a substantial number of
foreign and domestic companies, some with greater resources, financial or
otherwise, than the Company, and the rapid technological changes occurring in
the Company's markets are expected to lead to the entry of new competitors. The
Company's ability to anticipate technological changes and introduce enhanced
products on a timely basis will be a significant factor in the Company's ability
to expand and remain competitive. Existing competitors' actions and new entrants
may have an adverse impact on the Company's sales and profitability. The Company
believes that it enjoys a strong competitive position because of its large
installed cable television equipment base, its strong relationships with the
major MSOs, its technological leadership and new product development
capabilities, and the likely need for compatibility of new technologies with
currently installed systems. There can be no assurance, however, that
competitors will not be able to develop systems compatible with, or that are
alternatives to, the Company's proprietary technology or systems, or that the
Company will be able to introduce new products and technologies on a timely
basis. In addition, the Partnership is competing in the local telephone access
equipment market with a number of well-established suppliers. There is no
assurance that the Partnership will be successful in this market.
 
RAW MATERIALS
 
The Company purchases raw materials from many sources in the United States, as
well as from sources in the Far East, Canada and Europe and its products include
certain components that are currently available only from single sources. The
Company has in effect inventory controls and other policies intended to minimize
the effect of any interruption in the supply of these components. There is no
single supplier the loss of which would have a continuing material adverse
effect on the Company.
 
ENVIRONMENT
 
The Company is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous materials.
The manufacturing facilities of the Company are believed to be in substantial
compliance with current laws and regulations. Compliance with current laws and
regulations has not had, and is not expected to have, a material adverse effect
on the Company's results of operations and financial condition.
 
EMPLOYEES
 
As of March 1, 1999, approximately 7,800 people were employed by the Company. Of
these employees, approximately 1,900, 2,400 and 3,200 were located at the U.S.,
Taiwan and Mexico facilities, respectively, with the balance located in Europe,
Latin America and the Far East. As of March 1, 1999, approximately 500 of the
Company's employees were covered by collective bargaining agreements. Of these
employees, approximately 300 were located at the Mexican facilities and
approximately 200 were located at facilities in Germany. The management of the
Company believes that its relations with both its union and non-union employees
are satisfactory.
 
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ITEM 2. PROPERTIES
 
The Company has manufacturing, warehouse, sales, research and development and
administrative facilities worldwide which have an aggregate floor space of 1.8
million square feet. Of these facilities, aggregate floor space of approximately
1.1 million square feet is leased and the remainder is owned by the Company. The
management of the Company does not believe that there is any material long-term
excess capacity in the Company's facilities, although utilization is subject to
change based on customer demand. The Company's primary manufacturing facilities
are located in Taiwan and Mexico. The Company also has smaller manufacturing
facilities in San Diego, California, Lewisville, Texas, and Bad Salzdetfurth,
Germany. In addition, the Company leases office space for its sales, marketing
and engineering personnel in the U.S., Europe, Asia, and Latin America. The
Company's corporate headquarters are located in Horsham, Pennsylvania. The
management of the Company believes that the Company's facilities and equipment
generally are well maintained, in good operating condition and suitable for the
Company's purposes and adequate for present operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's common
stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
Distribution, by allegedly making false and misleading statements and failing to
disclose material facts about the Distributing Company's planned shipments in
1995 of its CFT2200 and Digicipher-Registered Trademark- products. Also pending
in the same court, under the same name, is a derivative action brought on behalf
of the Distributing Company. The derivative action alleges that, prior to the
Distribution, the members of the Distributing Company's Board of Directors,
several of its officers and Forstmann Little & Co. and related entities have
breached their fiduciary duties by reason of the matter complained of in the
class action and the defendants' alleged use of material non-public information
to sell shares of the Distributing Company's stock for personal gain. Both
actions seek unspecified damages and attorneys' fees and costs. The court
granted the defendants' motion to dismiss the original complaints in both of
these actions, but allowed the plaintiffs in each action an opportunity to file
amended complaints. Amended complaints were filed on November 7, 1997. The
defendants answered the amended consolidated complaint in the class actions,
denying liability, and filed a renewed motion to dismiss the derivative action.
On September 22, 1998, defendants' motion to dismiss the derivative action was
denied. In November 1998, the defendants filed an answer to the derivative
action, denying liability. On January 21, 1999, the plaintiffs in the class
actions filed their motion for class certification, including the defendants'
opposition. The Company intends to vigorously contest these actions.
 
  An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP.was brought
in February 1996 by certain holders of preferred stock of NLC, which merged into
a subsidiary of the Distributing Company in September 1995. The action was
originally filed in the Northern District of California and was subsequently
transferred to the Northern District of Illinois. The plaintiffs allege that the
defendants violated federal securities laws by making misrepresentations and
omissions and breached fiduciary duties to NLC in connection with the
acquisition of NLC by the Distributing Company. Plaintiffs seek, among other
things, unspecified compensatory and punitive damages and attorneys' fees and
costs. On September 23, 1997, the district court dismissed the complaint,
without prejudice, and the plaintiffs were given until November 7, 1997 to amend
their complaint. On November 7, 1997, plaintiffs served the defendants with
amended complaints, which contain allegations substantially similar to those in
the original complaint. The defendants filed a motion to dismiss parts of the
amended complaint and answered the balance of the amended complaint, denying
liability. On September 22, 1998, the district court dismissed with prejudice
the portion of the complaint alleging violations of Section 14(a) of the
Exchange Act, and denied the remainder of the defendants' motion to
 
                                       8
<PAGE>
dismiss. In November, 1998, the defendants filed an answer to the remaining
parts of the amended complaint, denying liability. The Company intends to
vigorously contest this action.
 
  In connection with the Distribution, the Company has agreed to indemnify
General Semiconductor with respect of its obligations, if any, arising out of or
in connection with the matters discussed in the preceding two paragraphs.
 
  On February 19, 1998, a consolidated securities class action complaint
entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleged that the defendants violated Sections 11 and 15 of
the Securities Act of 1933, as amended (the "Securities Act"), and Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false
and misleading statements about the Company's business, finances and future
prospects. The complaint seeks damages in an unspecified amount. On April 9,
1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May
5, 1998, the defendants moved to dismiss the remaining counts of the complaint.
The Company intends to vigorously contest this action.
 
  On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC
TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS L.P., KK MANAGER, L.L.C.,
GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC Communications Corporation and DSC
Technologies Corporation (collectively, "DSC") alleged that in connection with
the formation of the Partnership and the transfer to it of NLC's switched
digital video technology, the Partnership and KK Manager, L.L.C. misappropriated
DSC's trade secrets; that the Company improperly disclosed trade secrets when it
conveyed such technology to the Partnership; and that Spencer Trask & Co., Inc.
conspired to misappropriate DSC's trade secrets. The plaintiffs sought actual
damages for the defendants' purported unjust enrichment, disgorgement of
consideration, exemplary damages and attorney's fees, all in unspecified
amounts. In April 1998, the Company and the other defendants filed an action in
the United States District Court for the Eastern District of Texas, requesting
that the federal court preliminarily and permanently enjoin DSC from prosecuting
the Delaware Action because by pursuing such action, DSC effectively was trying
to circumvent and relitigate the Texas federal court's November 1997 judgment in
a previous lawsuit involving DSC, pursuant to which NLC had paid $140 million.
On May 14, 1998, the Texas court granted a preliminary injunction preventing DSC
from proceeding with the Delaware Action. That injunction order is now on appeal
to the United States Court of Appeal for the Fifth Circuit where it has been
briefed and awaits determination. On July 6, 1998, the defendants filed a motion
for summary judgment with the Texas court requesting a permanent injunction
preventing DSC from proceeding with this litigation. As a result of the
preliminary injunction, the Delaware Action has been stayed in its entirety. The
Company intends to vigorously contest this action.
 
  In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for
Arbitration against the Company alleging that the Company breached the terms of
a license agreement with StarSight by (a) developing a competing product that
wrongfully incorporates StarSight's technology and inventions claimed within a
certain StarSight patent, (b) failing to promote and market the StarSight
product as required by the license agreement, and (c) wrongfully using
StarSight's technical information, confidential information and StarSight's
graphical user interface in breach of the license agreement. StarSight is
seeking injunctive relief as well as damages (as specified below). The first
part of a bifurcated arbitration proceeding began on March 22, 1999 before an
arbitration panel of the American Arbitration Association in San Francisco,
California. A separate hearing relating to certain of the Company's digital set
top boxes and satellite products will be scheduled for a later date. On January
25, 1999, the Company received a copy of StarSight's Statement of Damages, as
directed by the arbitration panel. This statement identifies purported damages
arising from the sale by the Company of certain analog set top boxes containing
a native electronic program guide. StarSight alleges that it is entitled to
collect $90 million to $177 million in compensatory damages and an unspecified
amount of punitive damages.
 
                                       9
<PAGE>
StarSight is seeking additional damages, including consequential damages,
relating to the Company's digital set top boxes. The Company has denied
StarSight's allegations and intends to vigorously contest this action.
 
  On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND
INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United
States District Court for the Northern District of California. The complaint
alleges infringement by the Company of two U.S. patents allegedly covering
electronic program guides. The complaint seeks unspecified damages and an
injunction. The plaintiffs have sought to consolidate discovery for this action
with similar actions pending against Pioneer Electronics Corp. and
Scientific-Atlanta, Inc. The Company has responded to the plaintiffs' motion,
currently pending before the Judicial Panel on Multidistrict Litigation (the
"Judicial Panel"). On January 27, 1999, the court entered an order staying these
proceedings until the Judicial Panel decides the plaintiffs' consolidation
motion. The Company denies that it infringes the subject patents and intends to
vigorously defend this action.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of the Company's security holders during the
three months ended December 31, 1998.
 
                                       10
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
 
The Common Stock is listed and traded under the symbol GIC on the New York Stock
Exchange. The Common Stock began trading on July 24, 1997, as a result of the
Distribution. The Company did not pay dividends on its Common Stock during 1998.
The Company's ability to pay cash dividends on its Common Stock is limited by
certain covenants contained in a credit agreement to which the Company is a
party.
 
<TABLE>
<CAPTION>
                                                 Stock Price Ranges
                                              ------------------------
                                                     High          Low
                                              -----------  -----------
 
<S>                                           <C>          <C>
1997
 
Third quarter                                 $ 21 1/2     $ 16
 
Fourth quarter                                $ 19 1/8     $ 12 5/8
 
1998
 
First quarter                                 $ 22         $ 16 7/16
 
Second quarter                                $ 28 3/4     $ 19 3/4
 
Third quarter                                 $ 29 1/2     $ 16 11/16
 
Fourth quarter                                $ 36 15/16   $ 17 1/2
</TABLE>
 
  As of March 23, 1999, the number of registered stockholders of record of the
Company's Common Stock was 904.
 
                                       11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
FIVE YEAR SUMMARY
 
<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                    -----------------------------------------------
<S>                                                 <C>       <C>       <C>       <C>       <C>
(In millions, except per share data)                 1998(a)   1997(b)   1996(c)   1995(d)   1994(e)
                                                    -------   -------   -------   -------   -------
 
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
 
Net sales                                           $ 1,988   $ 1,764   $ 1,756   $ 1,533   $ 1,275
 
Cost of sales                                         1,431     1,336     1,350     1,080       878
 
Gross profit                                            557       428       406       453       397
 
Selling, general and administrative                     194       215       174       138       103
 
Research and development                                244       208       198       138       105
 
Purchased in-process technology                          --        --        --       140        --
 
Amortization of excess of cost over fair value of
  net assets acquired                                    14        15        14        14        15
 
NLC litigation costs                                     --        --       141        --        --
 
Operating income (loss)                                 104       (10)     (122)       22       175
 
Interest income (expense), net                            1        (5)      (26)      (23)      (27)
 
Income (loss) before income taxes and cumulative
  effect of changes in accounting principles             94       (10)     (149)       (2)      149
 
Net income (loss)                                   $    55   $   (16)  $   (96)  $     4   $   121
 
Earnings per share - basic                          $  0.35
 
Earnings per share - diluted                        $  0.33
 
Pro forma loss per share - basic and diluted (f)              $ (0.11)  $ (0.65)
 
                                                                     December 31,
                                                    -----------------------------------------------
                                                       1998      1997      1996      1995      1994
                                                    -------   -------   -------   -------   -------
CONSOLIDATED BALANCE SHEET DATA:
 
Total assets                                        $ 2,188   $ 1,675   $ 1,630   $ 1,354   $ 1,199
 
Other non-current liabilities                            68        66       188        75        78
 
Stockholders' equity                                  1,650     1,215     1,051       926       764
</TABLE>
 
--------------------------
 
(a) Includes charges of $124 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily including costs related to the closure
of various facilities, including the Company's satellite TV manufacturing
facility in Puerto Rico, severance and other employee separation costs, the
write-down of fixed assets to their estimated fair values and inventory to its
lower of cost or market, as well as a $75 million charge to fully reserve for
the R&D advance made to the Partnership (see Notes 5, 6 and 8 to the
consolidated financial statements contained in Item 8).
 
(b) Includes charges of $110 million ($79 million net-of-tax) reflecting
restructuring and other charges primarily including costs related to the closure
of various facilities, including the Company's satellite TV manufacturing
facility in Puerto Rico, severance and other employee separation costs, the
write-down of inventory to its lower of cost or market, the write-down of fixed
assets to their estimated fair values and costs related to dividing the
Distributing Company's Taiwan operations between the Company and General
Semiconductor, Inc. (see Notes 1, 5 and 6).
 
(c) Includes charges of $226 million ($145 million net-of-tax) reflecting Next
Level Communications ("NLC") litigation costs, restructuring charges and other
charges primarily related to the transition to the Company's next-generation
digital products and the write-down of inventory to its lower of cost or market
(see Notes 5, 6 and 16).
 
(d) Includes a charge of $140 million ($90 million net-of-tax) for purchased
in-process technology in connection with the acquisition of NLC (see Note 8).
 
(e) Includes an income tax benefit of $31 million, as a result of a reduction in
a valuation allowance related to domestic deferred income tax assets.
 
(f) Prior to the Distributions (see Note 1), the Company did not have its own
capital structure; accordingly, pro forma per share information has only been
presented for the years ended December 31, 1997 and 1996. The pro forma loss per
share was calculated by dividing the net loss by the pro forma weighted-average
number of shares outstanding. The pro forma weighted-average number of shares
outstanding used for 1996 equaled the number of common shares issued on the date
of the Distributions, and for 1997, included the number of common shares issued
on the date of the Distributions plus the actual share activity during the
period subsequent to the Distributions.
 
                                       12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
OVERVIEW OF BUSINESS
 
General Instrument Corporation ("General Instrument" or the "Company"), formerly
NextLevel Systems, Inc., is a leading worldwide provider of integrated and
interactive broadband access solutions and, with its strategic partners and
customers, is advancing the convergence of the Internet, telecommunications and
video entertainment industries. The Company was formerly the Communications
Business of the former General Instrument Corporation (the "Distributing
Company"). In July 1997, the Distributing Company distributed all of its
outstanding shares of capital stock of the Company to its stockholders, and the
Company then began operating as a publicly traded independent entity.
 
  The Company's consolidated financial statements and notes to the consolidated
financial statements ("Notes"), included elsewhere in this Form 10-K, should be
read as an integral part of the following financial review.
 
COMPARISON OF RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998 WITH THE YEAR ENDED DECEMBER 31, 1997
 
NET SALES. Net sales for the year ended December 31, 1998 were $1,988 million
compared to $1,764 million for the year ended December 31, 1997. Net sales in
1998 when compared to 1997 reflect higher sales of digital cable systems,
partially offset by lower sales of analog cable systems and a decline in
international sales. Analog and digital products represented 44% and 56%,
respectively, of total sales in 1998 compared to 58% and 42%, respectively, of
total sales in 1997.
 
  Worldwide broadband sales (consisting of digital and analog cable and wireless
television systems and transmission network systems) increased $277 million, or
21%, to $1,569 million in 1998 primarily as a result of increased U.S. sales
volumes of digital cable terminals and headends, partially offset by lower sales
of analog cable systems. These sales reflect the increasing commitment of U.S.
cable television operators to deploy interactive digital systems in order to
offer advanced entertainment, interactive services and Internet access to their
customers. For the years ended December 31, 1998 and 1997, broadband sales in
the U.S. were 84% and 69%, respectively, combined U.S. and Canadian sales were
86% and 74%, respectively, and all other international sales were 14% and 26%,
respectively, of total worldwide broadband sales.
 
  Worldwide satellite sales of $418 million for the year ended December 31, 1998
decreased $44 million, or 10%, from the comparable 1997 period primarily as a
result of lower private and commercial network sales in international markets.
For the years ended December 31, 1998 and 1997, satellite sales in the U.S. were
86% and 76%, respectively, combined U.S. and Canadian sales were 98% and 88%,
respectively, and all other international sales were 2% and 12%, respectively,
of total worldwide satellite sales.
 
  The decrease in broadband and satellite international sales during 1998 was
experienced in all international regions. The largest decreases in sales were
experienced in the Asia/Pacific and Latin American regions, and there can be no
assurance that international sales will return to 1997 levels in the near term.
 
  On January 22, 1999, PRIMESTAR, Inc. ("PRIMESTAR") announced that it reached
an agreement to sell its direct broadcast satellite ("DBS") medium-power
business and assets as well as its rights to acquire high-power satellite assets
to Hughes Electronics Corporation ("Hughes"). Sales to PRIMESTAR accounted for
11% of the Company's sales in 1998. The Company is currently uncertain whether
and to what extent PRIMESTAR will continue to order and purchase medium-power
equipment from the Company. Further, the Company does not expect to supply any
high-power equipment to PRIMESTAR. See "Developments Related to PRIMESTAR"
below.
 
   GROSS PROFIT. Gross profit increased $129 million, or 30%, to $557 million in
1998 from $428 million in 1997 and was 28% of sales in 1998 compared to 24% in
1997. Gross profit for the year ended December 31, 1998 was reduced by $9
million of restructuring charges (see Note 5 and "Restructurings" below) and $18
million of other charges (see Note 6 and "Other Charges" below) recorded in the
first quarter of 1998, primarily related to severance and other employee
 
                                       13
<PAGE>
separation costs, costs associated with the closure of various facilities, the
write-down of fixed assets to their estimated fair values and the write-down of
inventories to their lower of cost or market. Gross profit for the year ended
December 31, 1997 was reduced by $84 million of charges primarily related to the
closure of the Company's Puerto Rico satellite manufacturing facility, employee
costs related to dividing the Distributing Company's Taiwan operations between
the Company and General Semiconductor, Inc. and the write-down of inventories to
their lower of cost or market (see Notes 1, 5 and 6). Gross profit increases
primarily reflect increased sales levels as well as product cost reductions,
driven primarily by chip integration and productivity improvements at the
Company's Taiwan manufacturing facility.
 
   SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expense was $194 million in 1998 compared to $215 million in 1997 and
was 10% of sales in 1998 compared to 12% in 1997. SG&A expense for the year
ended December 31, 1998 included $6 million of restructuring charges (see Note 5
and "Restructurings" below) and $7 million of other charges (see Note 6 and
"Other Charges" below) recorded in the first quarter of 1998, primarily related
to severance and other employee separation costs, costs associated with the
closure of various facilities, including moving costs, and costs associated with
changing the Company's corporate name. SG&A expense in 1997 included $28 million
of charges related to severance and other employee separation costs, costs
associated with the closure of various facilities and legal and other
professional fees incurred in connection with the Distributions (see Notes 1, 5
and 6), partially offset by a $5 million credit related to the collection of
certain receivables previously considered to be uncollectible. SG&A spending for
1997 also included SG&A expenses related to NLC.
 
   RESEARCH AND DEVELOPMENT. Research and development ("R&D") expense increased
$36 million, or 17%, to $244 million in 1998 from $208 million in 1997 and was
12% of sales in 1998 and 1997. R&D expense for the year ended December 31, 1998
included a $75 million charge to fully reserve the Partnership Note (see Note
8). Proceeds of the Partnership Note are being utilized by the Partnership to
fund research and development activities through 1999 to develop, for widespread
commercial deployment, the next-generation telecommunications technology for the
delivery of telephony, video, and data from the telephone company central office
to the home. Such widespread deployment is not expected until the latter part of
1999 or early in 2000; however, there can be no assurance that the development
activities currently being undertaken will result in successful commercial
deployment. R&D expense for the year ended December 31, 1997 included $9 million
of charges primarily related to the write-down of certain assets used in R&D
activities to their estimated fair values (see Notes 5 and 6). R&D spending in
1998 reflects the continued development of the Company's digital set-top
terminals, broadband telephony, cable modems, advanced digital systems for cable
and satellite television distribution and product development through strategic
alliances.
 
   OTHER INCOME (EXPENSE) - NET. Other expense - net of $12 million for the year
ended December 31, 1998 primarily included the Company's equity interest in the
Partnership's loss (see Note 8), which includes the BBT litigation settlement
(see Note 16) and compensation expense related to key executives of an acquired
company, partially offset by gains on the sale of a portion of the Company's
investment in Ciena Corporation and the settlement of an insurance claim. Other
income of $6 million for the year ended December 31, 1997 predominantly reflects
net investment gains, primarily from the sale of a portion of the Company's
investment in Ciena Corporation.
 
   INTEREST INCOME (EXPENSE) - NET. Interest expense - net for the year ended
December 31, 1997 includes an allocation of interest expense from the
Distributing Company, which was allocated based upon the Company's net assets as
a percentage of the total net assets of the Distributing Company for the period
prior to the date of the Communications Distribution. Net interest expense
allocated to the Company was $15 million for the year ended December 31, 1997.
Subsequent to July 25, 1997, the date of the Communications Distribution, net
interest represents actual net interest expense incurred by the Company.
 
   INCOME TAXES. Through the date of the Distributions, income taxes were
determined as if the Company had filed separate tax returns under its then
existing structure for the periods presented. The Company recorded provisions
for income taxes of $38 million and $6 million for the years ended December 31,
1998 and 1997, respectively. Excluding the restructuring and other net charges
recorded in 1998 and 1997, the effective tax rates were 38%.
 
                                       14
<PAGE>
   DEVELOPMENTS RELATED TO PRIMESTAR. PRIMESTAR is the second largest provider
of satellite television entertainment in the United States and currently
operates a 160-channel medium-power DBS service. The Company is currently the
sole supplier of digital satellite receivers and digital satellite encoders to
PRIMESTAR.
 
  The announcement of the proposed acquisition of PRIMESTAR, described above,
stated that if the proposed transaction with Hughes is not consummated for any
reason, PRIMESTAR intends to continue its medium-power business. Prior to this
announcement, the Company had estimated that 1999 revenues from the sale of
equipment to PRIMESTAR would be approximately $100 million. The Company believes
that, if the proposed acquisition is consummated, such revenues will be
substantially reduced. While the Company expects to minimize the effect of the
potential loss of revenue from PRIMESTAR through increased sales of its digital
cable systems and reductions in overhead expenses, there can be no assurance
that the Company will be successful in replacing this lost revenue. In February
1999, the Company evaluated its overhead structure and has taken steps to
further consolidate its San Diego, California and Horsham, Pennsylvania
operations, including reducing headcount by approximately 200. The Company
expects to take a pre-tax charge during the first quarter of 1999 of
approximately $15 million, for severance and facility consolidation costs.
Approximately $10 million of this charge requires cash payments, which the
Company expects to make during 1999. The employee reductions are expected to
decrease ongoing SG&A expenses by approximately $25 million during 1999.
 
  The loss of PRIMESTAR as a continuing customer will have a significant impact
on the Company's satellite business. However, absent the failure of PRIMESTAR to
honor its contractual commitments with the Company, the Company believes that
the loss of PRIMESTAR's business will not have a material adverse effect on the
Company's financial condition or results of operations.
 
   RESTRUCTURINGS. In the first half of 1997, in connection with the
Distributions, the Company recorded pre-tax charges to cost of sales of $18
million for employee costs, which included a curtailment and settlement loss of
$4 million, related to dividing the Distributing Company's Taiwan operations
between the Company and General Semiconductor. Further, the Company recorded a
charge of $6 million to SG&A expense for legal and other professional fees
incurred in connection with the Distributions. These charges did not result in
the reduction of future costs; therefore, they have not had and are not expected
to have a significant impact on the Company's results of operations and cash
flows.
 
  In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are currently being manufactured by subcontractors in the U.S. and were
sold by the Company during 1998. The Company also decided to close its corporate
office and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of
the Chicago corporate office was completed during the first quarter of 1998. As
a result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. Of these charges, $21 million were recorded as
cost of sales, $14 million as SG&A expense and $1 million as research and
development expense. All of the fourth quarter severance and other employee
separation costs were paid by the end of 1998. Costs associated with the closure
of facilities include vacated long-term leases which are payable through the end
of the lease terms which extend through the year 2008 (see Note 5). These
restructuring costs provided cost savings in certain satellite production
processes; however, declining demand for certain satellite products has
substantially offset the cost reductions.
 
                                       15
<PAGE>
  As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense. As of December 31, 1998,
approximately $1 million of the first quarter severance costs remain to be paid
and will be paid during 1999 (see Note 5).
 
  In connection with the developments related to PRIMSTAR, in February 1999, the
Company evaluated its overhead structure and has taken steps to further
consolidate its San Diego, California and Horsham, Pennsylvania operations,
including reducing headcount by approximately 200. The Company expects to take a
pre-tax charge during the first quarter of 1999 of approximately $15 million,
for severance and facility consolidation costs.
 
   OTHER CHARGES. In the fourth quarter of 1997, the Company recorded $61
million ($44 million net of tax) of other charges, partially offset by $11
million ($7 million net of tax) of other income, described below. In conjunction
with the assessment of the satellite business, management concluded that future
sales of certain satellite products would not be sufficient to recover the
carrying value of related inventory. Accordingly, the Company recorded a $43
million charge to write-down inventory to its lower of cost or market.
Concurrent with this inventory write-down, management reviewed the fixed assets
and equipment related to production and testing associated with these products
and concluded that their carrying value would no longer be recoverable since
such assets would no longer be utilized and, accordingly, the Company wrote-down
such assets by $10 million to their estimated scrap value, which management
believes approximated fair value. These fixed assets were not being utilized as
of December 31, 1997 and 1998. A portion of these fixed assets have been
disposed of and the Company expects that the remaining assets will be disposed
of during 1999. The Company incurred approximately $8 million of professional
fees related to the assessment of the satellite business. Of the $61 million of
charges, $45 million were recorded as cost of sales, $8 million were recorded as
SG&A expense and $8 million were recorded as research and development expense.
The $61 million of other charges were partially offset by $11 million of other
income related to investment gains and income associated with the reversal of
accrued interest related to the final NLC Litigation settlement on the date the
court issued its final ruling.
 
  The Company incurred certain other pre-tax charges during the first quarter of
1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut down expenses and legal fees. The above charges
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense)-net," related
to costs incurred by the Partnership, which the Company accounts for under the
equity method. Such costs are primarily related to the BBT litigation settlement
(see Note 16) and compensation expense related to key executives of an acquired
company (see Note 6).
 
COMPARISON OF RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997 WITH THE YEAR ENDED DECEMBER 31, 1996
 
NET SALES. Net sales for the year ended December 31, 1997 were $1,764 million
compared to $1,756 million for the year ended December 31, 1996. Net sales in
1997 when compared to 1996 reflect higher sales of digital cable TV systems and
interactive advanced analog TV systems, offset by lower sales of basic analog
cable TV systems, cable transmission network systems, digital satellite
receivers and private/commercial network satellite systems. Analog and digital
products represented 58% and 42%, respectively, of total sales in 1997 compared
to 67% and 33%, respectively, of total sales in 1996.
 
                                       16
<PAGE>
  Worldwide broadband sales (consisting of digital and analog cable and wireless
television systems and transmission network systems) increased $112 million, or
10%, to $1,293 million in 1997 primarily as a result of increased U.S. sales
volumes of digital cable TV terminals and headends and CFT advanced analog cable
TV terminals, partially offset by lower sales of basic analog cable and
transmission network systems. These sales reflect the increasing commitment of
U.S. cable television operators to deploy state-of-the-art digital and
interactive advanced analog systems in order to offer advanced entertainment,
interactive services and Internet access to their customers. International
broadband sales increased $11 million, or 3%, to $403 million in 1997 and
represented 31% of worldwide broadband sales in 1997 compared to 33% in 1996.
Worldwide satellite sales of $462 million for the year ended December 31, 1997
decreased $113 million, or 20%, from 1996 primarily as a result of lower sales
volumes of digital satellite receivers to PRIMESTAR. International satellite
sales increased $41 million, or 59%, to $110 million in 1997, primarily as a
result of higher Canadian sales. International satellite sales represented 24%
of worldwide satellite sales in 1997 compared to 12% in 1996. NLC sales were $9
million in 1997.
 
   GROSS PROFIT. Gross profit increased $22 million, or 5%, to $428 million in
1997 from $406 million in 1996 and was 24% of sales in 1997 compared to 23% in
1996. Gross profit for the year ended December 31, 1997 was reduced by $84
million of charges primarily related to the closure of the Company's Puerto Rico
satellite manufacturing facility, employee costs related to dividing the
Distributing Company's Taiwan operations between the Company and General
Semiconductor, Inc. and the write-down of inventories to their lower of cost or
market (see Notes 1, 5 and 6). Gross profit for the year ended December 31, 1996
was reduced by $71 million of charges primarily related to the write-down of
inventories to their lower of cost or market and the accrual of upgrade and
product warranty liabilities in connection with the transition to the Company's
next-generation digital products (see Note 6). The higher gross profit and gross
profit margin in 1997 resulted from higher production volumes and ongoing cost
reduction programs on digital and advanced analog products.
 
   SELLING, GENERAL AND ADMINISTRATIVE. SG&A expense was $215 million in 1997
compared to $174 million in 1996 and was 12% of sales in 1997 compared to 10% in
1996. SG&A expense for the year ended December 31, 1997 included $28 million of
charges related to severance and other employee separation costs, costs
associated with the closure of various facilities and legal and other
professional fees incurred in connection with the Distributions (see Notes 1, 5
and 6), partially offset by a $5 million credit related to the collection of
certain receivables previously considered to be uncollectible. SG&A expense in
1996 included $14 million of charges primarily related to employee separation
costs due to the Distributing Company's plan to separate into three independent
companies, the write-down of various fixed assets to their estimated fair values
and the settlement of a litigation matter (see Notes 1, 5 and 6). SG&A base
spending was also greater in 1997 than in 1996 as a result of increased
marketing and field support for NLC's Nleve1(3)-Registered Trademark- telephony
system and the Company's DVB-compliant digital satellite products and increased
sales force, field support and marketing in international cable and satellite
television markets.
 
   RESEARCH AND DEVELOPMENT. R&D expense increased $10 million, or 5%, to $208
million in 1997 from $198 million in 1996 and was 12% of sales in 1997 compared
to 11% in 1996. R&D expense for the year ended December 31, 1997 included $9
million of charges primarily related to the write-down of fixed assets used in
R&D activities to their estimated fair values (see Notes 5 and 6). R&D spending
in 1997 reflects: the continued development of next-generation products,
including high-speed data systems for cable and telephone networks,
switched-digital access systems for fiber and twisted-pair networks, as well as
the modification of existing products for international markets; the continued
development of enhanced addressable analog terminals and advanced digital
systems for cable and satellite television distribution; and product development
and international expansion through strategic alliances. In addition, in 1997,
the Company remained focused on reducing costs and enhancing the features of its
digital cable and satellite television systems.
 
  The NLC business has expended approximately $50 million in research and
development costs from the date of the Company's acquisition of the NLC business
in 1995 through December 31, 1997.
 
                                       17
<PAGE>
   OTHER INCOME (EXPENSE) - NET. Other income of $6 million for the year ended
December 31, 1997 predominantly reflects investment gains, primarily from the
sale of a portion of the Company's investment in Ciena Corporation.
 
   INTEREST INCOME (EXPENSE) - NET. Net interest expense represents an
allocation of interest expense from the Distributing Company based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company through July 25, 1997, the date of the Distributions. Net interest
expense allocated to the Company was $15 million for the year ended December 31,
1997 compared to $26 million in 1996. Subsequent to July 25, 1997, net interest
income primarily represents actual interest earned on the Company's net cash
balance and the net reversal of accrued interest subsequent to receiving a
revised final judgment in the suit brought against NLC and the founders of NLC
by DSC Communications Corporation and DSC Technologies Corporation (the "NLC
Litigation").
 
  On a pro forma basis, interest income was $6 million in 1997 compared to
interest expense of $8 million in 1996 (see Note 4).
 
   INCOME TAXES. Through the date of the Distributions, income taxes were
determined as if the Company had filed separate tax returns under its then
existing structure for the periods presented. The Company recorded a provision
for income taxes of $6 million and a benefit for income taxes of $53 million for
the years ended December 31, 1997 and 1996, respectively. Excluding the
restructuring and other net charges recorded in 1997 and 1996, the effective tax
rates were 38% and 36%, respectively. The higher effective rate in 1997 resulted
from a higher provision for state income taxes (see Note 14).
 
   RESTRUCTURINGS. In 1996, the Company recorded an $8 million charge to SG&A
expense for the write-down of various assets to fair value. This charge consists
principally of a $3 million write-down of a facility that the Company decided to
vacate and a $4 million write-off of previously capitalized amounts related to a
data processing systems project which the Company abandoned in 1996. These
actions reduced depreciation expense associated with the assets written down.
 
  In the first half of 1997, in connection with the Distributions, the Company
recorded pre-tax charges to cost of sales of $18 million for employee costs
related to dividing the Distributing Company's Taiwan operations between the
Company and General Semiconductor. Further the Company recorded a charge of $6
million to SG&A expense for legal and other professional fees incurred in
connection with the Distributions. These charges do not result in the reduction
of future costs; therefore, they have not had and are not expected to have a
significant impact on the Company's results of operations and cash flows. Cash
payments related to these charges were paid by the end of the first quarter of
1998.
 
  In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility which reduced headcount by 1,100. This facility
manufactured receivers used in the private network, commercial and consumer
satellite markets for the reception of analog and digital television signals.
The Company does not expect reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location will be manufactured by subcontractors in the U.S. and will be sold by
the Company during 1998. The Company also decided to close its corporate office
and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of the
Chicago corporate office was completed during the first quarter of 1998. As a
result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. Of these charges, $21 million were recorded as
cost of sales, $14 million as SG&A expense and $1 million as research and
development expense. Through December 31, 1997, the Company made severance
payments of $5 million to approximately 800 employees, and the remaining
severance and other employee separation costs were paid by the end of 1998.
Costs associated with the closure of facilities ("Facility Costs") include
vacated long-term leases which are payable through the
 
                                       18
<PAGE>
end of the lease terms which extend through the year 2008 (see Note 5). These
restructuring costs provided cost savings in certain satellite production
processes; however, declining demand for certain satellite products has
substantially offset the cost reductions.
 
   OTHER CHARGES. In the fourth quarter of 1996, the Company recorded $57
million ($35 million net of tax) of charges related to the Company's transition
to next generation digital products and $20 million ($13 million net of tax) of
other charges related to the write-down to the lower of cost or market, of
inventory products the Company decided to discontinue and the settlement of a
litigation matter. Of these charges, $71 million were recorded as cost of sales
and related to the write-down of inventories to their estimated lower of cost or
market and the accrual of contractual upgrade and product warranty liabilities
in connection with the transition to the Company's next generation digital
products. The remaining $6 million of charges were recorded as SG&A expense and
related to the write-down of fixed assets to their estimated fair values and
settlement of a litigation matter. All of the fourth quarter charges were
utilized by the end of 1997. The following is a description of the $57 million
of charges related to the Company's transition to next generation digital
products:
 
- In the fourth quarter of 1996, the Company recorded a $47.9 million write-down
  of digital product inventory to its lower of cost or market as it became
  evident that the expected sales price, less costs to complete, would not be
  sufficient to recover the carrying value of the inventory.
 
- The initial sales of digital products occurred during the fourth quarter of
  1996. At the time of the sale, the Company accrued warranty liability in
  accordance with its accounting policy in Note 3. However, during the fourth
  quarter of 1996, subsequent to the initial sale, the Company was required to
  rework the product to correct an unanticipated system issue. This rework
  resulted in an additional $1.6 million of warranty expense and was incurred
  prior to December 31, 1996.
 
- In addition, the Company recorded an additional $3.8 million warranty
  liability as it became evident in the fourth quarter of 1996 that the failure
  rates on certain satellite products would exceed the rate previously
  anticipated. At the time of the sale of this product, the Company accrued a
  warranty liability in accordance with its accounting policy in Note 3.
 
- Also, in December 1996, the Company contractually agreed to provide an upgrade
  at no charge related to its transition from the analog platform to digital
  products. The $3.4 million cost of this upgrade was accrued on the date the
  Company became contractually obligated to perform such upgrade.
 
  In the fourth quarter of 1997, the Company recorded $61 million ($44 million
net of tax) of other charges offset by $11 million ($7 million net of tax) of
other income, described below. In conjunction with the assessment of the
satellite business, management concluded that future sales of certain satellite
products would not be sufficient to recover the carrying value of related
inventory. Accordingly, the Company recorded a $43 million charge to write-down
inventory to its lower of cost or market. Concurrent with this inventory
write-down, management reviewed the fixed assets and equipment related to
production and testing associated with these products and concluded that their
carrying value would no longer be recoverable since such assets would no longer
be utilized and, accordingly, the Company wrote-down such assets by $10 million
to their estimated scrap value, which management believes approximated fair
value. These fixed assets were not being utilized as of December 31, 1997. A
portion of these fixed assets have been disposed of and the Company expects that
the remaining assets will be disposed of during 1999. The Company incurred
approximately $8 million of professional fees related to the assessment of the
satellite business. Of the $61 million of charges, $45 million were recorded as
cost of sales, $8 million were recorded as SG&A expense and $8 million were
recorded as research and development expense. The $61 million of other charges
were partially offset by $11 million of other income related to investment gains
and income associated with the reversal of accrued interest related to the final
NLC Litigation settlement on the date the court issued its final ruling.
 
                                       19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
 
Prior to the Distributions, the Company participated in the Distributing
Company's cash management program. To the extent the Company generated positive
cash, such amounts were remitted to the Distributing Company. To the extent the
Company experienced temporary cash needs for working capital purposes or capital
expenditures, such funds were historically provided by the Distributing Company.
At the date of the Distributions, $125 million of cash was transferred to the
Company.
 
  For the years ended December 31, 1998 and 1997, cash provided by operations
was $271 million and cash used in operations was $1 million, respectively. Cash
provided by operations in 1998 primarily reflects cash generated from
operations, partially offset by the R&D advance made to the Partnership and
payments related to restructuring charges. Cash used in operations in 1997
primarily reflects the payment of the judgment in the NLC Litigation and the
funding of NLC's operations, offset by cash generated by the operations of the
broadband network systems business.
 
  At December 31, 1998, working capital was $437 million compared to $436
million at December 31, 1997. The Company believes that working capital levels
are appropriate to support the growth of the business; however, there can be no
assurance that future industry-specific developments or general economic trends
will not alter the Company's working capital requirements.
 
  During the years ended December 31, 1998 and 1997, the Company invested $92
million and $80 million, respectively, in equipment and facilities. In 1999, the
Company expects to continue to expand its capacity to meet increased current and
anticipated future demands for digital products, with capital expenditures for
the year expected to approximate $90 million. Additionally, during the years
ended December 31, 1998 and 1997, the Company made investments of $34 million
and $40 million, respectively. The Company's R&D expenditures were $244 million
(including the $75 million charge for the R&D advance made to the Partnership)
and $208 million for the years ended December 31, 1998 and 1997, respectively,
and are expected to approximate $165 million for the year ending December 31,
1999.
 
  The Company has a bank credit agreement (the "Credit Agreement") which
provides a $600 million unsecured revolving credit facility and matures on
December 31, 2002. The Credit Agreement permits the Company to choose between
two competitive interest rate options. The Credit Agreement contains financial
and operating covenants, including limitations on guarantee obligations, liens
and the sale of assets, and requires the maintenance of certain financial
ratios. Significant financial ratios include (i) maintenance of consolidated net
worth above $600 million adjusted for 50% of cumulative positive quarterly net
income subsequent to June 30, 1997; (ii) maintenance of an interest coverage
ratio based on EBITDA (excluding $116 million and $86 million of charges
incurred in 1998 and 1997, respectively) in comparison to net interest expense
of greater than 5 to 1; and (iii) maintenance of a leverage ratio comparing
total indebtedness to EBITDA (excluding $116 million and $86 million of charges
incurred in 1998 and 1997, respectively) of less than 3 to 1. None of the
restrictions contained in the Credit Agreement is expected to have a significant
effect on the Company's ability to operate. As of December 31, 1998, the Company
was in compliance with all financial and operating covenants contained in the
Credit Agreement and had available credit of $500 million.
 
  In January 1999, Sony Corporation purchased 7.5 million newly issued
unregistered shares of Common Stock of the Company for $188 million.
 
  On September 9, 1998, the Company announced a share repurchase program
authorizing the Company to repurchase up to 10 million shares of its outstanding
Common Stock. Through December 31, 1998, the Company had repurchased a total of
6.3 million shares at a cost of $126.3 million.
 
  On July 17, 1998, the Company consummated a transaction with TCI, pursuant to
which the Company acquired, in exchange for 21.4 million unregistered shares of
the Company's Common Stock, certain assets, a license to certain intellectual
property (which will enable the Company to conduct authorization services
intended to provide the cable industry with a secure access control platform to
support widespread deployment of digital terminals and related systems and
applications) and a $50 million non-interest bearing note receivable. The net
purchase price of $400 million was allocated primarily to the license acquired
(see Note 7).
 
                                       20
<PAGE>
  In January 1998, the Company transferred the net assets, principally
technology, and the management and workforce of NLC to a newly formed limited
partnership in exchange for approximately an 89% (subject to additional
dilution) limited partnership interest. The technology transferred to the
Partnership related to in-process research and development for the design and
marketing of a highly innovative next-generation telecommunication broadband
access system for the delivery of telephony, video and data from a telephone
company central office to the home. Additionally, the Company advanced to the
Partnership $75 million, utilizing available operating funds and borrowings
under its Credit Agreement, in exchange for the Note. Since the repayment of the
Note is solely dependent upon the results of the Partnership's research and
development activities and the commercial success of its product development,
the Company recorded a charge to fully reserve for the Note concurrent with the
funding (see Note 8). During 1998, the Company agreed to make additional equity
investments in the Partnership, aggregating $50 million, beginning in November
1998, to fund the Partnership's growth and assist the Partnership in meeting its
forecasted working capital requirements. Through December 31, 1998, the Company
has made $16 million of this $50 million investment. The Company expects to make
the remaining equity investment during the first half of 1999.
 
  The Company's management assesses its liquidity in terms of its overall
ability to obtain cash to support its ongoing business levels and to fund its
growth objectives. The Company's principal sources of liquidity both on a
short-term and long-term basis are cash flows provided by operations and
borrowings under the Credit Agreement. The Company believes that based upon its
analysis of its consolidated financial position and its expected operating cash
flows from future operations, along with available funding under the Credit
Agreement (see Note 15), cash flows will be adequate to fund operations,
research and development, capital expenditures, restructuring charges and
investments. There can be no assurance, however, that future industry-specific
developments or general economic trends will not adversely affect the Company's
operations or its ability to meet its cash requirements.
 
NEW TECHNOLOGIES
 
The Company operates in a dynamic and competitive environment, in which its
success will be dependent upon numerous factors, including its ability to
continue to develop appropriate technologies and successfully implement
applications based on those technologies. In this regard, the Company has made
significant investments to develop advanced systems and equipment for the cable
and satellite television, Internet/data delivery and local telephone access
markets. Additionally, the future success of the Company will be dependent on
the ability of the cable and satellite television operators to successfully
market the services provided by the Company's advanced digital terminals to
their customers. Furthermore, as a result of the higher costs of initial
production, digital products presently being shipped carry lower margins than
the Company's mature analog products.
 
  Management of the Company expects cable television operators in the United
States and abroad to continue to purchase analog products to upgrade their basic
networks and to develop, using U.S. architecture and systems, international
markets where cable penetration is low and demand for entertainment programming
is growing. However, management expects that demand in North America for its
analog cable products will continue to decline.
 
  As the Company continues to introduce new products and technologies and such
technologies gain market acceptance, there can be no assurance that sales of
products based on new technologies will not affect the Company's product sales
mix and/or will not have an adverse impact on sales of certain of the Company's
other products. For example, sales of analog cable products have been impacted
by a shift to digital deployment in North America.
 
INTERNATIONAL MARKETS
 
Management of the Company believes that additional growth for the Company will
come from international markets, although the Company's international sales
decreased during 1998 in comparison to the prior year, and there can be no
assurance that international sales will increase to 1997 levels in the near
future. In order to support the Company's international product and marketing
strategies, it is currently expected that the Company will add operations in
foreign
 
                                       21
<PAGE>
markets in the following areas, among others: customer service, sales and
expansion of manufacturing capacity at existing facilities. Although no
assurance can be given, management expects that the expansion of international
operations will not require significant increased levels of capital
expenditures.
 
EFFECT OF INFLATION
 
The Company continually attempts to minimize any effect of inflation on earnings
by controlling its operating costs and selling prices. During the past few
years, the rate of inflation has been low and has not had a material impact on
the Company's results of operations.
 
YEAR 2000 READINESS DISCLOSURE
 
The Company is preparing for the impact of the arrival of the Year 2000 on its
business, as well as on the businesses of its customers, suppliers and business
partners. The "Year 2000 Issue" is a term used to describe the problems created
by systems that are unable to accurately interpret dates after December 31,
1999. These problems are derived predominantly from the fact that many software
programs have historically categorized the "year" in a two-digit format. The
Year 2000 Issue creates potential risks for the Company, including potential
problems in the Company's products as well as in the Information Technology
("IT") and non-IT systems that the Company uses in its business operations. The
Company may also be exposed to risks from third parties with whom the Company
interacts who fail to adequately address their own Year 2000 Issues.
 
THE COMPANY'S STATE OF READINESS
 
  While the Company's Year 2000 efforts have been underway for several years,
the Company centralized its focus on addressing the Year 2000 Issue in 1998 by
forming a Year 2000 cross-functional project team of senior managers, chaired by
the Company's Vice President of Information Technology who reports directly to
the Company's Chief Executive Officer on this issue. The Audit Committee of the
Board of Directors is advised periodically on the status of the Company's Year
2000 compliance program.
 
  The Year 2000 project team has developed a phased approach to identifying and
remediating Year 2000 Issues, with many of these phases overlapping with one
another or conducted simultaneously.
 
  The first phase was to develop a corporate-wide, uniform strategy for
addressing the Year 2000 Issue and to assess the Company's current state of Year
2000 readiness. This included a review of all IT and non-IT systems, including
Company products and internal operating systems for potential Year 2000 Issues.
The Company completed this phase for its IT and non-IT systems prior to the end
of 1998. In addition, during this phase the Company developed its Year 2000
Policy Statement which was released to the Company's customers, suppliers and
business partners.
 
  The second phase of the Company's Year 2000 compliance program (begun
simultaneously with the first phase) was to define a Year 2000 "Compliance"
standard and to develop uniform test plans and test methodologies, building on
work already done by one of the Company's engineering groups. The Company
developed a comprehensive Year 2000 test plan and test methodologies for the
testing of its products, as well as third-party products. The Company has
adopted the following six compliance categories for its products: "Compliant,"
"Compliant with Upgrade," "Compliant with Minor Issues," "Not Compliant or End
of Life Product," "Testing to be Completed" and "Testing not Required." The
creation of these six categories has assisted the Company in communicating with
its customers, suppliers and business partners regarding the Year 2000 status of
the Company's products.
 
  To aid in communication with the Company's customers, suppliers and business
partners, the Company has developed an Internet web site that identifies the
current Year 2000 status for each of the Company's products in accordance with
the Company's Year 2000 compliance standard. The web site, which is updated
periodically, also identifies available upgrades, as well as the contemplated
completion date of testing and remediation for such products. In addition, the
Company has provided detailed, customer-specific inventory information to major
customers on a product-by-product basis in order to further assist such
customers with their own Year 2000 compliance programs. In furtherance of
providing information about its Year 2000 testing and remediation program, the
Company has disclosed
 
                                       22
<PAGE>
its test plan and methodologies to certain of its customers, strategic vendors
and business partners. The Company is also participating in industry-wide joint
system testing efforts and has participated in industry-wide forums with the
Federal Communications Commission in order to facilitate awareness in the
industry of Year 2000 Issues.
 
  The Company has also undertaken a review of its internal IT and non-IT systems
to identify potential Year 2000 Issues. In 1996, the Company began the process
of implementing a uniform worldwide business and accounting information system
to improve internal reporting processes. The internal IT systems being replaced
include order entry systems, purchasing and inventory management systems, and
the Company's general financial systems. Based upon representations from the
manufacturer and the Company's own internal testing, the Company believes that
this uniform information system is Year 2000 compliant. The Company also has
plans to identify and replace and/or upgrade legacy business systems that are
not Year 2000 compliant and are not part of the uniform worldwide business and
accounting information system. In conjunction with the Company's review of
internal IT systems, the Company engaged an outside consulting firm with Year
2000 consulting experience to perform an assessment of the Company's test plans
and test methodologies and to benchmark such plans and methodologies against the
practices of other companies. Based on these benchmark comparisons, certain
recommendations were made related to the test plans. The Company is currently
addressing these recommendations. In addition, the outside consulting firm is
continuing to provide assistance in monitoring the Company's Year 2000 status
and progress in areas such as: testing, internal and external communication and
contingency planning. With respect to non-IT systems, the Company is actively
analyzing its in-line manufacturing equipment in order to assess any Year 2000
issues. To date, no material problems have been discovered, and the Company will
continue to review, test and remediate (if necessary) such equipment. The
Company is also evaluating its other critical non-IT facility and internal
systems with date sensitive operating controls for Year 2000 Issues. While the
Company believes that most of these systems will function without substantial
Year 2000 compliance problems, the Company will continue to review, test and
remediate (if necessary) such systems.
 
  The third phase of the Company's Year 2000 compliance program is the actual
testing and remediation (if necessary) of the Company's IT and non-IT products
and systems. The Company has prioritized its testing and remediation work,
focusing on products which the Company believes are more likely to be impacted
by Year 2000 Issues. The Company has completed the testing and remediation (as
necessary) of the majority of its products in accordance with its adopted test
plans and methodologies and is diligently working to complete testing and
remediation (if necessary) of the remainder of its products (except for end of
life products) by the end of the third quarter of 1999. As of March 1, 1999, the
Company estimates that it has completed approximately 95% of the Year 2000
readiness analysis required for its Advanced Network Systems, Digital Network
Systems and Transmission Network Systems products. As of March 1, 1999, the
Company estimates that it has completed approximately 60% of the Year 2000
readiness analysis for its Satellite and Broadcast Network Systems products. For
certain of the Company's satellite and broadcast products and the Company's
national authorization center, testing and remediation (if necessary) is
currently anticipated to be completed by the end of the third quarter of 1999.
The Company has completed testing and remediation of substantially all of its IT
and non IT internal systems, with the exception of certain minor systems which
the Company expects to complete by the end of the third quarter of 1999.
 
  The Company is presently evaluating each of its principal suppliers, service
providers and other business partners to determine each of such party's Year
2000 status. The Company has developed a questionnaire and a Year 2000
certification for use with such third parties, and, as of March 1, 1999, the
Company had contacted approximately 300 vendors about their Year 2000
compliance, including many of the vendors that the Company has identified as
critical vendors. The Company is currently focused on obtaining Year 2000
Certifications or assurances from approximately 150 of these suppliers. The
Company anticipates that this evaluation will be on-going through the remainder
of 1999.
 
  The Company is working jointly with customers, strategic vendors and business
partners to identify and resolve any Year 2000 issues that may impact the
Company. However, there can be no assurance that the companies with which the
Company does business will achieve a Year 2000 conversion in a timely fashion,
or that such failure to convert by another company will not have a material
adverse effect on the Company.
 
                                       23
<PAGE>
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
 
  The total cost associated with the Company's Year 2000 remediation is not
expected to be material to the Company's financial condition or results of
operations. The estimated total cost of the Company's Year 2000 remediation is
not expected to exceed $5 million. Through March 1, 1999, the Company has spent
approximately $2 million in connection with Year 2000 Issues. The cost of
implementing the uniform worldwide business and accounting information system
has not been included in this figure since the replacement of the previous
systems was not accelerated due to Year 2000 Issues. All Year 2000 expenditures
are made from the respective departments' budgets. The percentage of the IT
budget during 1998 used for Year 2000 remediation was less than 3% and is
expected to represent less than 3% of the IT budget for 1999. No IT projects
have been deferred due to Year 2000 efforts.
 
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
 
  There can be no assurance that the Company will be completely successful in
its efforts to address Year 2000 Issues. If some of the Company's products are
not Year 2000 compliant, the Company could suffer lost sales or other negative
consequences, including, but not limited to, diversion of resources, damage to
the Company's reputation, increased service and warranty costs and litigation,
any of which could materially adversely affect the Company's business operations
or financial statements.
 
  The Company is also dependent on third parties such as its customers,
suppliers, service providers and other business partners. If these or other
third parties fail to adequately address Year 2000 Issues, the Company could
experience a negative impact on its business operations or financial statements.
For example, the failure of certain of the Company's principal suppliers to have
Year 2000 compliant internal systems could impact the Company's ability to
manufacture and/or ship its products or to maintain adequate inventory levels
for production.
 
THE COMPANY'S CONTINGENCY PLANS
 
  The Company is evaluating the need for certain contingency plans to address
situations that may result if the Company or any of the third parties upon which
the Company is dependent is unable to achieve Year 2000 readiness. For example,
the Company is in the process of developing plans and procedures for its
customer service division to assist customers with the transition through the
Year 2000. Part of this plan will include processes and procedures recently used
by the Company in connection with a program to upgrade a substantial number of
analog addressable controllers to solve a date rollover issue prior to the year
1999. The Company is also evaluating the need for increasing inventory levels of
key components of its manufactured products. Since the Company's Year 2000
compliance program is ongoing, its ultimate scope, as well as the consideration
of additional contingency plans, will continue to be evaluated as new
information becomes available.
 
YEAR 2000 FORWARD-LOOKING STATEMENTS
 
  The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of Year 2000 Issues by businesses and other third
parties who are service providers, suppliers or customers of the Company,
unanticipated system costs, the adequacy of and ability to develop and implement
contingency plans and similar uncertainties. The "forward-looking statements"
 
                                       24
<PAGE>
made in the foregoing Year 2000 discussion speak only as of the date on which
such statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
 
FORWARD-LOOKING INFORMATION
 
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this Form
10-K may include forward-looking statements concerning, among other things, the
Company's prospects, developments and business strategies. These forward-looking
statements are identified by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projects," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes," "subject to" and "scheduled." These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These risks
include, but are not limited to, uncertainties relating to general political and
economic conditions, uncertainties relating to government and regulatory
policies, uncertainties relating to customer plans and commitments, the
Company's dependence on the cable television industry and cable television
spending, Year 2000 readiness, the pricing and availability of equipment,
materials and inventories, technological developments, the competitive
environment in which the Company operates, changes in the financial markets
relating to the Company's capital structure and cost of capital, the
uncertainties inherent in international operations and foreign currency
fluctuations and authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission. Reference is made to
Exhibit 99 in this Form 10-K for a further discussion of such factors. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
A significant portion of the Company's products are manufactured or assembled in
Taiwan and Mexico. These foreign operations are subject to market risk changes
with respect to currency exchange rate fluctuations, which could impact the
Company's consolidated financial statements. The Company monitors its underlying
exchange rate exposures on an ongoing basis and continues to implement selective
hedging strategies to reduce the market risks from changes in exchange rates
(see Notes 3 and 20 to the consolidated financial statements contained in Item
8). On a selective basis, the Company enters into contracts to limit the
currency exposure of monetary assets and liabilities, contractual and other firm
commitments denominated in foreign currencies and the currency exposure of
anticipated, but not yet committed, transactions expected to be denominated in
foreign currencies. The use of these derivative financial instruments allows the
Company to reduce its overall exposure to exchange rate movements since the
gains and losses on these contracts substantially offset losses and gains on the
assets, liabilities and transactions being hedged.
 
  Foreign currency exchange contracts are sensitive to changes in exchange
rates. As of December 31, 1998, a hypothetical 10% fluctuation in the exchange
rate of foreign currencies applicable to the Company, principally the new Taiwan
and Canadian dollars, would result in a net $4 million gain or loss on the
contracts the Company has outstanding, which would offset the related net loss
or gain on the assets, liabilities and transactions being hedged.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Reference is made to Item 14(a) for a list of financial statements filed as part
of this Annual Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
None.
 
                                       25
<PAGE>
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Information required by this Item is contained in the sections captioned
"Management of the Company - Board of Directors of the Company," "Management of
the Company - Executive Officers" and "Management of the Company - Section 16(a)
Beneficial Ownership Reporting Compliance" included in the Proxy Statement for
the Company's 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement")
and is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Information required by this Item is contained in the sections captioned
"Management of the Company - Executive Officer Compensation," "Management of the
Company - Compensation of Directors," "Management of the Company - Stock
Options," "Management of the Company - Pension Plan and SERP" and "Management of
the Company - Severance Protection and Separation Agreements" in the 1999 Proxy
Statement and is incorporated herein by reference. The sections captioned
"Management of the Company - Compensation Committee Report on Compensation of
Executive Officers" and "Performance Graph" in the 1999 Proxy Statement are not
incorporated by reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
Information required by this Item is contained in the section captioned
"Beneficial Ownership of Common Stock" in the 1999 Proxy Statement and is
incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Information required by this Item is contained in the section captioned
"Management of the Company - Certain Relationships and Related Transactions" in
the 1999 Proxy Statement and is incorporated herein by reference.
 
                                       26
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                                        Page
                                                                                      ---------
 
<S>                                                                                   <C>
(a)  Documents Filed as Part of this Report:
 
    1.  FINANCIAL STATEMENTS.
 
       Independent Auditors' Report                                                         F-1
 
       Consolidated Statements of Operations for the Years ended December 31, 1996,
         1997, and 1998                                                                     F-2
 
       Consolidated Balance Sheets as of December 31, 1997 and 1998                         F-3
 
       Consolidated Statements of Stockholders' Equity for the Years ended December
         31, 1996, 1997, and 1998                                                           F-4
 
       Consolidated Statements of Cash Flows for the Years ended December 31, 1996,
         1997, and 1998                                                                     F-5
 
       Notes to Consolidated Financial Statements for the Years ended December 31,
         1996, 1997, and 1998                                                               F-6
 
    2.  FINANCIAL STATEMENT SCHEDULE.
 
       Independent Auditors' Report                                                        F-30
 
       Schedule II - Valuation and Qualifying Accounts                                     F-31
 
    3.  FINANCIAL STATEMENTS OF NEXT LEVEL COMMUNICATIONS L.P.
         (an unconsolidated majority owned investee)                                       F-32
 
    4.  LIST OF EXHIBITS.
 
       See Index of Exhibits included on pages 29-30.
 
(b) Reports on Form 8-K:
 
    None.
</TABLE>
 
                                       27
<PAGE>
SIGNATURES
 
Pursuant to the requirements of Section 13 or Section 15(d) of 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.
 
                                GENERAL INSTRUMENT CORPORATION
 
Date: March 31, 1999            By:             /s/ EDWARD D. BREEN
                                     ------------------------------------------
                                                  Edward D. Breen
                                     CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
                                                      OFFICER
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
                               Signature                                                        Title
------------------------------------------------------------------------  --------------------------------------------------
<C>                                                                       <S>
                          /s/ EDWARD D. BREEN
            ------------------------------------------------              Chairman of the Board, President and Chief
                            Edward D. Breen                                 Executive Officer (Principal Executive Officer)
 
                          /s/ ERIC M. PILLMORE
            ------------------------------------------------              Senior Vice President, Finance and Chief Financial
                            Eric M. Pillmore                                Officer (Principal Financial Officer)
 
                          /s/ MARC E. ROTHMAN
            ------------------------------------------------              Vice President, Financial Planning and Controller
                            Marc E. Rothman                                 (Principal Accounting Officer)
 
                          /s/ JOHN SEELY BROWN
            ------------------------------------------------              Director
                            John Seely Brown
 
                          /s/ FRANK M. DRENDEL
            ------------------------------------------------              Director
                            Frank M. Drendel
 
                           /s/ LYNN FORESTER
            ------------------------------------------------              Director
                             Lynn Forester
 
                       /s/ THEODORE J. FORSTMANN
            ------------------------------------------------              Director
                         Theodore J. Forstmann
 
                           /s/ ALEX J. MANDL
            ------------------------------------------------              Director
                             Alex J. Mandl
 
                            /s/ DAN SCHAEFER
            ------------------------------------------------              Director
                              Dan Schaefer
 
<CAPTION>
                               Signature                                           Date
------------------------------------------------------------------------  -----------------------
<C>                                                                       <C>
                          /s/ EDWARD D. BREEN
            ------------------------------------------------                  March 31, 1999
                            Edward D. Breen
                          /s/ ERIC M. PILLMORE
            ------------------------------------------------                  March 31, 1999
                            Eric M. Pillmore
                          /s/ MARC E. ROTHMAN
            ------------------------------------------------                  March 31, 1999
                            Marc E. Rothman
                          /s/ JOHN SEELY BROWN
            ------------------------------------------------                  March 31, 1999
                            John Seely Brown
                          /s/ FRANK M. DRENDEL
            ------------------------------------------------                  March 31, 1999
                            Frank M. Drendel
                           /s/ LYNN FORESTER
            ------------------------------------------------                  March 31, 1999
                             Lynn Forester
                       /s/ THEODORE J. FORSTMANN
            ------------------------------------------------                  March 31, 1999
                         Theodore J. Forstmann
                           /s/ ALEX J. MANDL
            ------------------------------------------------                  March 31, 1999
                             Alex J. Mandl
                            /s/ DAN SCHAEFER
            ------------------------------------------------                  March 31, 1999
                              Dan Schaefer
</TABLE>
 
                                       28
<PAGE>
INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
Exhibit                                                              Description
<S>              <C>
 
 2.1*            Agreement of Merger, dated as of July 25, 1997, between the Company and NextLevel Systems of Delaware, Inc.
 
 3.1##           Restated Certificate of Incorporation of the Company.
 
 3.2##           Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock.
 
 3.3##           Amended and Restated By-Laws of the Company.
 
 4.1***          Rights Agreement, dated as of June 12, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C., as
                 Rights Agent (the "Rights Agreement"), which includes, as Exhibit A thereto, the Certificate of Designation,
                 Preferences and Rights of Series A Junior Participating Preferred Stock of the Company, as Exhibit B thereto, the
                 Form of Right Certificate and as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares.
 
 4.2****         Amendment, dated as of December 16, 1997, to the Rights Agreement.
 
 4.3**           Form of Warrant Issuance Agreement.
 
 4.4###          Specimen Form of the Company's Common Stock Certificate.
 
10.1*            Employee Benefits Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
                 Semiconductor, Inc.
 
10.2*            Debt and Cash Allocation Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
                 Semiconductor, Inc.
 
10.3*            Insurance Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General Semiconductor, Inc.
 
10.4*            Tax Sharing Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General Semiconductor,
                 Inc.
 
10.5*            Trademark License Agreement, dated as of July 25, 1997, among the Company, CommScope, Inc. and General
                 Semiconductor, Inc.
 
10.6*            Transition Services Agreement, dated as of July 25, 1997, between the Company and General Semiconductor, Inc.
 
10.7*            Transition Services Agreement, dated as of July 25, 1997, between the Company and CommScope, Inc.
 
10.8*            Credit Agreement, dated as of July 23, 1997, among the Company, Certain Banks, The Chase Manhattan Bank, as
                 Administrative Agent, and The Chase Manhattan Bank, Bank of America National Trust and Savings Association,
                 BankBoston, N.A., The Bank of Nova Scotia, Bank of Tokyo-Mitsubishi Trust Company, Caisse Nationale de Credit
                 Agricole, CIBC Inc., Deutsche Bank, A.G., New York Branch and/or Cayman Islands Branch, The Fuji Bank Limited and
                 NationsBank, N.A. as Co-Agents.
 
10.9#            First Amendment, dated as of March 18, 1998, to the Credit Agreement, dated as of July 23, 1997, among the Company,
                 certain banks, the Chase Manhattan Bank as Administrative Agent, and certain other banks as Co-Agents.
 
10.10##          Asset Purchase Agreement among TCIVG-GIC, Inc., NDTC Technology, Inc. and the Company dated as of June 17, 1998.
 
10.11##          License Agreement by and between NDTC Technology, Inc. and the Company dated as of July 17, 1998.
 
10.12            Stock Purchase Agreement by and between Sony Corporation of America and the Company dated November 30, 1998.
 
10.13*+          The Company's 1997 Long-Term Incentive Plan.
 
10.14*****+      Form of Severance Protection Agreement between the Company and certain executive officers.
 
10.15**+         The Company's Annual Incentive Plan.
</TABLE>
 
                                       29
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                              Description
<S>              <C>
10.16**+         The Company's Deferred Compensation Plan.
 
10.17**+         The Company's Supplemental Executive Retirement Plan.
 
21               Subsidiaries of the Company.
 
23               Consent of Deloitte & Touche LLP.
 
27               Financial Data Schedule.
 
99               Forward-Looking Information.
</TABLE>
 
  All other exhibits are not applicable.
 
--------------------------
 
*   Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 001-12925).
 
**  Incorporated herein by reference from the Company's Annual Report on Form
10-K for the period ended December 31, 1997 (File No. 001-12925).
 
***  Incorporated herein by reference from the Company's Registration Statement
on Form 8-A, filed with the Commission on June 30, 1997 (File No. 001-12925).
 
**** Incorporated herein by reference from the Company's Current Report on Form
8-K dated as of December 17, 1997 (File No. 001-12925).
 
***** Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (File No. 001-12925).
 
#   Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998 (File No. 001-12925).
 
## Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998 (File No. 001-12925).
 
### Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 (File No. 001-12925).
 
+   Management contract or compensatory plan.
 
                                       30
<PAGE>
INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
General Instrument Corporation:
 
We have audited the accompanying consolidated balance sheets of General
Instrument Corporation and its subsidiaries (formerly NextLevel Systems, Inc.
and, prior thereto, the Communications Business of the former General Instrument
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
  In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of General Instrument Corporation and
its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
 
/s/ DELOITTE & TOUCHE LLP
-----------------------------
DELOITTE & TOUCHE LLP
 
Parsippany, New Jersey
February 9, 1999
 
                                      F-1
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                           ----------------------------------
<S>                                                                                        <C>               <C>
(In thousands, except per share amounts)                                                               1998              1997
                                                                                           ----------------  ----------------
 
NET SALES                                                                                  $      1,987,825  $      1,764,088
 
Cost of sales                                                                                     1,431,327         1,336,482
                                                                                           ----------------  ----------------
GROSS PROFIT                                                                                        556,498           427,606
                                                                                           ----------------  ----------------
OPERATING EXPENSES:
 
  Selling, general and administrative                                                               193,637           215,404
 
  Research and development                                                                          244,295           207,826
 
  Amortization of excess of cost over fair value of
    net assets acquired                                                                              14,319            14,571
 
  NLC litigation costs                                                                                   --                --
                                                                                           ----------------  ----------------
    Total operating expenses                                                                        452,251           437,801
                                                                                           ----------------  ----------------
 
OPERATING INCOME (LOSS)                                                                             104,247           (10,195)
 
Other income (expense) - net (including equity interest in Partnership losses of $25,089
  for the year ended December 31, 1998)                                                             (11,815)            5,766
 
Interest income (expense) - net                                                                       1,217            (5,210)
                                                                                           ----------------  ----------------
INCOME (LOSS) BEFORE INCOME TAXES                                                                    93,649            (9,639)
 
(Provision) benefit for income taxes                                                                (38,199)           (6,474)
                                                                                           ----------------  ----------------
NET INCOME (LOSS)                                                                          $         55,450  $        (16,113)
                                                                                           ----------------  ----------------
 
Pro Forma Loss Per Share - Basic and Diluted                                                                 $          (0.11)
                                                                                                             ----------------
Pro Forma Weighted - Average Shares Outstanding                                                                       147,523
 
Earnings Per Share - Basic                                                                 $           0.35
                                                                                           ----------------
Earnings Per Share - Diluted                                                               $           0.33
                                                                                           ----------------
Weighted - Average Shares Outstanding - Basic                                                       159,547
 
Weighted - Average Shares Outstanding - Diluted                                                     168,952
 
<CAPTION>
<S>                                                                                        <C>
(In thousands, except per share amounts)                                                               1996
                                                                                           ----------------
NET SALES                                                                                  $      1,755,585
Cost of sales                                                                                     1,349,815
                                                                                           ----------------
GROSS PROFIT                                                                                        405,770
                                                                                           ----------------
OPERATING EXPENSES:
  Selling, general and administrative                                                               174,432
  Research and development                                                                          198,071
  Amortization of excess of cost over fair value of
    net assets acquired                                                                              14,278
  NLC litigation costs                                                                              141,000
                                                                                           ----------------
    Total operating expenses                                                                        527,781
                                                                                           ----------------
OPERATING INCOME (LOSS)                                                                            (122,011)
Other income (expense) - net (including equity interest in Partnership losses of $25,089
  for the year ended December 31, 1998)                                                              (1,427)
Interest income (expense) - net                                                                     (25,970)
                                                                                           ----------------
INCOME (LOSS) BEFORE INCOME TAXES                                                                  (149,408)
(Provision) benefit for income taxes                                                                 53,098
                                                                                           ----------------
NET INCOME (LOSS)                                                                          $        (96,310)
                                                                                           ----------------
Pro Forma Loss Per Share - Basic and Diluted                                               $          (0.65)
                                                                                           ----------------
Pro Forma Weighted - Average Shares Outstanding                                                     147,315
Earnings Per Share - Basic
Earnings Per Share - Diluted
Weighted - Average Shares Outstanding - Basic
Weighted - Average Shares Outstanding - Diluted
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-2
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                                   December 31,
                                                                                                                 ----------------
<S>                                                                                                              <C>
(In thousands, except share data)                                                                                            1998
                                                                                                                 ----------------
 
ASSETS
 
Cash and cash equivalents                                                                                        $        148,675
 
Short-term investments                                                                                                      4,865
 
Accounts receivable, less allowance for doubtful accounts of
  $3,833 and $3,566, respectively (includes accounts receivable
  from related party of $81,075 at December 31, 1998)                                                                     340,039
 
Inventories                                                                                                               281,451
 
Deferred income taxes                                                                                                     100,274
 
Other current assets                                                                                                       15,399
                                                                                                                 ----------------
  Total current assets                                                                                                    890,703
 
Property, plant and equipment, net                                                                                        237,131
 
Intangibles, less accumulated amortization of $97,630
  and $86,333, respectively                                                                                               497,696
 
Excess of cost over fair value of net assets acquired, less
  accumulated amortization of $122,110 and $108,123, respectively                                                         455,466
 
Deferred income taxes                                                                                                       1,999
 
Investments and other assets                                                                                              104,765
                                                                                                                 ----------------
TOTAL ASSETS                                                                                                     $      2,187,760
                                                                                                                 ----------------
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Accounts payable                                                                                                 $        267,565
 
Other accrued liabilities                                                                                                 186,113
                                                                                                                 ----------------
  Total current liabilities                                                                                               453,678
 
Deferred income taxes                                                                                                      15,913
 
Other non-current liabilities                                                                                              67,998
                                                                                                                 ----------------
  Total liabilities                                                                                                       537,589
                                                                                                                 ----------------
Commitments and contingencies (See Notes 16 and 21)
 
Stockholders' Equity:
 
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
  no shares issued                                                                                                             --
 
Common Stock, $.01 par value; 400,000,000 shares authorized;
  173,393,275 and 148,358,188 shares issued, respectively                                                                   1,734
 
Additional paid-in capital                                                                                              1,742,824
 
Note receivable from stockholder                                                                                          (40,615)
 
Retained earnings (accumulated deficit)                                                                                    36,214
 
Accumulated other comprehensive income, net of taxes of
  $1,020 and $11,347, respectively                                                                                          2,845
                                                                                                                 ----------------
                                                                                                                        1,743,002
 
Less - Treasury Stock, at cost, 4,619,069 and 4,309 shares, respectively                                                  (92,831)
                                                                                                                 ----------------
Total stockholders' equity                                                                                              1,650,171
                                                                                                                 ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                       $      2,187,760
                                                                                                                 ----------------
 
<CAPTION>
 
<S>                                                                                                              <C>
(In thousands, except share data)                                                                                            1997
 
                                                                                                                 ----------------
 
ASSETS
Cash and cash equivalents                                                                                        $         35,225
 
Short-term investments                                                                                                     30,346
 
Accounts receivable, less allowance for doubtful accounts of
  $3,833 and $3,566, respectively (includes accounts receivable
  from related party of $81,075 at December 31, 1998)                                                                     343,625
 
Inventories                                                                                                               288,078
 
Deferred income taxes                                                                                                     105,582
 
Other current assets                                                                                                       21,862
 
                                                                                                                 ----------------
 
  Total current assets                                                                                                    824,718
 
Property, plant and equipment, net                                                                                        236,821
 
Intangibles, less accumulated amortization of $97,630
  and $86,333, respectively                                                                                                82,546
 
Excess of cost over fair value of net assets acquired, less
  accumulated amortization of $122,110 and $108,123, respectively                                                         471,186
 
Deferred income taxes                                                                                                       5,634
 
Investments and other assets                                                                                               54,448
 
                                                                                                                 ----------------
 
TOTAL ASSETS                                                                                                     $      1,675,353
 
                                                                                                                 ----------------
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable                                                                                                 $        200,817
 
Other accrued liabilities                                                                                                 188,250
 
                                                                                                                 ----------------
 
  Total current liabilities                                                                                               389,067
 
Deferred income taxes                                                                                                       5,745
 
Other non-current liabilities                                                                                              65,730
 
                                                                                                                 ----------------
 
  Total liabilities                                                                                                       460,542
 
                                                                                                                 ----------------
 
Commitments and contingencies (See Notes 16 and 21)
Stockholders' Equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
  no shares issued                                                                                                             --
 
Common Stock, $.01 par value; 400,000,000 shares authorized;
  173,393,275 and 148,358,188 shares issued, respectively                                                                   1,484
 
Additional paid-in capital                                                                                              1,213,566
 
Note receivable from stockholder                                                                                               --
 
Retained earnings (accumulated deficit)                                                                                   (19,236)
 
Accumulated other comprehensive income, net of taxes of
  $1,020 and $11,347, respectively                                                                                         18,999
 
                                                                                                                 ----------------
 
                                                                                                                        1,214,813
 
Less - Treasury Stock, at cost, 4,619,069 and 4,309 shares, respectively                                                       (2)
 
                                                                                                                 ----------------
 
Total stockholders' equity                                                                                              1,214,811
 
                                                                                                                 ----------------
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                       $      1,675,353
 
                                                                                                                 ----------------
 
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-3
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                   Note       Retained
                                                             Common Stock     Additional     Receivable       Earnings
                                                    ---------------------        Paid-In           From   (Accumulated
(In thousands)                                          Shares     Amount        Capital    Stockholder       Deficit)
                                                    ----------  ---------  -------------  -------------  -------------
 
<S>                                                 <C>         <C>        <C>            <C>            <C>
BALANCE, JANUARY 1, 1996                                    --  $      --  $          --  $          --  $          --
 
Comprehensive loss
 
  Net loss                                                  --         --             --             --             --
Total comprehensive loss
 
Transfers from the Distributing Company                     --         --             --             --             --
 
Other transactions with the Distributing Company            --         --             --             --             --
                                                    ----------  ---------  -------------  -------------  -------------
BALANCE, DECEMBER 31, 1996                                  --         --             --             --             --
 
Comprehensive income
 
  Net income (loss)                                         --         --             --             --        (19,236)
 
  Other comprehensive income (loss), net-of-tax:
 
  Unrealized gains (losses) on
     available-for-sale securities, net
     of reclassification adjustment
     (see Note 10)                                          --         --             --             --             --
Total comprehensive income
 
Transfers from the Distributing Company                     --         --             --             --             --
 
Other transactions with the
  Distributing Company                                      --         --             --             --             --
 
Spin-off from the Distributing Company                 147,315      1,473      1,195,948             --             --
 
Exercise of stock options and related
  tax benefit                                              679          7         10,362             --             --
 
Stock issued in connection with a business
  acquisition                                              358          4          6,996             --             --
 
Other                                                        6         --            260             --             --
                                                    ----------  ---------  -------------  -------------  -------------
BALANCE, DECEMBER 31, 1997                             148,358      1,484      1,213,566             --        (19,236)
 
Comprehensive income
 
  Net income                                                --         --             --             --         55,450
 
  Other comprehensive income,
     net-of-tax:
 
  Unrealized losses on available-for-sale se-
     curities, net of reclassification adjustment
     (see Note 10)                                          --         --             --             --             --
Total comprehensive income
 
Treasury stock purchases (6,278 shares)                     --         --             --             --             --
 
Exercise of stock options and related tax benefit
  (5,342 shares, of which 1,663 shares were issued
  from Treasury)                                         3,679         37         64,501             --             --
 
Stock issued in connection with an acquisition          21,356        213        442,923        (43,320)            --
 
Payment of note receivable from stockholder                 --         --             --          2,705             --
 
Warrant costs related to customer purchases                 --         --         21,834             --             --
                                                    ----------  ---------  -------------  -------------  -------------
BALANCE, DECEMBER 31, 1998                             173,393  $   1,734  $   1,742,824  $     (40,615) $      36,214
                                                    ----------  ---------  -------------  -------------  -------------
 
<CAPTION>
                                                        Accumulated
                                                              Other        Common                          Total
                                                      Comprehensive      Stock In      Divisional  Stockholders'
(In thousands)                                               Income      Treasury      Net Equity         Equity
                                                    ---------------  ------------  --------------  -------------
<S>                                                 <C>              <C>           <C>             <C>
BALANCE, JANUARY 1, 1996                            $            --  $         --  $      926,168  $     926,168
Comprehensive loss
  Net loss                                                       --            --         (96,310)       (96,310)
                                                                                                   -------------
Total comprehensive loss                                                                                 (96,310)
Transfers from the Distributing Company                          --            --         226,370        226,370
Other transactions with the Distributing Company                 --            --          (5,054)        (5,054)
                                                    ---------------  ------------  --------------  -------------
BALANCE, DECEMBER 31, 1996                                       --            --       1,051,174      1,051,174
Comprehensive income
  Net income (loss)                                              --            --           3,123        (16,113)
  Other comprehensive income (loss), net-of-tax:
  Unrealized gains (losses) on
     available-for-sale securities, net
     of reclassification adjustment
     (see Note 10)                                           (2,577)           --          21,576         18,999
                                                                                                   -------------
Total comprehensive income                                                                                 2,886
Transfers from the Distributing Company                          --            --         125,310        125,310
Other transactions with the
  Distributing Company                                           --            --          17,814         17,814
Spin-off from the Distributing Company                       21,576            --      (1,218,997)            --
Exercise of stock options and related
  tax benefit                                                    --            --              --         10,369
Stock issued in connection with a business
  acquisition                                                    --            --              --          7,000
Other                                                            --            (2)             --            258
                                                    ---------------  ------------  --------------  -------------
BALANCE, DECEMBER 31, 1997                                   18,999            (2)             --      1,214,811
Comprehensive income
  Net income                                                     --            --              --         55,450
  Other comprehensive income,
     net-of-tax:
  Unrealized losses on available-for-sale se-
     curities, net of reclassification adjustment
     (see Note 10)                                          (16,154)           --              --        (16,154)
                                                                                                   -------------
Total comprehensive income                                                                                39,296
Treasury stock purchases (6,278 shares)                          --      (126,300)             --       (126,300)
Exercise of stock options and related tax benefit
  (5,342 shares, of which 1,663 shares were issued
  from Treasury)                                                 --        33,471              --         98,009
Stock issued in connection with an acquisition                   --            --              --        399,816
Payment of note receivable from stockholder                      --            --              --          2,705
Warrant costs related to customer purchases                      --            --              --         21,834
                                                    ---------------  ------------  --------------  -------------
BALANCE, DECEMBER 31, 1998                          $         2,845  $    (92,831) $           --  $   1,650,171
                                                    ---------------  ------------  --------------  -------------
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-4
<PAGE>
GENERAL INSTRUMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                             ------------------------------
(In thousands)                                                                                         1998            1997
                                                                                             --------------  --------------
 
<S>                                                                                          <C>             <C>
OPERATING ACTIVITIES:
 
Net income (loss)                                                                            $       55,450  $      (16,113)
 
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
 
  Depreciation and amortization                                                                      83,564          89,857
 
  Warrant costs related to customer purchases                                                        21,834              --
 
  Gain on sale of short-term investment                                                             (11,429)        (10,667)
 
  NLC litigation costs, net                                                                              --              --
 
  Losses from asset sales and write-downs, net                                                       20,569          19,486
 
  Loss from equity investment                                                                        25,089              --
 
  Changes in assets and liabilities:
 
    Accounts receivable                                                                              (4,738)         57,557
 
    Inventories                                                                                      (4,773)        (22,637)
 
    Prepaid expenses and other current assets                                                         1,350           7,919
 
    Deferred income taxes                                                                              (278)          5,237
 
    Non-current assets                                                                               (2,504)          1,226
 
    Accounts payable and other accrued liabilities                                                   83,933         (11,245)
 
    NLC litigation payment                                                                               --        (140,692)
 
    Other non-current liabilities                                                                     2,268          18,955
 
  Other                                                                                                 454             617
                                                                                             --------------  --------------
Net cash provided by (used in) operating activities                                                 270,789            (500)
                                                                                             --------------  --------------
 
INVESTING ACTIVITIES:
 
  Additions to property, plant and equipment                                                        (91,760)        (79,828)
 
  Investments in other assets                                                                       (31,387)        (32,770)
 
  Acquisitions, net of cash acquired                                                                 (2,150)         (6,980)
 
  Proceeds from sale of short-term investment                                                        11,429          10,667
 
  Proceeds from sale of assets                                                                           --          10,529
                                                                                             --------------  --------------
Net cash used in investing activities                                                              (113,868)        (98,382)
                                                                                             --------------  --------------
 
FINANCING ACTIVITIES:
 
  Transfers from Distributing Company                                                                    --         125,310
 
  Proceeds from stock option exercises                                                               80,124           9,363
 
  Purchase of treasury shares                                                                      (126,300)             --
 
  Payment of note receivable from stockholder                                                         2,705              --
 
  Other                                                                                                  --            (566)
                                                                                             --------------  --------------
Net cash provided by (used in) financing activities                                                 (43,471)        134,107
                                                                                             --------------  --------------
 
Change in cash and cash equivalents                                                                 113,450          35,225
 
Cash and cash equivalents, beginning of year                                                         35,225              --
                                                                                             --------------  --------------
Cash and cash equivalents, end of year                                                       $      148,675  $       35,225
                                                                                             --------------  --------------
 
<CAPTION>
 
(In thousands)                                                                                         1996
                                                                                             --------------
<S>                                                                                          <C>
OPERATING ACTIVITIES:
Net income (loss)                                                                            $      (96,310)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                                                                      84,500
  Warrant costs related to customer purchases                                                            --
  Gain on sale of short-term investment                                                                  --
  NLC litigation costs, net                                                                          91,650
  Losses from asset sales and write-downs, net                                                       11,974
  Loss from equity investment                                                                            --
  Changes in assets and liabilities:
    Accounts receivable                                                                            (160,550)
    Inventories                                                                                     (42,450)
    Prepaid expenses and other current assets                                                        (2,185)
    Deferred income taxes                                                                            (3,978)
    Non-current assets                                                                                3,327
    Accounts payable and other accrued liabilities                                                   60,108
    NLC litigation payment                                                                               --
    Other non-current liabilities                                                                   (26,079)
  Other                                                                                               3,347
                                                                                             --------------
Net cash provided by (used in) operating activities                                                 (76,646)
                                                                                             --------------
INVESTING ACTIVITIES:
  Additions to property, plant and equipment                                                       (134,353)
  Investments in other assets                                                                        (3,700)
  Acquisitions, net of cash acquired                                                                (11,671)
  Proceeds from sale of short-term investment                                                            --
  Proceeds from sale of assets                                                                           --
                                                                                             --------------
Net cash used in investing activities                                                              (149,724)
                                                                                             --------------
FINANCING ACTIVITIES:
  Transfers from Distributing Company                                                               226,370
  Proceeds from stock option exercises                                                                   --
  Purchase of treasury shares                                                                            --
  Payment of note receivable from stockholder                                                            --
  Other                                                                                                  --
                                                                                             --------------
Net cash provided by (used in) financing activities                                                 226,370
                                                                                             --------------
Change in cash and cash equivalents                                                                      --
Cash and cash equivalents, beginning of year                                                             --
                                                                                             --------------
Cash and cash equivalents, end of year                                                       $           --
                                                                                             --------------
</TABLE>
 
See notes to consolidated financial statements.
 
                                      F-5
<PAGE>
GENERAL INSTRUMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data, unless otherwise noted)
 
1. COMPANY BACKGROUND
 
General Instrument Corporation ("General Instrument" or the "Company"), formerly
NextLevel Systems, Inc., is a leading worldwide provider of integrated and
interactive broadband access solutions and, with its strategic partners and
customers, is advancing the convergence of the Internet, telecommunications and
video entertainment industries. The Company is the world's leading supplier of
digital and analog set-top terminals and systems for wired and wireless cable
television networks, as well as hybrid fiber/coaxial network transmission
systems used by cable television operators, and is a provider of digital
satellite television systems for programmers, direct-
 
to-home ("DTH") satellite networks and private networks for business
communications. Through its limited partnership interest in Next Level
Communications, L.P. (the "Partnership") (see Note 8), the Company provides
next-generation broadband access solutions for local telephone companies with
the Partnership's NLevel(3)-Registered Trademark-Switched Digital Access System
("NLevel(3)").
 
  The Company was formerly the Communications Business of the former General
Instrument Corporation (the "Distributing Company"). In a transaction that was
consummated on July 28, 1997, the Distributing Company (i) transferred all the
assets and liabilities, at the Distributing Company's historical cost, relating
to the manufacture and sale of broadband communications products used in the
cable television, satellite, and telecommunications industries to the Company
(then a wholly-owned subsidiary of the Distributing Company) and all the assets
and liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope"), at the
Distributing Company's historical cost, and (ii) distributed all of its
outstanding shares of capital stock of each of the Company and CommScope to its
stockholders on a pro rata basis as a dividend. Approximately 147.3 million
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), based on a ratio of one for one, were distributed to the Distributing
Company's stockholders of record on July 25, 1997 (the "Communications
Distribution"). On July 28, 1997, approximately 49.1 million shares of CommScope
common stock, based on a ratio of one for three, were distributed to the
Company's stockholders of record on that date (the "CommScope Distribution" and,
together with the Communications Distribution, the "Distributions"). On July 28,
1997, the Company and CommScope began operating as independent entities with
publicly traded common stock, and the Distributing Company retained no ownership
interest in either the Company or CommScope. Additionally, immediately following
the Communications Distribution, the Distributing Company was renamed General
Semiconductor, Inc. ("General Semiconductor") and effected a one for four
reverse stock split.
 
2. BASIS OF PRESENTATION
 
The consolidated financial statements include an allocation of certain assets,
liabilities and general corporate expenses from the Distributing Company for the
periods prior to the Distributions. In the opinion of management, general
corporate administrative expenses have been allocated to the Company on a
reasonable and consistent basis by management of the Distributing Company using
estimates of the relative efforts provided to the Company by the Distributing
Company. However, it is not practicable to determine the actual costs that would
have been incurred if the Company operated on a stand-alone basis; accordingly,
such allocations may not necessarily be indicative of the level of expenses
which would have been incurred had the Company been operating as a separate
stand-alone entity during the periods prior to the Distributions.
 
  Prior to the Distributions, the Company participated in the Distributing
Company's cash management program, and the accompanying consolidated financial
statements include an allocation of net interest expense from the Distributing
Company for the periods prior to the Distributions. To the extent the Company
generated positive cash, such amounts were remitted to the Distributing Company.
To the extent the Company experienced temporary cash needs for working capital
purposes or capital expenditures, such funds were historically provided by the
Distributing Company. The net effect of these transactions is reflected in
stockholders' equity. Net interest expense has been allocated based upon the
Company's net assets as a percentage of the total net assets of the Distributing
Company. The allocations were made consistently in each
 
                                      F-6
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
period, and management believes the allocations are reasonable. However, these
interest costs would not necessarily be indicative of what the actual costs
would have been had the Company operated as a separate, stand-alone entity.
Subsequent to the Distributions, the Company is responsible for all cash
management functions using its own resources or purchased services and is
responsible for the costs associated with operating as a public company.
 
  Prior to the Distributions, the Company's financial results included the costs
incurred under the Distributing Company's pension and postretirement benefit
plans for employees and retirees of the Company. Subsequent to the
Distributions, the Company's financial results include the costs incurred under
the Company's own pension and postretirement benefit plans. The provision for
income taxes for the periods prior to the Distributions was based on the
Company's expected annual effective tax rate calculated assuming the Company had
filed separate tax returns under its then existing structure. Subsequent to the
Distributions, the provision for income taxes is based on the Company's actual
results for that period.
 
  The financial information included herein, related to the periods prior to the
Distributions, may not necessarily reflect the consolidated results of
operations, financial position, changes in stockholders' equity and cash flows
of the Company since the Company was not a separate stand-alone entity.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of General Instrument and its wholly-owned subsidiaries.
Investments in which the Company exercises significant influence, but which it
does not control, are accounted for under the equity method of accounting.
Investments in which the Company has less than a 20% ownership interest, and
does not exercise significant influence, are accounted for at cost. All
intercompany accounts and transactions have been eliminated.
 
   USE OF ESTIMATES. The preparation of the accompanying consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
 
   REVENUE RECOGNITION. The Company recognizes revenue when products are shipped
and services are performed. Revenues generated by services performed and the
costs of those services are not material.
 
   PRODUCT WARRANTY. The Company warrants its products against defects and
accrues estimated warranty expense at the time of sale. Actual warranty costs
incurred are charged against the accrual when paid.
 
   CASH EQUIVALENTS. The Company considers all highly liquid debt instruments
with a maturity of three months or less at the date of purchase to be cash
equivalents.
 
   SHORT-TERM INVESTMENTS. Marketable equity securities held by the Company are
classified as "available-for-sale" securities and reported at fair value. Any
unrealized holding gains and losses, net of taxes, are excluded from operating
results and are recognized as a separate component of stockholders' equity until
realized. Fair value of the securities is determined based on market prices and
realized gains and losses are determined using the securities' cost. The Company
held no debt securities during any period presented.
 
   INVENTORIES. Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market.
 
   PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Provisions for depreciation are based on estimated useful lives of the
assets using the straight-line method. Useful lives are 5 to 35 years for
buildings and improvements; economic useful life or lease term, whichever is
shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment.
 
   INTANGIBLE ASSETS. Intangible assets consist primarily of a license, which is
being amortized over its 20-year term based on the expected revenue stream. The
revenue earned from the license is solely dependent on the Company's deployment
of digital terminals and such deployment is expected to rise significantly
during the 20-year term. The Company believes the expected revenue stream is a
reliable measure of the future benefit of the license both in the aggregate and
in terms of the periods to which such benefit will be realized. Accordingly, the
Company believes this method of amortization is a more appropriate method than
straight-line. At each reporting date, the Company's method of amortization
requires the determination of a fraction, the numerator of which is the
 
                                      F-7
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
actual revenues for the period and the denominator of which is the expected
revenues from the license during its 20-year term (see Note 7). Intangible
assets also include patents, which are being amortized on a straight-line basis
over 5 to 17 years. Management believes that, as of December 31, 1998, the
carrying values and remaining lives of such assets are appropriate.
 
   EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 30 to 40 years. Management continually reassesses the appropriateness
of both the carrying value and remaining life of the excess of cost over fair
value of net assets acquired by assessing recoverability based on forecasted
operating cash flows, on an undiscounted basis, and other factors. Management
believes that, as of December 31, 1998, the carrying value and remaining life of
the excess of cost over fair value of net assets acquired are appropriate.
 
   LONG-LIVED ASSETS. Whenever events indicate that the carrying values of
long-lived assets or identifiable intangibles, and the goodwill related to those
assets, may not be recoverable, the Company evaluates the carrying values of
such assets using future undiscounted cash flows. If the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset,
the Company will recognize an impairment loss equal to the difference between
the fair value and carrying value of such asset. The Company recorded
significant impairment losses during the periods presented (see Notes 5 and 6).
Management believes that, as of December 31, 1998, the carrying values of such
assets are appropriate.
 
   FOREIGN CURRENCY TRANSLATION. The Company has determined the U.S. dollar to
be the functional currency of its foreign operations. Accordingly, gains and
losses recognized as a result of translating foreign operations' monetary assets
and liabilities from local currencies to U.S. dollars are reflected in the
accompanying consolidated statements of operations. For periods prior to the
Distributions, the Company had been considered in the Distributing Company's
overall risk management strategy to reduce its exposure to adverse movements in
foreign exchange rates. To limit foreign currency exposure on monetary assets
and liabilities, the Distributing Company, on behalf of the Company, and
subsequent to the Distributions, the Company entered into foreign currency
forward exchange contracts on a month-to-month basis.
 
   BENEFIT PLANS. Prior to the Distributions, the Company participated in the
Distributing Company's sponsored non-contributory, defined benefit pension plans
covering substantially all employees of the Company. Subsequent to the
Distributions, substantially all employees are covered by defined benefit
pension plans of the Company. The benefits under the plans are based on years of
service and compensation levels. Contributions to pension funds are made when
actuarial computations prescribe such funding.
 
   INCOME TAXES. The Company's operating results for periods prior to the
Distributions were included in the Distributing Company's consolidated U.S. and
state income tax returns and in the tax returns of certain of the Distributing
Company's foreign subsidiaries. Through the date of the Distributions, the
provision for income taxes was based on the Company's expected annual effective
tax rate calculated assuming the Company had filed separate tax returns under
its then existing structure. Subsequent to the Distributions, the provision for
income taxes is based on the Company's actual results for that period. Deferred
income taxes reflect the future tax consequences of differences between the
financial reporting and tax bases of assets and liabilities. Deferred income
taxes have been provided for the income tax liability that would be incurred on
the repatriation of undistributed earnings of the Company's foreign
subsidiaries, except for locations where the Company has designated earnings to
be permanently reinvested.
 
   EARNINGS PER SHARE AND PRO FORMA LOSS PER SHARE. On December 31, 1997, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which replaces primary and fully diluted earnings per
share calculated under Accounting Principles Board Opinion ("APB") No. 15,
"Earnings per Share," with basic and diluted earnings per share. Basic earnings
per share is computed by dividing net income by the weighted-average number of
common shares outstanding. Diluted earnings per share is computed by dividing
net income by the weighted-average number of common and common equivalent shares
outstanding adjusted for the dilutive effect of stock options and warrants
(unless such common stock equivalents would be anti-dilutive), and the
computation of diluted earnings per share assumes the exercise of stock options
and warrants using
 
                                      F-8
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
the treasury stock method. For the year ended December 31, 1998 the calculation
of diluted weighted-average shares outstanding included the dilutive effects of
stock options and warrants of 2,575 and 6,830 shares, respectively.
 
   Prior to the Distributions, the Company did not have its own capital
structure, and pro forma per share information has been presented for the years
ended December 31, 1997 and 1996. The pro forma weighted-average number of
shares outstanding used in the pro forma per share calculation for 1996 equaled
the number of common shares issued on the date of the Distributions, and for
1997, included the number of common shares issued on the date of the
Distributions plus the actual share activity during the period subsequent to the
Distributions. Further, since the computation of diluted loss per share is
anti-dilutive for the years ended December 31, 1997 and 1996, the amounts
reported for pro forma basic and diluted loss per share are the same.
 
   RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
 
   NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED. In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued and
is effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities. The Company is
currently evaluating the impact this pronouncement will have on its consolidated
financial statements.
 
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
 
The unaudited pro forma consolidated statements of operations presented below
were prepared to give effect to the Distributions as if they had occurred on
January 1, 1996. The unaudited pro forma statements of operations set forth
below do not purport to represent what the Company's operations actually would
have been had the Distributions occurred on January 1, 1996 or to project the
Company's operating results for any future period.
 
  The unaudited pro forma information has been prepared utilizing the historical
consolidated statements of operations of the Company which were adjusted to
reflect: (i) an additional $4 million and $7 million of selling, general and
administrative ("SG&A") costs for the years ended December 31, 1997 and 1996,
respectively, to eliminate the allocation of corporate expenses to CommScope and
General Semiconductor, as such costs subsequent to the Distributions are no
longer allocable and (ii) a net debt level of $100 million at the beginning of
each period presented through July 25, 1997, the date of the Communications
Distribution.
 
<TABLE>
<S>                              <C>        <C>
                                 Year Ended December
                                         31,
                                 --------------------
                                      1997       1996
                                 ---------  ---------
 
Net sales                        $1,764,088 $1,755,585
 
Cost of sales                    1,336,482  1,349,815
                                 ---------  ---------
 
Gross profit                       427,606    405,770
                                 ---------  ---------
 
Operating expenses:
 
  Selling, general and
     administrative                219,004    181,032
 
  Research and development         207,826    198,071
 
  Amortization of excess of
     cost over fair value of
     net assets acquired            14,571     14,278
 
  NLC litigation costs                  --    141,000
                                 ---------  ---------
 
     Total operating expenses      441,401    534,381
                                 ---------  ---------
 
Operating loss                     (13,795)  (128,611)
 
Other income (expense), net          5,766     (1,427)
 
Interest income (expense), net       5,631     (7,595)
                                 ---------  ---------
 
Loss before income taxes            (2,398)  (137,633)
 
(Provision) benefit for income
  taxes                             (9,269)    48,989
                                 ---------  ---------
 
Net loss                         $ (11,667) $ (88,644)
                                 ---------  ---------
 
Weighted-average shares
  outstanding                      147,523    147,315
 
Loss per share - basic and
  diluted                        $   (0.08) $   (0.60)
</TABLE>
 
5. RESTRUCTURINGS
 
In December 1996, the Distributing Company committed to certain restructuring
actions not related to the Distributions. These actions resulted in a charge of
$8 million to SG&A expense for the write-down of various assets to fair value.
This charge consists principally of a $3 million write-down of a facility that
the Company decided to vacate and a $4 million write-off of previously
capitalized amounts related to a data processing systems project which the
Company abandoned in 1996.
 
  In the first half of 1997, in connection with the Distributions (see Note 1),
the Company recorded pre-tax charges of $18 million to cost of sales for
employee costs, which included a curtailment and settlement loss of $4 million
(see Note 17), related to dividing the Distributing Company's Taiwan operations
between the Company and General Semiconductor. Further, the Company recorded
 
                                      F-9
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
a charge of $6 million to SG&A expense for legal and other professional fees
incurred in connection with the Distributions.
 
  In the fourth quarter of 1997, with the change in senior management, the
Company undertook an effort to assess the future viability of its satellite
business. As the satellite business had been in a state of decline, management
of the Company made a decision to streamline the cost structure of its San
Diego-based satellite business by reducing this unit's headcount by 225. In
conjunction with the assessment of the satellite business, the Company also made
a strategic decision with respect to its worldwide consolidated manufacturing
operations that resulted in the closure of its Puerto Rico satellite TV
manufacturing facility, which manufactured receivers used in the private
network, commercial and consumer satellite markets for the reception of analog
and digital television signals, and reduced headcount by 1,100. The Company has
not experienced reduced revenues as a result of the closure of this
manufacturing facility since the products previously manufactured at this
location are currently being manufactured by subcontractors in the U.S. and were
sold by the Company during 1998. The Company also decided to close its corporate
office and move from Chicago, Illinois to Horsham, Pennsylvania. The closure of
the Chicago corporate office was completed during the first quarter of 1998. As
a result of the above actions, the Company recorded a pre-tax charge of $36
million during the fourth quarter of 1997, which included $15 million for
severance and other employee separation costs, $11 million for costs associated
with the closure of the facilities and $10 million related to the write-off of
fixed assets at these facilities. Of these charges, $21 million were recorded as
cost of sales, $14 million as SG&A expense and $1 million as research and
development expense. All of the fourth quarter severance and other employee
separation costs were paid by the end of 1998. Costs associated with the closure
of facilities ("Facility Costs") include vacated long-term leases which are
payable through the end of the lease terms which extend through the year 2008.
  The $18 million and $21 million of restructuring charges described in the
preceding two paragraphs were recorded to cost of sales during 1997 since they
relate to the Taiwan and Puerto Rico manufacturing facilities. The costs of
these facilities have historically been included in cost of sales; therefore,
the restructuring charges related to these facilities have also been recorded in
cost of sales.
 
  As part of the restructuring plan, the Company recorded an additional $16
million of pre-tax charges in the first quarter of 1998 which primarily included
$8 million for severance and other employee separation costs, $3 million of
facility exit costs, including the early termination of a leased facility which
the Company decided to close in the quarter ended March 31, 1998, and $5 million
related to the write-down of fixed assets to their estimated fair values. Of
these charges, $9 million were recorded as cost of sales, $6 million as SG&A and
$1 million as research and development expense.
 
The following tabular reconciliation summarizes the restructuring activity
discussed above:
<TABLE>
<CAPTION>
                                      1996                               1997                                1998
                              --------------------      Balance  --------------------       Balance  --------------------
                                           Amounts  at Dec. 31,               Amounts   at Dec. 31,               Amounts
(in millions)                 Additions   Utilized         1996  Additions   Utilized          1997  Additions   Utilized
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
 
<S>                           <C>        <C>        <C>          <C>        <C>        <C>           <C>        <C>
 
Property, Plant & Equipment
  (1)                              $4.2      $(3.3)        $0.9      $10.4     $ (3.5)        $ 7.8      $ 4.6     $(12.4)
 
Facility Costs                      3.0         --          3.0       11.2       (3.7)         10.5        3.3      (10.0)
 
Severance                           0.4       (0.4)          --       32.7      (12.8)         19.9        7.6      (26.7)
 
Professional Fees                    --         --           --        6.0       (6.0)           --         --         --
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
Total                              $7.6      $(3.7)        $3.9      $60.3     $(26.0)        $38.2      $15.5     $(49.1)
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
 
<CAPTION>
 
                                   Balance
                               at Dec. 31,
(in millions)                         1998
                              ------------
<S>                           <C>
Property, Plant & Equipment
  (1)                                 $ --
Facility Costs                         3.8
Severance                              0.8
Professional Fees                       --
                              ------------
Total                                 $4.6
                              ------------
</TABLE>
 
(1) The amount provided represents a direct reduction to the property, plant and
equipment balance to reflect the identified impaired assets at their fair value.
The amounts utilized reflect the disposition of such identified impaired assets.
 
6. OTHER CHARGES
 
In the fourth quarter of 1996, the Company recorded $57 million ($35 million net
of tax) of charges related to the Company's transition to next generation
digital products and $20 million ($13 million net of tax) of other charges
related to the write-down to the lower of cost or market, of inventory products
the Company decided to discontinue
 
                                      F-10
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
and the settlement of a litigation matter. Sales of the product the Company
decided to discontinue were not material. Of these charges, $71 million were
recorded as cost of sales and related to the write-down of inventories to their
estimated lower of cost or market and the accrual of contractual upgrade and
product warranty liabilities in connection with the transition to the Company's
next generation digital products. The remaining $6 million of charges were
recorded as SG&A expense and related to the write-down of fixed assets to their
estimated fair values and settlement of a litigation matter. All of the fourth
quarter charges were utilized by the end of 1997. The following is a description
of the $57 million of charges related to the Company's transition to next
generation digital products:
 
- In the fourth quarter of 1996, the Company recorded a $47.9 million write-down
  of digital product inventory to its lower of cost or market as it became
  evident that the expected sales price, less costs to complete, would not be
  sufficient to recover the carrying value of the inventory.
 
- The initial sales of digital products occurred during the fourth quarter of
  1996. At the time of the sale, the Company accrued warranty liability in
  accordance with its accounting policy in Note 3. However, during the fourth
  quarter of 1996, subsequent to the initial sale, the Company was required to
  rework the product to correct an unanticipated system issue. This rework
  resulted in an additional $1.6 million of warranty expense and was incurred
  prior to December 31, 1996.
 
- In addition, the Company recorded an additional $3.8 million warranty
  liability as it became evident in the fourth quarter of 1996 that the failure
  rates on certain satellite products would exceed the rate previously
  anticipated. At the time of the sale of this product, the Company accrued a
  warranty liability in accordance with its accounting policy in Note 3.
 
- Also, in December 1996, the Company contractually agreed to provide an upgrade
  at no charge related to its transition from the analog platform to digital
  products. The $3.4 million cost of this upgrade was accrued on the date the
  Company became contractually obligated to perform such upgrade.
 
  In the fourth quarter of 1997, the Company recorded $61 million ($44 million
net of tax) of other charges, partially offset by $11 million ($7 million net of
tax) of other income, described below. In conjunction with the assessment of the
satellite business, management concluded that future sales of certain satellite
products would not be sufficient to recover the carrying value of related
inventory. Accordingly, the Company recorded a $43 million charge to write-down
inventory to its lower of cost or market. Concurrent with this inventory
write-down, management reviewed the fixed assets and equipment related to
production and testing associated with these products and concluded that their
carrying value would no longer be recoverable since such assets would no longer
be utilized and, accordingly, the Company wrote-down such assets by $10 million
to their estimated scrap value, which management believes approximated fair
value. These fixed assets were not being utilized as of December 31, 1998. A
portion of these fixed assets have been disposed of and the Company expects that
the remaining assets will be disposed of during 1999. The Company incurred
approximately $8 million of professional fees related to the assessment of the
satellite business. Of the $61 million of charges, $45 million were recorded as
cost of sales, $8 million were recorded as SG&A expense and $8 million were
recorded as research and development expense. The $61 million of other charges
were partially offset by $11 million of other income related to investment gains
and income associated with the reversal of accrued interest related to the final
NLC Litigation settlement on the date the court issued its final ruling.
 
  The Company incurred certain other pre-tax charges during the first quarter of
1998 primarily related to management's decision to close a satellite
manufacturing facility due to reduced demand for the products manufactured by
that facility. Concurrent with this decision, the Company determined that the
carrying value of the inventory would not be recoverable and accordingly, the
Company wrote down the inventory to its lower of cost or market. In addition,
the Company incurred moving costs associated with relocating certain fixed
assets to other facilities, shut down expenses and legal fees. The above charges
totaled $25 million, of which $18 million are included in cost of sales and $7
million are included in SG&A expense. In addition, the Company incurred $8
million of charges, which are included in "other income (expense) - net,"
related to costs incurred by the Partnership, which the Company accounts for
under the equity method. Such costs are primarily related to the BBT litigation
settlement (see Note 16) and compensation expense related to key executives of
an acquired company.
 
                                      F-11
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
The following tabular reconciliation summarizes the other charge activity
discussed above:
<TABLE>
<CAPTION>
                                      1996                               1997                                1998
                              --------------------      Balance  --------------------       Balance  --------------------
                                           Amounts  at Dec. 31,               Amounts   at Dec. 31,               Amounts
(In millions)                 Additions   Utilized         1996  Additions   Utilized          1997  Additions   Utilized
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
 
<S>                           <C>        <C>        <C>          <C>        <C>        <C>           <C>        <C>
Inventory(1)                      $64.4      $(4.2)       $60.2      $42.6     $(59.5)        $43.3      $15.0     $(43.3)
 
Property, Plant &
  Equipment(1)                      4.9       (1.7)         3.2       10.0       (4.8)          8.4         --       (1.1)
 
Professional Fees & Other
  Costs                             8.2       (7.1)         1.1        7.7       (5.6)          3.2       10.1      (13.3)
 
Partnership Related Costs            --         --           --         --         --            --        8.4       (8.4)
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
Total                             $77.5     $(13.0)       $64.5      $60.3     $(69.9)        $54.9      $33.5     $(66.1)
                              ---------  ---------  -----------  ---------  ---------  ------------  ---------  ---------
 
<CAPTION>
 
                                   Balance
                               at Dec. 31,
(In millions)                         1998
                              ------------
<S>                           <C>
Inventory(1)                         $15.0
Property, Plant &
  Equipment(1)                         7.3
Professional Fees & Other
  Costs                                 --
Partnership Related Costs               --
                              ------------
Total                                $22.3
                              ------------
</TABLE>
 
(1) These charges represent a direct reduction to the inventory and property,
plant and equipment balances to reflect these assets at the lower of cost or
market and fair values, respectively. The amounts utilized reflect the
disposition of such identified assets.
 
7. ASSET PURCHASE
 
On June 17, 1998, the Company entered into an Asset Purchase Agreement (the
"Agreement") with two affiliates of Tele-Communications, Inc., TCIVG-GIC, Inc.
("TCIVG") and NDTC Technology, Inc. ("NDTC Technology" and, collectively with
TCIVG, "TCI") pursuant to which the Company agreed to acquire from TCIVG, in
exchange for 21.4 million unregistered shares of the Company's Common Stock,
certain assets, a license to certain intellectual property from NDTC Technology
which will enable the Company to conduct authorization services and future cash
consideration as discussed below. The shares issued to TCI are restricted in
that they are not registered and are not transferable to any unrelated party
other than in the event of a change of control of the Company for a period of
three years following their date of issuance. The Company's provision of
services under the aforementioned license is intended to provide the cable
industry with a secure access control platform to support widespread deployment
of digital terminals and related systems and applications. On July 17, 1998, the
transaction was consummated. The Agreement provides the Company with minimum
revenue guarantees from TCI over the first nine years from the date of closing.
The Company has contracted with NDTC Technology for certain support services
during the first nine years following the date of closing, with renewable
one-year terms. The Agreement gives the Company the right to license the
technology for a period of 20 years. As mentioned above, the Agreement contains
a provision for TCIVG to pay the Company $50 million over the first five years
from the date of closing in equal monthly installments which represents a
reduction of purchase price. The present value of the $50 million note
receivable was recorded as a reduction of stockholders' equity. The net purchase
price of $400 million was allocated to the license and the assets acquired based
on their respective estimated fair values. The fair value of assets acquired
includes property, plant and equipment of $2 million, deferred tax liabilities
of $30 million and a license of $428 million. The Company computed the purchase
price by multiplying the number of shares issued by the per share trading price
of the stock reduced by a 10% discount to reflect the restrictions associated
with the unregistered shares, and adjusted such resulting amount to reflect the
$50 million reduction in purchase price discussed above.
 
  The Company is amortizing the cost of the license over its 20-year term based
on the expected revenue stream. The revenue earned from the license is solely
dependent on the Company's deployment of digital terminals. Such deployment is
expected to rise significantly during the 20-year license term as supported by
industry data and the Company's contractual obligations with customers. The
Company expects revenues resulting from such deployments, which are calculated
based on estimated monthly fees times the estimated subscriber base, to rise
from approximately $2.5 million in 1998 to approximately $44 million by 2002 to
approximately $70 million by 2007 to approximately $80 million per annum during
the last seven years of the 20-year license term. The Company
 
                                      F-12
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
believes the expected revenue stream is a reliable measure of the future benefit
of the license both in the aggregate and in terms of the periods to which such
benefit will be realized. Accordingly, the Company believes this method of
amortization is a more appropriate method than straight-line. At each reporting
date, the Company's method of amortization requires the determination of a
fraction, the numerator of which is the actual revenues for the period and the
denominator of which is the expected revenues from the license during its
20-year term. This method results in any variation from original estimates being
recognized in the current period in a manner consistent with a
units-of-production method of depreciation. Under the Company's method,
amortization for the period from July 17, 1998 to December 31, 1998 was
approximately $0.7 million.
 
8. THE PARTNERSHIP
 
In January 1998, the Company transferred at historical cost the net assets of
its Next Level Communications ("NLC") subsidiary purchased in 1995, the
underlying NLC technology related to the design and marketing of a
next-generation telecommunication broadband access system for the delivery of
telephony, video and data from a telephone company central office to the home,
and the management and workforce of NLC to the newly formed Partnership in
exchange for approximately an 89% limited partnership interest (subject to
additional dilution). Such transaction was accounted for at historical cost. The
limited partnership interest is included in "investments and other assets" in
the accompanying consolidated balance sheet at December 31, 1998. The operating
general partner, which was formed by Spencer Trask & Co., an unrelated third
party, has acquired approximately an 11% interest in the Partnership and has the
potential to acquire up to an additional 11% in the future. The Company does not
have the option to acquire the remaining interest in the Partnership. Net assets
transferred to the Partnership of $45 million primarily included property, plant
and equipment, inventories and accounts receivable partially offset by accounts
payable and accrued expenses. The Company's net equity investment in the
Partnership was $36 million at December 31, 1998.
 
  Pursuant to the Partnership agreement, the operating general partner controls
the Partnership and is responsible for developing the business plan and
infrastructure necessary to position the Partnership as a stand-alone company.
The Company, as the limited partner, has certain protective rights, including
the right to approve an alteration of the legal structure of the Partnership,
the sale of the Partnership's principal assets, the sale of the Partnership and
a change in the limited partner's financial interests in the Partnership. The
Company can not remove the general partner, except for cause; however, it has
the right to approve a change in the general partner. Since the operating
general partner controls the day-to-day operations of the Partnership and has
the ability to make decisions typical of a controlling party, including the
execution of agreements on all material matters affecting the Partnership's
business, the Partnership's operating results have not been consolidated with
the operating results of the Company subsequent to the January 1998 transfer.
 
  The Company does not expect widespread commercial deployment of this
technology until the latter part of 1999 or early in 2000, however, there can be
no assurance that the development activities currently being undertaken will
result in successful commercial deployment.
 
  In addition, in January 1998, the Company advanced $75 million to the
Partnership in exchange for an 8% debt instrument (the "Note"), and the Note
contains normal creditor security rights, including a prohibition against
incurring amounts of indebtedness for borrowed money in excess of $10 million.
Since the repayment of the Note is solely dependent upon the results of the
Partnership's research and development activities and the commercial success of
its product development, the Company recorded a charge to research and
development expense during the quarter ended March 31, 1998 to fully reserve for
the Note concurrent with the funding. The proceeds of the Note are being
utilized to fund the research and development activities of the Partnership
through 1999 to develop the aforementioned telecommunication technology for
widespread commercial deployment. During 1998, the Company agreed to make
additional equity investments in the Partnership, aggregating $50 million,
beginning in November 1998, to fund the Partnership's growth and assist the
Partnership in meeting its forecasted working capital requirements. Through
December 31, 1998, the Company has made $16 million of this $50 million
investment. The Company expects to make the remaining equity investment during
the first half of 1999.
 
                                      F-13
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  The Company is accounting for its interest in the Partnership as an investment
under the equity method of accounting. Further, the Company's share of the
Partnership's losses related to future research and development activities will
be offset against the $75 million reserve discussed above. Also, the Company
eliminates its interest income from the Note against the Partnership's related
interest expense on the Note. For the year ended December 31, 1998, the
Company's share of the Partnership's losses was $25 million, (net of the
Company's share of research and development expenses and the interest income
elimination). The following summarized financial information is provided for the
Partnership as of and for the year ended December 31, 1998:
 
<TABLE>
<S>                                                  <C>
Net sales                                                $ 43,830
 
Gross profit                                                  397
 
Loss before income taxes                                  (81,731)
 
Net cash used in operating activities                     (66,633)
 
Current assets                                             69,829
 
Non-current assets                                         27,942
 
Current liabilities                                        31,265
 
Non-current liabilities                                    81,275
</TABLE>
 
9. SHORT-TERM INVESTMENTS
 
Short-term investments are comprised of marketable equity securities at December
31, 1998 and 1997, and all such securities were classified as
"available-for-sale." Proceeds and the related realized gains from the sales of
available-for-sale securities were $11 million during both 1998 and 1997. The
Company held no such securities during 1996. Short-term investments, excluding
cash equivalents, consisted of the following at December 31, 1998 and 1997:
 
<TABLE>
<S>                                <C>         <C>         <C>
                                                    Gross
                                         Fair  Unrealized       Cost
Marketable Equity Securities            Value       Gains      Basis
                                   ----------  ----------  ---------
 
December 31, 1998                     $ 4,865     $ 3,865     $1,000
                                   ----------  ----------  ---------
 
December 31, 1997                     $30,346     $30,346     $   --
                                   ----------  ----------  ---------
</TABLE>
 
--------------------------------------------------------------------------------
 
10. OTHER COMPREHENSIVE INCOME
 
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that an enterprise report the
change in its net assets during the period from non-owner sources. Since this
statement only requires additional disclosures, it had no impact on the
Company's consolidated financial position or cash flows. During 1998 and 1997,
other comprehensive income (loss) comprised unrealized gains (losses) on
available-for-sale securities. Below is a reconciliation of the gross unrealized
holding gains (losses) arising during 1998 and 1997 and the net unrealized gains
(losses), including reclassification adjustments and the related tax benefit
(expense) of each:
<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                   ---------------------------------------------------------------
<S>                                                                <C>          <C>          <C>          <C>          <C>
                                                                                   1998                             1997
                                                                   -------------------------------------  ------------------------
 
<CAPTION>
                                                                                        Tax                                    Tax
                                                                       Pre-tax    (Expense)   Net-of-tax      Pre-tax    (Expense)
                                                                        Amount   or Benefit       Amount       Amount   or Benefit
                                                                   -----------  -----------  -----------  -----------  -----------
<S>                                                                <C>          <C>          <C>          <C>          <C>
 
Unrealized holding gains (losses) arising during the period        $   (15,052) $     5,870  $    (9,182) $    41,013  $   (15,507)
 
Less: reclassification adjustment for gains included in net
  income                                                               (11,429)       4,457       (6,972)     (10,667)       4,160
                                                                   -----------  -----------  -----------  -----------  -----------
 
Unrealized gains (losses) on available-for-sale securities, net    $   (26,481) $    10,327  $   (16,154) $    30,346  $   (11,347)
                                                                   -----------  -----------  -----------  -----------  -----------
 
<CAPTION>
 
<S>                                                                <C>
 
                                                                    Net-of-tax
                                                                        Amount
                                                                   -----------
<S>                                                                <C>
Unrealized holding gains (losses) arising during the period        $    25,506
Less: reclassification adjustment for gains included in net
  income                                                                (6,507)
                                                                   -----------
Unrealized gains (losses) on available-for-sale securities, net    $    18,999
                                                                   -----------
</TABLE>
 
                                      F-14
<PAGE>
Notes (Dollars in thousands, except per share data, unless otherwise noted)
 
11. INVENTORIES
 
Inventories consist of:
 
<TABLE>
<S>                                            <C>           <C>
                                                      December 31,
                                               --------------------------
                                                       1998          1997
                                               ------------  ------------
 
Raw materials                                  $    103,807  $    111,148
 
Work in process                                      19,236        19,676
 
Finished goods                                      158,408       157,254
                                               ------------  ------------
 
                                               $    281,451  $    288,078
                                               ------------  ------------
</TABLE>
 
12. PROPERTY, PLANT AND EQUIPMENT - NET
 
Property, plant and equipment - net consist of:
 
<TABLE>
<S>                                             <C>           <C>
                                                       December 31,
                                                --------------------------
                                                       1998          1997
                                                ------------  ------------
Land and land improvements                       $   17,683    $   17,683
 
Buildings, improvements and leasehold
   improvements                                      33,051        37,443
 
Machinery and equipment                             462,305       421,615
                                                ------------  ------------
 
                                                    513,039       476,741
 
Less accumulated depreciation                      (275,908)     (239,920)
                                                ------------  ------------
 
                                                 $  237,131    $  236,821
                                                ------------  ------------
</TABLE>
 
13. OTHER ACCRUED LIABILITIES
 
Other accrued liabilities consist of:
 
<TABLE>
<S>                                             <C>           <C>
                                                       December 31,
                                                --------------------------
                                                       1998          1997
                                                ------------  ------------
 
Salaries and compensation liabilities            $   41,286    $   49,831
 
Payroll, state and local taxes                       10,764         7,648
 
Product and warranty liabilities                     56,666        54,594
 
Other                                                77,397        76,177
                                                ------------  ------------
 
                                                 $  186,113    $  188,250
                                                ------------  ------------
</TABLE>
 
14. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are as
follows:
 
<TABLE>
<S>                               <C>          <C>           <C>
                                          Year Ended December 31,
                                  ---------------------------------------
                                        1998           1997          1996
                                  -----------  ------------  ------------
 
Domestic                           $  81,881   $    (23,157) $   (189,487)
 
Foreign                               11,768         13,518        40,079
                                  -----------  ------------  ------------
 
Total                              $  93,649   $     (9,639) $   (149,408)
                                  -----------  ------------  ------------
</TABLE>
 
The components of the provision (benefit) for income taxes are as follows:
 
<TABLE>
<S>                               <C>          <C>          <C>
                                         Year Ended December 31,
                                  -------------------------------------
                                        1998         1997         1996
                                  -----------  -----------  -----------
 
Current:
 
   Federal                         $  19,987    $   7,583    $  (5,878)
 
   Foreign                             8,939        3,905        4,312
 
   State                               9,550        3,800        1,796
                                  -----------  -----------  -----------
 
                                      38,476       15,288          230
                                  -----------  -----------  -----------
 
Deferred:
 
   Federal                             7,932      (11,039)     (52,635)
 
   Foreign                            (5,971)         926        1,269
 
   State                              (2,238)       1,299       (1,962)
                                  -----------  -----------  -----------
 
                                        (277)      (8,814)     (53,328)
                                  -----------  -----------  -----------
 
Provision (benefit) for income
  taxes                            $  38,199    $   6,474    $ (53,098)
                                  -----------  -----------  -----------
</TABLE>
 
  Actual current tax liabilities are lower than reflected above for the year
ended December 31, 1998 by $17,602 for the stock option deduction benefits
recorded as a credit to stockholders' equity.
 
  The provision for income taxes for the periods prior to the Distributions was
based on the Company's expected annual effective tax rate calculated assuming
the Company had filed separate tax returns under its then existing structure.
Subsequent to the Distributions, the provision for income taxes is based on the
Company's actual results for that period.
 
  The following table presents the principal reasons for the difference between
the actual income tax provision (benefit) and the tax provision (benefit)
computed by applying the U.S. federal statutory income tax rate to the loss
before income taxes:
 
<TABLE>
<S>                                <C>         <C>         <C>
                                        Year Ended December 31,
                                   ----------------------------------
                                         1998        1997        1996
                                   ----------  ----------  ----------
 
Federal income tax provision
  (benefit) at 35%                    $32,777     $(3,374)   $(52,293)
 
State income taxes - net                4,253       3,314        (108)
 
Foreign operations                       (996)      1,153      (6,655)
 
Non-deductible purchase
  accounting item                       4,880       4,997       4,997
 
Other - net                            (2,715)        384         961
                                   ----------  ----------  ----------
 
Provision (benefit) for income
  taxes                               $38,199      $6,474    $(53,098)
                                   ----------  ----------  ----------
 
Effective income tax rate               40.8%       67.2%      (35.5%)
</TABLE>
 
                                      F-15
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
 
<TABLE>
<S>                                            <C>          <C>
                                                     December 31,
                                               ------------------------
                                                      1998         1997
                                               -----------  -----------
 
Deferred tax assets:
 
  Domestic net operating loss carryforwards
     (expiring in 2012)                        $    18,892  $    35,325
 
  Tax credit carryforwards (expiring through
     2018)                                          11,897        6,516
 
  Accounts receivable and inventory reserves        33,312       33,732
 
  Product and warranty liabilities                  22,064       21,250
 
  Employee benefits                                 28,996       26,784
 
  Reserve on Partnership Note                       11,010           --
 
  Warrant costs related to customer purchases        8,515           --
 
  Other accrued liabilities                         15,686       12,354
 
  Other                                              3,438        4,275
                                               -----------  -----------
 
Gross deferred tax assets                          153,810      140,236
                                               -----------  -----------
 
Deferred tax liabilities:
 
  Fixed and intangible assets                       65,063       17,673
 
  Unrealized gain on short-term investments          1,020       11,347
 
  Other                                              1,367        5,745
                                               -----------  -----------
 
Gross deferred tax liabilities                      67,450       34,765
                                               -----------  -----------
 
Net deferred tax asset                         $    86,360  $   105,471
                                               -----------  -----------
</TABLE>
 
  In July 1997, the Company, General Semiconductor and CommScope entered into a
tax-sharing agreement that effectively provides that the Company will be
responsible for the consolidated tax liability of the Distributing Company for
all periods prior to the Distributions.
 
  At December 31, 1996, the federal and state income taxes which were currently
payable or receivable were settled with the Distributing Company through
divisional net equity. In addition, during the year ended December 31, 1996, the
Distributing Company settled certain tax matters which decreased the Company's
tax payable through divisional net equity to the Distributing Company and
resulted in a credit of $5 million to goodwill, since these matters related to
periods prior to the acquisition of the Distributing Company by affiliates of
Forstmann Little & Co.
 
  Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $14 million and $6 million in 1998 and 1997, respectively,
as those earnings are considered to be permanently reinvested. Determining the
tax liability that would arise if these earnings were remitted is not
practicable. Income taxes received during 1998 and 1997 subsequent to the
Distributions were $5 million and $2 million, respectively. Income taxes paid
during 1998 were $15 million.
 
15. LONG-TERM DEBT
 
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides a $600 million unsecured revolving credit facility
and matures on December 31, 2002. The Credit Agreement permits the Company to
choose between two interest rate options: an Adjusted Base Rate (as defined in
the Credit Agreement), which is based on the highest of (i) the rate of interest
publicly announced by The Chase Manhattan Bank as its prime rate, (ii) 1% per
annum above the secondary market rate for three - month certificates of deposit
and (iii) the federal funds effective rate from time to time plus 0.5%, and a
Eurodollar rate (LIBOR) plus a margin which will vary based on certain
performance criteria. The Company is also able to set interest rates through a
competitive bid procedure. In addition, the Credit Agreement requires the
Company to pay a facility fee on the total loan commitment. The Credit Agreement
contains financial and operating covenants, including limitations on guarantee
obligations, liens and the sale of assets, and requires the maintenance of
certain financial ratios. In addition, under the Credit Agreement, certain
changes in control of the Company would result in an event of default, and the
lenders under the Credit Agreement could declare all outstanding borrowings
under the Credit Agreement immediately due and payable. None of the restrictions
contained in the Credit Agreement is expected to have a significant effect on
the Company's ability to operate, and as of December 31, 1998 and 1997, the
Company was in compliance with all financial and operating covenants under the
Credit Agreement. At December 31, 1998 and 1997, the Company had not borrowed
under the Credit Agreement and had available credit of $500 million and $513
million, respectively. Interest paid related to the Credit Agreement during 1998
and 1997 subsequent to the Distributions was $1 million and $5 million,
respectively.
 
                                      F-16
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
16. COMMITMENTS AND CONTINGENCIES
 
The Company leases office space, manufacturing and warehouse facilities and
transportation and other equipment under operating leases, which expire at
various dates through the year 2009. Rent expense was $15 million, $16 million
and $15 million in 1998, 1997 and 1996, respectively. The Company has two
seven-year operating lease agreements for its domestic administrative
facilities, and the total cost of the facilities covered by these agreements
approximates $110 million. These leases provide for a substantial residual value
guarantee (approximately 83% of the total cost) which is due upon termination of
the lease and include purchase and renewal options. The Company can exercise its
purchase option or the facilities can be sold to a third party. Upon termination
of the leases, the Company expects the fair market value of the leased
facilities to substantially reduce or eliminate the payment under the residual
value guarantees. The table of future minimum operating lease payments below
excludes any payments related to these guarantees.
 
  Total future minimum rentals to be received under noncancelable subleases as
of December 31, 1998 are $9 million. Future minimum lease payments required
under noncancelable operating leases as of December 31, 1998 are as follows:
 
<TABLE>
<S>                                                   <C>
1999                                                     $9,769
2000                                                      9,073
2001                                                      8,649
2002                                                      8,421
2003                                                      5,932
Thereafter                                                8,643
                                                      ---------
Total minimum lease payments                            $50,487
                                                      ---------
</TABLE>
 
  The Company had approximately $109 million and $87 million of letters of
credit outstanding at December 31, 1998 and 1997, respectively.
 
  The Company is either a plaintiff or a defendant in several pending legal
matters. In addition, the Company is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge and disposal of
hazardous materials. The Company's manufacturing facilities are believed to be
in substantial compliance with current laws and regulations. Compliance with
current laws and regulations has not had, and is not expected to have, a
material adverse effect on the Company's consolidated financial statements.
 
  In April 1995, DSC Communications Corporation and DSC Technologies Corporation
(collectively, "DSC") brought suit against NLC and the founders of NLC (the "NLC
Litigation"). In June 1996, a final judgment against NLC and the individual
defendants was entered in favor of DSC and a pre-tax charge to earnings of $141
million was recorded. In October 1997, the trial court entered a revised final
judgment, and in November 1997, the Company satisfied the judgment with a
payment of $141 million.
 
  On May 5, 1998, the action entitled BroadBand Technologies, Inc. v. General
Instrument Corp., pending in the United States District Court for the Eastern
District of North Carolina, was dismissed with prejudice. In addition, on May 4,
1998, the action entitled Next Level Communications v. BroadBand Technologies,
Inc., was dismissed with prejudice. These dismissals were entered pursuant to a
settlement agreement under which, among other things, the Partnership has paid
BroadBand Technologies ("BBT") $5 million and BBT and the Partnership have
entered into a perpetual cross-license of patents applied for or issued
currently or during the next five years. At the time of the formation of the
Partnership (see Note 8), the Company, as limited partner, and Spencer Trask, as
general partner, estimated that no liability existed with respect to the BBT
litigation. Further, the Partnership indemnified the Company with respect to
this litigation because such litigation was directly related and attributable to
the technology transferred to the Partnership.
 
  A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of the Distributing Company's common
stock during the period March 21, 1995 through October 18, 1995. The complaint
alleges that the Distributing Company and certain of its officers and directors,
as well as Forstmann Little & Co. and certain related entities, violated the
federal securities laws, namely, Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
Distributions, by allegedly making false and misleading statements and failing
to disclose material facts about the
 
                                      F-17
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
Distributing Company's planned shipments in 1995 of its CFT 2200 and
Digicipher-Registered Trademark- products. Also pending in the same court, under
the same name, is a derivative action brought on behalf of the Distributing
Company. The derivative action alleges that, prior to the Distributions, the
members of the Distributing Company's Board of Directors, several of its
officers and Forstmann Little & Co. and related entities have breached their
fiduciary duties by reason of the matter complained of in the class action and
the defendants' alleged use of material non-public information to sell shares of
the Distributing Company's stock for personal gain. Both actions seek
unspecified damages and attorneys' fees and costs. The court granted the
defendants' motion to dismiss the original complaints in both of these actions,
but allowed the plaintiffs in each action an opportunity to file amended
complaints. Amended complaints were filed on November 7, 1997. The defendants
answered the amended consolidated complaint in the class actions, denying
liability, and filed a renewed motion to dismiss the derivative action. On
September 22, 1998, defendants' motion to dismiss the derivative action was
denied. In November 1998, the defendants filed an answer to the derivative
action, denying liability. On January 21, 1999, the plaintiffs in the class
actions filed their motion for class certification, including the defendants'
opposition. The Company intends to vigorously contest these actions.
 
  An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was brought
in February 1996 by certain holders of preferred stock of Next Level
Communications ("NLC"), which merged into a subsidiary of the Distributing
Company in September 1995. The action was originally filed in the Northern
District of California and was subsequently transferred to the Northern District
of Illinois. The plaintiffs allege that the defendants violated federal
securities laws by making misrepresentations and omissions and breached
fiduciary duties to NLC in connection with the acquisition of NLC by the
Distributing Company. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorneys' fees and costs. On September
23, 1997, the district court dismissed the complaint, without prejudice, and the
plaintiffs were given until November 7, 1997 to amend their complaint. On
November 7, 1997, plaintiffs served the defendants with amended complaints,
which contain allegations substantially similar to those in the original
complaint. The defendants filed a motion to dismiss parts of the amended
complaint and answered the balance of the amended complaint, denying liability.
On September 22, 1998, the district court dismissed with prejudice the portion
of the complaint alleging violations of Section 14(a) of the Exchange Act, and
denied the remainder of the defendants' motion to dismiss. In November 1998, the
defendants filed an answer to the remaining parts of the amended complaint,
denying liability. The Company intends to vigorously contest this action.
 
  In connection with the Distributions, the Company has agreed to indemnify
General Semiconductor, Inc. with respect of its obligations, if any, arising out
of or in connection with the matters discussed in the preceding two paragraphs.
 
  On February 19, 1998, a consolidated securities class action complaint
entitled IN RE NEXTLEVEL SYSTEMS, INC. SECURITIES LITIGATION was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, naming the Company and certain former officers and directors as
defendants. The complaint was filed on behalf of stockholders who purchased or
otherwise acquired stock of the Company between July 25, 1997 and October 15,
1997. The complaint alleged that the defendants violated Sections 11 and 15 of
the Securities Act of 1933, as amended (the "Securities Act"), and Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder by making false
and misleading statements about the Company's business, finances and future
prospects. The complaint seeks damages in an unspecified amount. On April 9,
1998, the plaintiffs voluntarily dismissed their Securities Act claims. On May
5, 1998, the defendants moved to dismiss the remaining counts of the complaint.
The Company intends to vigorously contest this action.
 
  On March 5, 1998, an action entitled DSC COMMUNICATIONS CORPORATION AND DSC
TECHNOLOGIES CORPORATION V. NEXT LEVEL COMMUNICATIONS, L.P, KK MANAGER, L.L.C.,
GENERAL INSTRUMENT CORPORATION AND SPENCER TRASK & CO., INC. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC alleged that in connection with the
formation of the Partnership and the transfer to it of NLC's switched digital
video technology, the Partnership and KK Manager misappropriated DSC's trade
 
                                      F-18
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
secrets; that the Company improperly disclosed trade secrets when it conveyed
such technology to the Partnership; and that Spencer Trask conspired to
misappropriate DSC's trade secrets. The plaintiffs sought actual damages for the
defendants' purported unjust enrichment, disgorgement of consideration,
exemplary damages and attorney's fees, all in unspecified amounts. In April
1998, the Company and the other defendants filed an action in the United States
District Court for the Eastern District of Texas, requesting that the federal
court preliminarily and permanently enjoin DSC from prosecuting the Delaware
Action because by pursuing such action, DSC effectively was trying to circumvent
and relitigate the Texas federal court's November 1997 judgment in a previous
lawsuit involving DSC, described above, pursuant to which NLC had paid $141
million. On May 14, 1998, the Texas court granted a preliminary injunction
preventing DSC from proceeding with the Delaware Action. That injunction order
is now on appeal to the United States Court of Appeal for the Fifth Circuit
where it has been briefed and awaits determination. On July 6, 1998, the
defendants filed a motion for summary judgment with the Texas court requesting a
permanent injunction preventing DSC from proceeding with this litigation. As a
result of the preliminary injunction, the Delaware Action has been stayed in its
entirety. The Company intends to vigorously contest this action.
 
  In May 1997, StarSight Telecast, Inc. ("StarSight") filed a Demand for
Arbitration against the Company alleging that the Company breached the terms of
a license agreement with StarSight by (a) developing a competing product that
wrongfully incorporates StarSight's technology and inventions claimed within a
certain StarSight patent, (b) failing to promote and market the StarSight
product as required by the license agreement, and (c) wrongfully using
StarSight's technical information, confidential information and StarSight's
graphical user interface in breach of the license agreement. StarSight is
seeking injunctive relief as well as damages (as specified below). The
arbitration proceeding is scheduled to begin March 22, 1999 before an
arbitration panel of the American Arbitration Association in San Francisco,
California. On January 25, 1999, the Company received a copy of StarSight's
Statement of Damages, as directed by the arbitration panel. This statement
identifies purported damages arising from the sale by the Company of certain
analog set top boxes containing a native electronic program guide. StarSight
alleges that it is entitled to collect $90 million to $177 million in
compensatory damages and an unspecified amount of punitive damages. The Company
has denied StarSight's allegations and intends to vigorously contest this
action.
 
  On November 30, 1998, an action entitled GEMSTAR DEVELOPMENT CORPORATION AND
INDEX SYSTEMS, INC. V. GENERAL INSTRUMENT CORPORATION was filed in the United
States District Court for the Northern District of California. The complaint
alleges infringement by the Company of two U.S. patents allegedly covering
electronic program guides. The complaint seeks unspecified damages and an
injunction. The plaintiffs have sought to consolidate discovery for this action
with similar actions pending against Pioneer Electronics Corp. and
Scientific - Atlanta, Inc. The Company has responded to the plaintiffs' motion,
currently pending before the Judicial Panel on Multidistrict Litigation (the
"Judicial Panel"). On January 27, 1999, the court entered an order staying these
proceedings until the Judicial Panel decides the plaintiffs' consolidation
motion. The Company denies that it infringes the subject patents and intends to
vigorously defend this action.
 
  While the ultimate outcome of the matters described above cannot be
determined, the Company intends to vigorously contest these actions and
management does not believe that the final disposition of these matters will
have a material adverse effect on the Company's consolidated financial
statements.
 
17. EMPLOYEE BENEFIT PLANS
 
PENSION AND OTHER POSTRETIREMENT PLANS. Prior to the Distributions, the Company
participated in the Distributing Company's domestic and foreign pension plans,
and the Company's consolidated financial statements reflect the costs
experienced for its employees and retirees while included in the Distributing
Company's plans. The Company, CommScope and General Semiconductor entered into
an Employee Benefits Allocation Agreement, which provided that, effective as of
the Distributions, the Company assumed responsibility for liabilities of the
Distributing Company under the Distributing Company's employee benefit plans
with respect to individuals who are employees or retirees of the Company. In
connection with dividing the Distributing Company's Taiwan operations between
 
                                      F-19
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
the Company and General Semiconductor, a curtailment and settlement loss of $4
million was recorded by the Company.
 
  Following the Distributions, the Company established separate defined benefit
plans for the employees and retirees of the Company. Assets included in trusts
under qualified pension plans were divided after the Distributions between the
trusts for the Distributing Company's qualified pension plans and the Company's
qualified pension plans. Each such domestic plan received the legally required
funding under the Employee Retirement Income Security Act of 1974 ("ERISA"), and
foreign plans received funding as specified under the applicable statutory
requirements.
 
  Prior to the Distributions, the Company participated in the Distributing
Company's sponsored contributory health-care and life insurance benefits plan.
Following the Distributions, the Company established a separate postretirement
benefit plan for the employees and retirees of the Company (the "Plan"). The
Plan is an unfunded contributory group medical plan for all full-time U.S.
employees of the Company not covered by a collective bargaining agreement and
who meet defined age and service requirements. The Company recognizes the cost
of providing and maintaining postretirement benefits during employees' active
service periods. The Plan is the primary provider of benefits for retirees up to
age 65. After age 65, Medicare becomes the primary provider.
 
Net periodic benefit cost of the Company for the years ended December 31, 1998
and 1997 consists of the following:
 
<TABLE>
<CAPTION>
                                                                    Pension Benefits                           Other Benefits
                                                 ------------------------------------------------------  --------------------------
                                                                Year Ended December 31,                   Year Ended December 31,
                                                 ------------------------------------------------------  --------------------------
                                                            1998                        1997                     1998          1997
                                                 --------------------------  --------------------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>
COMPONENTS OF NET PERIODIC                           Domestic       Foreign      Domestic       Foreign
BENEFIT COST                                     ------------  ------------  ------------  ------------
Service cost                                     $      3,557  $      1,719  $      2,651  $      1,713  $      1,063  $        824
 
Interest                                                2,881         1,347         2,443         1,612           591           531
 
Expected return on plan assets                         (2,081)         (135)       (1,755)         (285)           --            --
 
Net amortization and deferral                              (9)          367           (11)          578          (186)         (181)
 
Curtailment and settlement loss                            --            --            --         4,282            --            --
                                                 ------------  ------------  ------------  ------------  ------------  ------------
Net periodic benefit cost                        $      4,348  $      3,298  $      3,328  $      7,900  $      1,468  $      1,174
                                                 ------------  ------------  ------------  ------------  ------------  ------------
</TABLE>
 
  The Company's share of the Distributing Company's consolidated net periodic
benefit costs that has been recorded in the accompanying statement of operations
in 1996 was $5 million for pension benefit costs and $0.8 million for other
benefit costs. The net periodic benefit cost presented above for 1997 includes
the Company's share of the Distributing Company's net periodic benefit cost for
the period prior to the Distributions.
 
<TABLE>
<CAPTION>
                                                                    Pension Benefits                           Other Benefits
                                                 ------------------------------------------------------  --------------------------
                                                            1998                        1997                     1998          1997
                                                 --------------------------  --------------------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>
CHANGE IN BENEFIT OBLIGATION                         Domestic       Foreign      Domestic       Foreign
                                                 ------------  ------------  ------------  ------------
 
Benefit obligation at beginning of year          $     37,986  $     20,211  $     32,558  $     31,243  $      8,528  $      5,510
 
Service cost                                            3,557         1,719         2,651         1,713         1,063           824
 
Interest                                                2,881         1,347         2,443         1,612           591           531
 
Actuarial (gain) loss                                   6,890           534         1,021          (647)          642         1,967
 
Benefits paid                                            (690)       (1,946)         (687)         (174)         (118)         (304)
 
Effect of curtailment                                      --            --            --        (1,806)           --            --
 
Settlement payments                                        --            --            --       (11,307)           --            --
 
Effect of foreign exchange                                 --           250            --          (423)           --            --
                                                 ------------  ------------  ------------  ------------  ------------  ------------
Benefit obligation at end of year                $     50,624  $     22,115  $     37,986  $     20,211  $     10,706  $      8,528
                                                 ------------  ------------  ------------  ------------  ------------  ------------
</TABLE>
 
                                      F-20
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
<TABLE>
<CAPTION>
                                                                    Pension Benefits
                                                 ------------------------------------------------------
                                                            1998                        1997
                                                 --------------------------  --------------------------
CHANGE IN PLAN ASSETS                                Domestic       Foreign      Domestic       Foreign
                                                 ------------  ------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>
 
Fair value of plan assets at beginning of year   $     25,680  $        912  $     22,104  $      8,752
 
Actual return on plan assets                            3,374            53         4,263            --
 
Employer contributions                                  2,651         3,386            --         1,751
 
Benefits paid                                            (690)       (1,937)         (687)      (10,704)
 
Transfers from the Distributing Company                    --            --            --         1,616
 
Effect of foreign exchange                                 --            65            --          (503)
                                                 ------------  ------------  ------------  ------------
 
Fair value of plan assets at end of year         $     31,015  $      2,479  $     25,680  $        912
                                                 ------------  ------------  ------------  ------------
 
<CAPTION>
 
                                                                    Pension Benefits                           Other Benefits
                                                 ------------------------------------------------------  --------------------------
                                                                      December 31,                              December 31,
                                                 ------------------------------------------------------  --------------------------
                                                            1998                        1997                     1998          1997
                                                 --------------------------  --------------------------  ------------  ------------
RECONCILIATION OF FUNDED STATUS                      Domestic       Foreign      Domestic       Foreign
                                                 ------------  ------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>
 
Funded status                                        $(19,609)     $(19,636)     $(12,306)     $(19,299)     $(10,706)      $(8,528)
 
Unrecognized prior service cost                          (181)           --          (200)           --        (1,668)       (1,800)
 
Unrecognized actuarial (gain) loss                      4,041         8,119        (1,462)        7,752          (819)       (1,515)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
 
Accrued benefit liability                            $(15,749)     $(11,517)     $(13,968)     $(11,547)     $(13,193)     $(11,843)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
 
WEIGHTED-AVERAGE ASSUMPTIONS
 
Discount rate                                           6.75%         6.75%         7.25%         6.75%         6.75%         7.25%
 
Investment return                                       9.00%         7.00%         9.00%         8.00%            --            --
 
Compensation increase                                   4.75%         6.00%         4.75%         6.00%            --            --
</TABLE>
 
  The domestic pension plans consist principally of a qualified retirement plan
that has satisfied the full funding limitation requirements under ERISA. The
Company maintains unfunded supplemental retirement plans for certain members of
management, and net periodic benefit cost and accrued benefit obligations for
these plans are included in the amounts above. The Company's foreign pension
plans consist principally of a Taiwan pension plan, which is funded under
Taiwan's statutory requirements. The Company's domestic plan's assets consist of
fixed income and equity securities, and the Taiwan plan's assets principally
consist of fixed income securities.
 
  The assumed rate of future increases in health care cost during 1998 was
11.25% for pre-age 65 retirees and is expected to decline to 6% by the year
2005, and 9.0% for post-age 65 retirees and is expected to decline to 6% by the
year 2003. Under the Plan, the actuarially determined effect of a one-percentage
point change in the
 
assumed health care cost trend rate would have the following effects:
 
<TABLE>
<S>                                     <C>               <C>
                                          One-Percentage    One-Percentage
                                          Point Increase    Point Decrease
                                        ----------------  ----------------
 
Effect on postretirement benefit
  obligation                                      $2,356           $(1,772)
 
Effect on total of service and
  interest cost components                           427              (303)
</TABLE>
 
   SAVINGS PLAN. The Company maintains a voluntary savings plan covering all
non-union employees (prior to the Distributions, eligible employees of the
Company participated in the Distributing Company's savings plan). Eligible
employees may elect to contribute up to 10% of their salaries subject to certain
limitations. The Company contributes an amount equal to 50% of the first 6% of
the employee's salary that the employee contributes subject to certain
limitations. The Company's expense related to these savings plans was $3
million, $4 million and $3 million for the years ended December 31, 1998, 1997
and 1996, respectively.
 
                                      F-21
<PAGE>
Notes (Dollars in thousands, except per share data, unless otherwise noted)
 
18. STOCKHOLDERS' EQUITY
 
COMMON SHARES. Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the authorized capital stock of the Company consists of 400
million shares. As discussed in Note 1, approximately 147.3 million shares of
the Company's Common Stock, based on a ratio of one for one, were distributed to
the Distributing Company's stockholders of record on July 25, 1997.
 
   STOCK OPTION AGREEMENTS. During 1997 and in prior years, certain employees of
the Company were granted awards under the Distributing Company's 1993 Long-Term
Incentive Plan (the "Distributing Company Plan"). Awards issued to employees of
the Company consisted primarily of stock options.
 
  Immediately following the Distributions, awards outstanding under the
Distributing Company Plan held by the Company's employees were replaced by
substitute awards under the Company's 1997 Long-Term Incentive Plan (the "1997
Plan"), and the substitute awards preserved the economic value of the canceled
Distributing Company options. Accordingly, the substitute options have the same
ratio of the exercise price per option to the market value per share, the same
aggregate intrinsic value (difference between market value per share and
exercise price) and the same vesting provisions, option period and other terms
and conditions as the Distributing Company options being replaced.
  The 1997 Plan provides for the granting of stock options, stock appreciation
rights, restricted stock, performance units, performance shares and phantom
shares and phantom stock to employees of the Company and its subsidiaries and
the granting of stock options to directors of the Company. Generally, stock
options have a 10-year term and vest within three or four years of grant.
 
  The number of shares of Distributing Company common stock subject to options
held by the Company's employees at December 31, 1996 was approximately 9
million. The following table summarizes stock option activity relating to the
Company's stock option plan subsequent to the Distributions.
 
<TABLE>
<S>                                          <C>             <C>
                                                                  Weighted-
                                                  Number of)        Average
                                                     Shares  Exercise Price
                                              (In Thousands       Per Share
                                             --------------  --------------
 
Distributing Company options
  related to employees of the
  Company, and outstanding
  at July 28, 1997                                   11,349          $22.45
                                             --------------
 
Company options substituted for
  Distributing Company Options,
  and outstanding at July 28, 1997                   16,655           15.30
 
Granted                                               3,069           16.59
 
Exercised                                              (679)          13.78
 
                                                     (2,117)          15.93
Canceled
                                             --------------
                                                     16,928           15.52
Outstanding at December 31, 1997
 
Granted                                               3,509           21.87
 
Exercised                                            (5,342)          15.00
 
                                                     (1,240)          17.74
Canceled
                                             --------------
                                                     13,855           17.13
Outstanding at December 31, 1998
                                             --------------
</TABLE>
 
The following table summarizes information about stock options outstanding and
exercisable under the 1997 Plan.
 
<TABLE>
<CAPTION>
                                       Shares Under Options Outstanding                             Options Exercisable
                       ----------------------------------------------------------------  ------------------------------------------
                                    Options      Weighted-Average                                     Options
                             Outstanding at             Remaining                              Exercisable at
Range of Exercise         December 31, 1998           Contractual      Weighted-Average     December 31, 1998      Weighted-Average
Prices                       (In Thousands)          Term (Years)        Exercise Price        (In Thousands)        Exercise Price
---------------------  --------------------  --------------------  --------------------  --------------------  --------------------
<S>         <C>        <C>                   <C>                   <C>                   <C>                   <C>
 
$   1.03 -  $    1.87                    67                   4.0                $ 1.32                    67                $ 1.32
 
   10.82 -      13.82                   154                   4.2                 11.08                   151                 11.03
 
   14.14 -      15.75                 7,749                   7.8                 15.24                 3,654                 14.98
 
   16.00 -      17.80                 2,069                   7.2                 17.09                 1,319                 17.16
 
   18.57 -      20.88                   758                   8.8                 20.07                    41                 20.19
 
   21.69 -      24.44                 2,996                   9.6                 21.75                    --                    --
 
   25.00 -      30.00                    62                   9.7                 27.08                    --                    --
</TABLE>
 
                                      F-22
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  At December 31, 1998, 0.4 million shares were reserved for future awards under
the 1997 Plan.
 
  The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plan. Since the exercise price
of all stock options granted was equal to the closing price of the Common Stock
on the New York Stock Exchange on the date of grant, no compensation expense has
been recognized by the Company under its stock option plan. Compensation expense
would have been $19 million and $23 million for the years ended December 31,
1998 and 1997, respectively, had compensation cost for stock options awarded
under the 1997 Plan and under the Distributing Company Plan been determined
based upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company's net income for the year ended December 31, 1998 would have been $44
million and basic and diluted earnings per share would have been $0.28 and
$0.26, respectively. The Company's pro forma net loss and pro forma loss per
share (basic and diluted) for the year ended December 31, 1997 would have been
$31 million and $0.21, respectively.
 
  The incremental fair value of the Company's options was determined using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected holding period of 4 years; a risk-free interest rate of
4.49% and 6.08% for 1998 and 1997, respectively; an expected volatility of 40%
and 35% for 1998 and 1997, respectively; and an expected dividend yield of 0%.
The weighted-average per share fair values of the options granted during 1998
and 1997 were estimated at $8.17 and $6.20, respectively.
 
   WARRANTS. In December 1997, the Company entered into agreements to supply an
aggregate of 15 million of its two-way, interactive digital cable terminals to
nine of the leading North American cable television multiple system operators
("MSOs") over a three to five year period, beginning in 1998. In connection with
these legally binding supply agreements, the Company issued warrants to purchase
approximately 29 million shares of the Company's Common Stock. Warrants
aggregating 7.2 million, 7.3 million and 14.2 million issued to the MSOs will
vest and become exercisable on December 31, 1998, 1999, and 2000, respectively,
provided that in each of those years each such MSO fulfills its obligation to
purchase a threshold number of digital terminals from the Company. Each warrant
is exercisable for one share of Common Stock for a period of 18 months after it
vests at an exercise price of $14.25 for each share of Common Stock. If, in any
year, the Company fails to deliver the threshold number of digital terminals for
such year, through no fault of the MSO, the total number of such MSOs warrants
will vest for that year. If, in any year, an MSO fails to purchase the threshold
number of terminals for such year, through no fault of the Company, no warrants
for such year will vest, and the MSO shall be subject to legal proceedings and
damages relating to such failure. The Company believes that the magnitude of
such damages would be substantial. The Company believes it is probable that the
MSOs will perform under the terms of the supply agreement because there is a
sufficiently large disincentive for non-performance, accordingly, it believes a
performance commitment has been met and the fair value of the warrants was
determined as of the date of the supply agreement. The weighted-average per
share fair value of the warrants granted during 1997 approximated $3.50 using
the Black-Scholes pricing model with assumptions consistent with those discussed
above, except for the expected holding periods for the warrants, which range
from 2.5 to 4.5 years. The value of the warrants for each MSO is being expensed
to cost of sales based upon actual units shipped to the MSO in a year in
relation to the total threshold number of units required to be purchased by the
MSO in such year. During 1998, the Company recorded $21.8 million to cost of
sales related to these warrants, since the full amount of the 1998 warrants
vested on December 31, 1998.
 
  On a quarterly basis, management assesses the Company's ability to deliver the
threshold number of units and to the extent it believes the Company will not be
able to deliver the committed number of units, a charge reflecting the fair
value of warrants for the undeliverable units for that year would be recorded.
 
   STOCKHOLDER RIGHTS PLAN. On June 10, 1997, the Board of Directors adopted a
stockholder rights plan designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder received a dividend of
one right for each outstanding share of Common Stock. The rights are attached
to,
 
                                      F-23
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
and presently only trade with, the Common Stock and currently are not
exercisable. Except as specified below, upon becoming exercisable, all rights
holders will be entitled to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $85.
 
  The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement that
a person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock, or (ii) 10 business days following a person's or
group's commencement of, or announcement of, an intention to commence a tender
or exchange offer, the consummation of which would result in beneficial
ownership of 15% or more of the Common Stock. Each right will entitle the holder
to purchase Common Stock of the Company having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. If the Company is
acquired through a merger or other business combination transaction (other than
a Permitted Offer, as defined), each right will entitle the holder to purchase
common stock of the surviving company having a market value (immediately prior
to such acquisition) of twice the exercise price of the right. The Company may
redeem the rights for $0.01 each at any time prior to such acquisition. The
rights will expire on June 10, 2007, unless earlier redeemed.
 
  In connection with the rights plan, the Board of Directors approved the
creation of, out of the authorized but unissued shares of Common Stock of the
Company, a Series A Junior Participating Preferred Stock ("Participating
Preferred Stock"), consisting of 400,000 shares with a par value of $0.01 per
share. The holders of the Participating Preferred Stock are entitled to receive
dividends, if declared by the Board of Directors, from funds legally available.
Each share of Participating Preferred Stock is entitled to one thousand votes on
all matters submitted to stockholder vote. The shares of Participating Preferred
Stock are not redeemable by the Company or convertible into Common Stock or any
other security of the Company.
 
   OTHER TRANSACTIONS. On September 9, 1998, the Company announced a share
repurchase program authorizing the Company to repurchase up to 10 million shares
of its outstanding Common Stock. Through December 31, 1998, the Company had
repurchased a total of 6.3 million shares at a cost of $126.3 million.
 
  In January 1999, Sony Corporation purchased 7.5 million newly issued
unregistered shares of Common Stock of the Company for $188 million.
 
19. RELATED PARTY TRANSACTIONS
 
In connection with the asset purchase from TCI, which was consummated on July
17, 1998 (see Note 7), TCI obtained approximately a 12% ownership interest in
the Company, and at December 31, 1998, such ownership interest was 13%. TCI is
also a significant customer of the Company. Sales to TCI represented 31% of
total Company sales for the year ended December 31, 1998. Management believes
the transactions with TCI are at arms length and are under terms no less
favorable to the Company than those with other customers. At December 31, 1998
accounts receivable from TCI totaled $81 million.
 
20. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
 
Derivative financial instruments are primarily used by the Company to reduce
market risk arising from changes in foreign exchange and interest rates. The
Company does not use derivative financial instruments for trading purposes, nor
does it engage in currency or interest rate speculation. Derivatives used by the
Company consist of foreign exchange instruments. The Company believes that the
various counterparties with which the Company enters into these agreements
consist of only financially sound institutions and, accordingly, believes that
the credit risk for non-performance of these contracts is remote. The Company
monitors its underlying market risk exposures on an ongoing basis and believes
that it can modify or adapt its hedging strategies as needed.
 
  The Company enters into forward exchange contracts on a month-to-month basis
to reduce foreign currency exposure with regard to certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. These
contracts generally do not subject the Company's results of operations to risk
of exchange rate movements because gains and losses on these contracts generally
offset, in the same period, gains and losses on the monetary assets and
liabilities covered by the exchange contracts.
 
                                      F-24
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  On a selective basis, the Company (and the Distributing Company, on behalf of
the Company, prior to the Distributions) enters into forward exchange and
purchased option contracts to reduce the currency exposure of contractual and
other firm commitments denominated in foreign currencies. The Company may also
use forward exchange and purchased option contracts designed to limit the
currency exposure of anticipated, but not yet committed, transactions expected
to be denominated in foreign currencies. The purpose of these activities is to
protect the Company from the risk that the eventual net cash flows in U.S.
dollars from foreign receivables and payables will be adversely affected by
changes in exchange rates. Gains and losses on such transactions related to
contractual and other firm commitments are deferred and recognized in the
Company's results of operations in the same period as the gain or loss from the
settlement of the underlying transactions. Gains and losses on forward exchange
contracts used to limit anticipated, but not yet committed, transactions are
recognized in the Company's results of operations as changes in exchange rates
for the applicable foreign currencies occur. Historically, foreign exchange
contracts with respect to contractual and other firm commitments and
anticipated, but not yet committed, transactions have been short-term in nature.
In addition, purchased options have had no intrinsic value at the time of
purchase.
 
  The Company generally settles forward exchange contracts at maturity at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of the contract premium or
discount. The amortization of these premiums or discounts during each of the
three years in the period ended December 31, 1998 was not significant. As of
December 31, 1998 and 1997, the Company had outstanding forward exchange
contracts with notional amounts of $58 million and $73 million, respectively,
comprised of foreign currencies that were to be purchased (principally the New
Taiwan dollar and the Pound Sterling in 1998 and the New Taiwan and Canadian
dollars in 1997) and $13 million and $11 million, respectively, comprised of
foreign currencies that were to be sold (principally the Canadian dollar and the
Deutsche Mark in 1998 and the Canadian dollar in 1997). All outstanding forward
exchange contracts at December 31, 1998 and 1997 mature within 12 months, and
the fair values of such contracts approximated their carrying values, which were
not material. Accordingly, deferred gains or losses on such contracts at
December 31, 1998 and 1997 were not significant. Foreign currency transaction
losses included in operations were $1 million, $2 million and $2 million in
1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, the Company
had no purchased option contracts outstanding.
 
  The estimated fair value of cash equivalents, accounts receivable, and
accounts payable, approximates their carrying value. The Company has an
investment in equity securities of a publicly traded company, which have certain
restrictions, which may under certain circumstances cause the investment to be
redeemed at cost. Such restrictions do not lapse until April 2000 and,
therefore, the Company has not reflected this investment at its fair value at
December 31, 1998. Accordingly, the Company is carrying this investment at its
cost of $23 million, which has been included in "Investments and other assets"
on the consolidated balance sheets as of December 31, 1998 and 1997. When such
restrictions expire, the investment will be classified as available-for-sale
with any unrealized gain or loss recorded through stockholders' equity. At
December 31, 1998, the fair value of this investment, were it not restricted,
would have been approximately $272 million.
 
21. SEGMENT AND GEOGRAPHIC INFORMATION
 
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosure about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the Chairman of the Board and Chief Executive Officer.
 
                                      F-25
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  The Company currently has two reportable segments: Broadband Networks Systems
and Satellite and Broadcast Network Systems. The Broadband Networks Systems
segment is comprised of digital and analog cable and wireless television systems
and transmission network systems which includes cable television analog and
digital set top terminal products and headend and amplifier equipment products
for the transmission of voice, video and high speed data over cable TV networks.
The Satellite and Broadcast Network Systems segment includes analog and digital
satellite television system products which enable programmers, satellite
operators and business users to deliver high quality, compressed video service
to cable television headends, corporate locations or directly to consumer homes.
Although both of the Company's segments provide communications equipment
products that deliver video, audio and high-speed internet/data services, they
have not been aggregated due primarily to different customer bases.
 
  The Company has also disclosed separately below the results of NLC for the
years prior to the transfer of the net assets of NLC to the Partnership. As
disclosed in Note 8, the results of the Partnership are included in other income
(expense)-net in the statement of operations for the year ended December 31,
1998.
 
  The accounting policies of the segments are the same as those described in the
summary of significant accounting policies, however, as described below, for
internal management reporting purposes certain costs, such as corporate overhead
and restructuring charges, have not been allocated to the segments. The Company
measures segment performance based upon operating profit. Information on the
segments and reconciliations to consolidated amounts are as follows:
 
                                      F-26
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
<TABLE>
<CAPTION>
                                                                                    Satellite
                                                                    Broadband   and Broadcast                         Corporate
                                                                     Networks         Network          Next Level   Unallocated
                                                                      Systems         Systems   Communications(a)     and Other
                                                                -------------  --------------  ------------------  ------------
<S>                                                             <C>            <C>             <C>                 <C>
 
1998
 
  Net sales                                                     $   1,569,483        $418,342           $      --  $         --
 
  Operating income (loss)                                             234,884          35,201                  --      (165,838)(c)
 
  Other income (expense) - net (including equity interest in
     Partnership losses of $25,089)                                        --              --                  --       (11,815)
 
  Interest income (expense) - net                                          --              --                  --         1,217
 
  Income (loss) before income taxes                                        --              --                  --        93,649
 
  Segment assets(b)                                                   649,183         203,119                  --         6,319(d)
 
  Capital expenditures                                                 78,869          12,891                  --            --
 
  Depreciation and intangible amortization expense                     41,215          23,975                  --        18,374(e)
 
  Warrant costs related to customer purchases                          21,834              --                  --            --
 
1997
 
  Net sales                                                     $   1,292,930        $462,068             $ 9,090  $         --
 
  Operating income (loss)                                             218,942          (7,449)            (58,462)     (163,226)(c)
 
  Other income (expense) - net                                             --              --                  --         5,766
 
  Interest income (expense) - net                                          --              --                  --        (5,210)
 
  Income (loss) before income taxes                                        --              --                  --        (9,639)
 
  Segment assets(b)                                                   512,241         338,250              37,970       (19,937)(d)
 
  Capital expenditures                                                 42,064          26,740              10,702           322
 
  Depreciation and intangible amortization expense                     33,962          33,225               4,133        18,537(e)
 
1996
 
  Net sales                                                     $   1,180,424        $575,161           $      --  $         --
 
  Operating income (loss)                                             153,388          22,229             (29,781)     (267,847)(c)
 
  Other income (expense) - net                                             --              --                  --        (1,427)
 
  Interest income (expense) - net                                          --              --                  --       (25,970)
 
  Income (loss) before income taxes                                        --              --                  --      (149,408)
 
  Segment assets(b)                                                   588,284         321,138              12,214       (13,075)(d)
 
  Capital expenditures                                                 99,172          27,040               8,048            93
 
  Depreciation and intangible amortization expense                     32,344          31,553               2,063        18,540(e)
 
<CAPTION>
 
                                                                        Total
                                                                      Company
                                                                -------------
<S>                                                             <C>
1998
  Net sales                                                     $   1,987,825
  Operating income (loss)                                             104,247
  Other income (expense) - net (including equity interest in
     Partnership losses of $25,089)                                   (11,815)
  Interest income (expense) - net                                       1,217
  Income (loss) before income taxes                                    93,649
  Segment assets(b)                                                   858,621
  Capital expenditures                                                 91,760
  Depreciation and intangible amortization expense                     83,564
  Warrant costs related to customer purchases                          21,834
1997
  Net sales                                                     $   1,764,088
  Operating income (loss)                                             (10,195)
  Other income (expense) - net                                          5,766
  Interest income (expense) - net                                      (5,210)
  Income (loss) before income taxes                                    (9,639)
  Segment assets(b)                                                   868,524
  Capital expenditures                                                 79,828
  Depreciation and intangible amortization expense                     89,857
1996
  Net sales                                                     $   1,755,585
  Operating income (loss)                                            (122,011)
  Other income (expense) - net                                         (1,427)
  Interest income (expense) - net                                     (25,970)
  Income (loss) before income taxes                                  (149,408)
  Segment assets(b)                                                   908,561
  Capital expenditures                                                134,353
  Depreciation and intangible amortization expense                     84,500
</TABLE>
 
(a) See Note 8.
 
(b) Segment assets include accounts receivable, inventories and property, plant
and equipment. Other balance sheet items are not allocated to the segments.
 
(c) Primarily reflects unallocated costs, including amortization of excess of
cost over fair value of net assets acquired of $14 million, $15 million and $14
million in 1998, 1997 and 1996, respectively, and restructuring and other
charges of $115 million, $122 million and $126 million in 1998, 1997 and 1996,
respectively (see Notes 5, 6, and 16). The remaining reconciling amounts reflect
unallocated corporate selling, general and administrative expenses.
 
(d) Primarily reflects non-trade accounts receivable of $8 million, $15 million
and $17 million at December 31, 1998, 1997 and 1996, respectively, and certain
unallocated property, plant and equipment balances of $16 million, $17 million
and $21 million at December 31, 1998, 1997 and 1996, respectively, offset by
restructuring and other charge adjustments not allocated to the segments for
internal management reporting purposes.
 
(e) Primarily reflects amortization of excess of cost over fair value of net
assets acquired of $14 million, $15 million and $14 million in 1998, 1997 and
1996, respectively, as well as intangible amortization of $4 million, $3 million
and $4 million in 1998, 1997 and 1996, respectively.
 
                                      F-27
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  Net revenues are attributed to geographic areas based upon the location to
which the product is shipped. A majority of the foreign long-lived assets are
located in Taiwan and Mexico, where the Company manufactures or assembles a
significant portion of its products.
 
<TABLE>
<CAPTION>
                                     U.S.      Foreign          Total
                            -------------  -----------  -------------
<S>                         <C>            <C>          <C>
 
1998
 
  Net revenues              $   1,683,072  $   304,753  $   1,987,825
 
  Long-lived assets             1,090,126      100,167      1,190,293
 
1997
 
  Net revenues              $   1,251,324  $   512,764  $   1,764,088
 
  Long-lived assets               711,297       79,256        790,553
 
1996
 
  Net revenues              $   1,294,646  $   460,939  $   1,755,585
 
  Long-lived assets               745,000       78,333        823,333
</TABLE>
 
  A limited number of cable and satellite television operators provide services
to a large percentage of television households in the U.S. The loss of some of
these operators as customers could have a material adverse effect on the
Company's sales. TCI, including affiliates, accounted for 31%, 14%, and 23% of
the Company's consolidated net sales in 1998, 1997 and 1996, respectively. Time
Warner, including affiliates, accounted for 14% and 13% of the Company's
consolidated net sales in 1997 and 1996, respectively. PRIMESTAR accounted for
11% of the Company's consolidated net sales in 1998.
 
  On January 22, 1999, PRIMESTAR announced that it reached an agreement to sell
its direct broadcast satellite medium-power business and assets as well as its
rights to acquire high-power satellite assets to Hughes Electronics Corporation.
The Company is currently uncertain whether and to what extent PRIMESTAR will
continue to order and purchase medium-power equipment from the Company. Further,
the Company does not expect to supply any high-power equipment to PRIMESTAR.
 
  Absent the failure of PRIMESTAR to honor its contractual commitments with the
Company, the Company believes that the loss of PRIMESTAR's business will not
have a material adverse effect on the Company's financial condition or results
of operations.
 
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
Summarized quarterly data for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                              Quarter Ended
                                          --------------------------------------------------------------------------------------
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
                                               March 31,              June 30,           September 30,          December 31,
                                          --------------------  --------------------  --------------------  --------------------
 
<CAPTION>
                                            1998(a)    1997(b)       1998    1997(c)       1998       1997       1998    1997(d)
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
                                          ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
 
Net sales                                  $416,920   $408,028   $488,505   $450,403   $518,196   $464,582   $564,203   $441,075
 
Gross profit                                 92,988    113,514    141,121    117,618    152,863    133,441    169,526     63,033
 
Net income (loss)                           (59,891)     4,960     29,963        406     39,409     24,458     45,969    (45,937)
 
Earnings (loss) per share - basic(e)       $  (0.40)             $   0.20              $   0.23   $   0.17   $   0.27   $  (0.31)
 
Earnings (loss) per share - diluted(e)        (0.40)                 0.19                  0.22       0.16       0.26      (0.31)
</TABLE>
 
(a) Includes pre-tax charges of $124 million ($79 million net-of-tax) reflecting
$16 million of restructuring charges (see Note 5) and $33 million of other
charges (see Note 6) primarily including costs related to the closure of various
facilities, including the Company's satellite TV manufacturing facility in
Puerto Rico, severance and other employee separation costs, the write down of
fixed assets to their estimated fair values and inventory to its lower of cost
or market, as well as a $75 million charge to fully reserve for the R&D advance
made to the Partnership (see Note 8). Of these charges, $27 million were
recorded as cost of sales, $13 million were recorded as SG&A expense, $75
million were recorded as R&D expense and $9 million were recorded as other
expense.
 
(b) Includes a pre-tax charge of $3 million ($2 million net-of-tax), recorded as
cost of sales, for employee costs related to dividing the Distributing Company's
Taiwan operations between the Company and General Semiconductor.
 
(c) Includes a pre-tax charge of $15 million ($11 million net-of-tax), recorded
as cost of sales, for employee costs related to dividing the Distributing
Company's Taiwan operations between the Company and General Semiconductor and a
pre-tax charge of $6 million ($4 million net-of-tax), recorded as SG&A expense,
related to legal and other professional fees incurred in connection with the
Distributions.
 
(d) Includes pre-tax charges of $86 million reflecting $36 million ($24 million
net-of-tax) of restructuring charges (see Note 5) and $61 million ($44 million
net-of-tax) of other charges (see Note 6), primarily related to the
restructuring of the satellite business and the consolidation of the corporate
headquarters, offset by $11 million ($7 million net of tax) of other income and
interest income (see Note 6). These costs include $66 million recorded as cost
of sales, $22 million recorded as SG&A expense and $9 million recorded as R&D
expense, partially offset by $4 million of other income and $7 million of
interest income.
 
(e) Historical earnings (loss) per share for the periods prior to the
Distributions have been omitted since the Company was not a separate company
with a capital structure of its own.
 
                                      F-28
<PAGE>
NOTES (Dollars in thousands, except per share data, unless otherwise noted)
 
  The Common Stock is listed and traded under the symbol GIC on the New York
Stock Exchange. The Common Stock began trading on July 24, 1997, as a result of
the Distributions. The Company did not pay dividends on its Common Stock during
1997 or 1998. The Company's ability to pay cash dividends on its Common Stock is
limited by certain covenants contained in a credit agreement to which the
Company is a party. The high and low stock prices of the Common Stock are listed
below:
 
<TABLE>
<CAPTION>
                                     Stock Price Ranges
                                ----------------------------
<S>                             <C>    <C>     <C>    <C>
                                         High            Low
                                -------------  -------------
 
1997
 
  Third Quarter                 $  21  1/2     $  16
 
  Fourth Quarter                $  19  1/8     $  12  5/8
 
1998
 
  First Quarter                 $  22          $  16  7/16
 
  Second Quarter                $  28  3/4     $  19  3/4
 
  Third Quarter                 $  29  1/2     $  16  11/16
 
  Fourth Quarter                $  36  15/16   $  17  1/2
</TABLE>
 
                                      F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
General Instrument Corporation:
 
We have audited the financial statements of General Instrument Corporation and
its subsidiaries (formerly NextLevel Systems, Inc. and, prior thereto, the
Communications Business of the former General Instrument Corporation) as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated February 9, 1999;
such report is included elsewhere in this Form 10-K. Our audits also included
the financial state-
 
ment schedule of General Instrument Corporation, listed in Item 14(a)2. This
financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
/s/ DELOITTE & TOUCHE LLP
------------------------------------
 
DELOITTE & TOUCHE LLP
 
Parsippany, New Jersey
 
February 9, 1999
 
                                      F-30
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                   Balance at                                                         Balance at
                                                 Beginning of                                                             End of
(In thousands)                                         Period     Additions      Deductions           Other               Period
<S>                                             <C>             <C>           <C>             <C>                    <C>
                                                -------------   -----------   -------------   -------------          -----------
 
Allowance For Doubtful Accounts:
 
Year ended December 31, 1998                    $       3,566    $    2,074     $    (1,807)   $         --           $    3,833
 
Year ended December 31, 1997                    $      12,910    $      437     $    (4,781)   $     (5,000)(a)       $    3,566
 
Year ended December 31, 1996                    $      10,144    $    5,190     $    (2,424)   $         --           $   12,910
</TABLE>
 
(a) Other represents the collection of certain receivables previously considered
to be uncollectable.
 
                                      F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
 
To the Partners of
Next Level Communications L.P.:
 
We have audited the accompanying balance sheet of Next Level Communications L.P.
as of December 31, 1998 and the related statements of operations, partners'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
 
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
  In our opinion, such financial statements present fairly, in all material
respects, the financial position of Next Level Communications L.P. as of
December 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
 
  As discussed in Note 2, Next Level Communications L.P. has incurred operating
losses and negative cash flows and is dependent upon obtaining additional
capital to fund its operations and meet its obligations.
 
/s/ DELOITTE & TOUCHE LLP
-----------------------------
DELOITTE & TOUCHE LLP
 
San Francisco, California
February 9, 1999
 
                                      F-32
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                                        --------------
<S>                                                                                                     <C>
(dollars in thousands)                                                                                           1998
                                                                                                        --------------
 
ASSETS
 
CURRENT ASSETS:
 
  Cash and cash equivalents                                                                              $     28,983
 
  Trade receivables (net of allowance for doubtful accounts of $490)                                           11,068
 
  Other receivables                                                                                             5,023
 
  Inventories                                                                                                  20,670
 
  Receivable from General Instrument                                                                            3,350
 
  Other current assets                                                                                            735
                                                                                                        --------------
    Total current assets                                                                                       69,829
 
PROPERTY AND EQUIPMENT, NET                                                                                    21,558
 
INTANGIBLE ASSETS, NET                                                                                          6,266
 
OTHER ASSETS                                                                                                      118
                                                                                                        --------------
    TOTAL ASSETS                                                                                         $     97,771
                                                                                                        --------------
LIABILITIES AND PARTNERS' DEFICIT
 
CURRENT LIABILITIES:
 
  Accounts payable                                                                                       $     16,467
 
  Accrued expenses                                                                                             10,697
 
  Deferred revenue                                                                                              3,705
 
  Current portion of capital lease obligations                                                                    396
                                                                                                        --------------
 
    Total current liabilities                                                                                  31,265
 
NOTE PAYABLE TO GENERAL INSTRUMENT (INCLUDING ACCRUED INTEREST OF $5,940)                                      80,940
 
LONG TERM CAPITAL LEASE OBLIGATIONS                                                                               335
 
COMMITMENTS AND CONTINGENCIES (NOTE 12)
 
PARTNERS' DEFICIT                                                                                             (14,769)
                                                                                                        --------------
 
TOTAL LIABILITIES AND PARTNERS' DEFICIT                                                                  $     97,771
                                                                                                        --------------
</TABLE>
 
See notes to financial statements.
 
                                      F-33
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF OPERATIONS
 
                                                       Year Ended
                                                         December
                                                              31,
                                                      -----------
 
(dollars in thousands)                                       1998
                                                      -----------
 
NET SALES:
 
  Equipment                                           $    39,243
 
  Software                                                  4,587
                                                      -----------
 
    Total net sales                                        43,830
                                                      -----------
 
COST OF SALES:
 
  Equipment                                                43,172
 
  Software                                                    261
                                                      -----------
 
    Total cost of sales                                    43,433
                                                      -----------
 
GROSS PROFIT                                                  397
                                                      -----------
 
OPERATING EXPENSES:
 
  Research and development                                 47,086
 
  Selling, general and administrative                      26,248
 
  Litigation settlement                                     5,000
                                                      -----------
 
    Total operating expenses                               78,334
                                                      -----------
 
LOSS FROM OPERATIONS                                      (77,937)
 
INTEREST EXPENSE                                           (6,035)
 
OTHER INCOME                                                2,241
                                                      -----------
 
NET LOSS                                              $   (81,731)
                                                      -----------
 
See notes to financial statements.
 
                                      F-34
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
                                                                                                       Year Ended December 31,
                                                                                                                 1998
                                                                                                      --------------------------
<S>                                                                                                   <C>           <C>
                                                                                                                         Limited
                                                                                                           General       Partner
                                                                                                           Partner       Capital
(dollars in thousands)                                                                                     Capital     (Deficit)
                                                                                                      ------------  ------------
 
BALANCE, JANUARY 1, 1998                                                                              $         --  $         --
 
Partner capital contributions                                                                               10,000        56,962
 
Net loss                                                                                                    (8,990)      (72,741)
                                                                                                      ------------  ------------
BALANCE, DECEMBER 31, 1998                                                                            $      1,010  $    (15,779)
                                                                                                      ------------  ------------
 
<CAPTION>
 
<S>                                                                                                   <C>
 
                                                                                                         Partners'
                                                                                                           Capital
(dollars in thousands)                                                                                   (Deficit)
                                                                                                      ------------
BALANCE, JANUARY 1, 1998                                                                              $         --
Partner capital contributions                                                                               66,962
Net loss                                                                                                   (81,731)
                                                                                                      ------------
BALANCE, DECEMBER 31, 1998                                                                            $    (14,769)
                                                                                                      ------------
</TABLE>
 
See notes to financial statements.
 
                                      F-35
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
STATEMENT OF CASH FLOWS
 
                                                       Year Ended
                                                         December
                                                              31,
                                                      -----------
 
(dollars in thousands)                                       1998
                                                      -----------
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
  Net loss                                            $   (81,731)
 
  Adjustments to reconcile net loss to net cash
  used in operating activities:
 
    Depreciation and amortization                          10,733
 
    Loss on disposal of assets                              1,162
 
    Changes in assets and liabilities:
 
      Trade receivables                                    (6,323)
 
      Inventories                                          (7,286)
 
      Prepaid expenses and other current assets            (4,683)
 
      Accrued interest payable to General
     Instrument                                             5,940
 
      Accounts payable                                      7,141
 
      Accrued expenses                                      8,414
                                                      -----------
 
        Net cash used by operating activities             (66,633)
                                                      -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
  Purchases of property and equipment                      (9,612)
 
  Proceeds from notes receivable                              264
                                                      -----------
 
        Net cash used in investing activities              (9,348)
                                                      -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
  Limited Partner capital contribution                     19,587
 
  General Partner capital contribution                     10,000
 
  Proceeds from note payable to General Instrument         75,000
                                                      -----------
 
        Net cash provided from financing
       activities                                         104,587
                                                      -----------
 
NET INCREASE IN CASH AND CASH EQUIVALENTS                  28,606
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                377
                                                      -----------
 
CASH AND CASH EQUIVALENTS AT END OF YEAR              $    28,983
                                                      -----------
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
  Equipment acquired under capital leases             $       731
 
See notes to financial statements.
 
                                      F-36
<PAGE>
NEXT LEVEL COMMUNICATIONS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
 
1. ORGANIZATION AND BUSINESS
 
Next Level Communications L.P. (the "Partnership") designs, manufactures and
markets broadband access systems capable of transmitting telephony, video, and
data to homes and businesses.
 
   NEXT LEVEL COMMUNICATIONS - Next Level Communications ("NLC" or the "Limited
Partner") was incorporated as a California corporation on June 22, 1994 and
commenced operations in July 1994. In September 1995, Next Level Communications
was acquired by General Instrument Corporation ("General Instrument") in an
acquisition accounted for using the purchase method of accounting; accordingly,
the purchase price was allocated to the fair value of assets and liabilities of
Next Level Communications. Through December 31, 1997, Next Level Communications
was a 100% owned subsidiary of General Instrument.
 
  In January 1998, General Instrument transferred the net assets, management and
workforce of NLC to the Partnership in exchange for an 89% limited partner
interest. Such 89% limited partnership interest is held by NLC, a wholly owned
subsidiary of General Instrument. KK Manager LLC (the "General Partner"),
acquired an 11% general partner interest in the Partnership in exchange for a
$10 million cash contribution.
 
  Net losses have been allocated to the partners based on their respective
partnership percentages. If the Partnership converts to a corporation (the
"Successor Corporation") in conjunction with an Initial Public Offering ("IPO"),
each partner will receive voting common stock of the Successor Corporation based
on their respective partnership percentages. The General Partner has an option,
which expires in January 2003, to acquire from the Limited Partner, up to 11% of
the Successor Corporation common stock at a predetermined valuation of $700
million. Such option is exercisable after an IPO or in connection with a merger
or sale of the Successor Corporation. Upon dissolution of the Partnership, the
assets will be used to pay all liabilities of the Partnership and any remaining
assets, after establishment of reserves, will be distributed to the partners in
accordance with their respective partnership percentages.
 
2. Results of Operations for 1998 and Management Plans for 1999
 
In 1998, the Partnership incurred net losses of $81.7 million and net cash used
by operating activities was $66.6 million. At December 31, 1998, partners'
deficit was $14.8 million.
 
  The Partnership has prepared cash flow projections for 1999 which indicate
that additional capital will be required during the latter part of 1999 to fund
its operations and meets its obligations. The Partnership believes that it has
several alternatives available to it to obtain the required capital, including
additional equity contributions from its partners, private placement financing
or an IPO. Management of the Partnership believes that cash and cash equivalents
at December 31, 1998, cash flows from operations, capital contributions from the
Limited Partner (see Note 8), and additional capital from the sources noted
above will enable the Partnership to fund its operations and meet its
obligations through at least December 31, 1999.
 
3. Significant Accounting Policies
 
USE OF ESTIMATES - The preparation of the accompanying financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the year. Actual results could differ from these estimates.
 
   CASH EQUIVALENTS - The Partnership considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
 
   INVENTORIES are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
 
   PROPERTY AND EQUIPMENT are stated at cost. Provisions for depreciation are
based on estimated useful lives using the straight-line method. Useful lives
range from the shorter of five to ten years or the lease term for leasehold
improvements and two to seven years for machinery and equipment. Whenever events
indicate that the carrying values of property and equipment may not be
recoverable, the Partnership evaluates the carrying values of such
 
                                      F-37
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
 
assets using estimated undiscounted cash flows. Management believes that, as of
December 31, 1998, the carrying value of such assets are appropriate.
 
   INTANGIBLE ASSETS consists principally of goodwill which is being amortized
on a straight-line basis over seven years. Management periodically reassesses
the appropriateness of both the carrying value and remaining life of the
intangible assets by assessing recoverability based on forecasted operating cash
flows, on an undiscounted basis, and other factors. At December 31, 1998,
accumulated amortization was $1,940. Management believes that, as of December
31, 1998, the carrying value and remaining lives of such assets are appropriate.
 
   FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the short-term nature of these instruments. The fair value of
long-term debt is based upon current interest rates for debt instruments with
comparable maturities and characteristics.
 
   REVENUE RECOGNITION - The Partnership recognizes revenue from equipment sales
when the product has been shipped. Sales contracts do not permit the right of
return of product by the customer. Amounts received in excess of revenue
recognized are recorded as deferred revenue.
 
  Software license revenues are recognized when software revenue recognition
criteria have been met, pursuant to Statement of Position ("SOP") 97-2, SOFTWARE
REVENUE RECOGNITION. Under SOP 97-2, license revenue is recognized when a
non-cancelable license agreement has been signed, the product has been shipped,
there are no uncertainties surrounding product acceptance, the fees are fixed
and determinable and collection is probable. The portion of revenues from new
license agreements which relate to the Partnership's obligations to provide
customer support are deferred and recognized ratably over the maintenance
period.
 
   PRODUCT WARRANTY - The Partnership provides for the estimated costs to
fulfill customer warranty and other contractual obligations upon the recognition
of the related revenue. Such provisions are determined based upon estimates of
component failure rates. Actual warranty costs are charged against the accrual
when incurred.
 
   INCOME TAXES are not included in the financial statements, since income taxes
are the responsibility of the partners.
 
   STOCK-BASED COMPENSATION - Stock-based awards granted to employees are
accounted for using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES.
 
   COMPREHENSIVE INCOME - Statement of Financial Accounting Standards
("SFAS")No. 130, REPORTING COMPREHENSIVE INCOME, requires that all items
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This statement also requires
that an entity classify items of other comprehensive income by their nature in
an annual financial statement. Comprehensive income includes net income and
other comprehensive income. Comprehensive loss was the same as net loss for
1998.
 
   SEGMENT REPORTING - SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, establishes standards for the reporting of information
about operating segments, including related disclosures about products and
services, geographic areas and major customers, and requires selected
information about operating segments in interim financial statements. Segment
data has not been presented as management has determined that the Partnership
does not operate in more than one reportable segment.
 
   NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued, which establishes
accounting and reporting standards for derivative instruments and hedging
activities which are required for fiscal years beginning after June, 15, 1999.
SFAS No. 133 requires that all derivative instruments be measured at fair value
and recognized in the balance sheet as either assets or liabilities. The
Partnership believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
 
   CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - Two customers comprised
substantially all of the Partnership's revenue from equipment sales in 1998. As
of December 31, 1998, 84% of the Partnership's trade accounts receivable were
derived from these two customers. The loss of any of these customers or any
substantial reduction in orders by any of these customers could have a material
adverse affect on the Partnership operating
 
                                      F-38
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
 
results. Additionally, the Partnership relies on certain contract manufacturers
to perform substantially all of its manufacturing activities. The inability of
its contract manufacturers to fulfill their obligations to the Partnership could
adversely impact future results.
 
  The Partnership performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Partnership
maintains allowances for potential losses, and has not incurred any significant
losses to date.
 
4. Acquisition of Telenetworks
 
In September 1997, NLC acquired of all of the outstanding capital stock of
Telenetworks, a specialized data protocol communications software company. The
purchase price was approximately $7 million in cash. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
assets acquired and liabilities assumed were recorded at their estimated fair
values as of the date of acquisition. The $6.9 million excess of the purchase
price over the net identifiable assets acquired was allocated to goodwill. In
January 1998, in conjunction with the formation of the Partnership, the Limited
Partner contributed the assets and liabilities of Telenetworks to the
Partnership.
  In conjunction with the acquisition in September 1997, General Instrument
granted $7 million in restricted common stock of General Instrument to certain
Telenetworks employees. The restrictions on the common stock of General
Instrument lapsed over a 270-day period which ended on May 31, 1998. Since this
stock was contingently payable based on the individual's continued employment,
prepaid compensation of $7 million was recorded and amortized to compensation
expense over the life of the restrictions. Compensation expense of $3.9 million
was recorded in 1998.
 
  In June 1998, the Partnership issued approximately $2.9 million in loans to
former Telenetworks employees due to certain tax liabilities associated with the
restricted stock, $2.5 million of which was outstanding at December 31, 1998 and
recorded in other receivables. The loans are due in April 1999, and are
collateralized by the common stock of General Instrument held by such employees.
 
5. Inventories
 
Inventories at December 31, 1998 consist of:
 
<TABLE>
<S>                                                   <C>
Raw materials                                         $   7,203
 
Work-in-process                                           1,157
 
Finished goods                                           12,310
                                                      ---------
 
Total                                                 $  20,670
                                                      ---------
</TABLE>
 
  The Partnership recorded a provision for inventory obsolescence of $5.8
million in 1998.
 
6. Property and Equipment - net
 
Property and equipment - net at December 31, 1998 consists of:
 
<TABLE>
<S>                                                      <C>
Leasehold improvements                                   $   4,457
 
Machinery and equipment                                     28,315
                                                         ---------
Total                                                       32,772
 
Less accumulated depreciation                              (11,214)
                                                         ---------
Property and equipment - net                             $  21,558
                                                         ---------
</TABLE>
 
  Machinery and equipment includes assets acquired under capital leases of $.9
million and accumulated depreciation of $.2 million at December 31, 1998.
 
7. Accrued Expenses
 
Accrued expenses at December 31, 1998 consists of:
 
<TABLE>
<S>                                                       <C>
Accrued payroll and related expenses                      $   4,767
 
Other accrued expenses                                        5,930
                                                          ---------
Total                                                     $  10,697
                                                          ---------
</TABLE>
 
8. Related Party Transactions with General Instrument
 
In January 1998, in conjunction with the formation of the Partnership, General
Instrument advanced $75 million to the Partnership in exchange for a note (the
"Note") bearing interest at a rate of 8%. The Note includes certain covenants
including limitations on borrowings, and is due in 2005. The Note provides for
the deferral of scheduled interest payments under certain circumstances.
Deferred interest payments bear interest at 10% and are not payable until
certain earnings levels, as defined, are met. The Partnership or the Successor
Corporation has an option, following an IPO of the Successor Corporation, to
repay the Note, together with accrued interest, in shares of stock of the
Successor Corporation. In 1998, the Partnership deferred interest payments of
$4.5 million. At December 31, 1998, the Partnership owed General Instrument
$80.9 million under this Note, including accrued interest of $5.9 million. The
fair value of the Note, computed based
 
                                      F-39
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
 
upon current interest rates for debt instruments with comparable maturities and
characteristics, at December 31, 1998 was approximately $62.5 million.
 
  General Instrument has agreed to provide an additional $34 million of capital
contributions in 1999, payable in installments through April 1999, in return for
an increase in its Partnership interest to 90.4%.
 
9. STOCK OPTION PLANS
 
Certain employees of the Partnership have been granted contingently issuable
stock options in NLC which expire in ten years. Such options are exercisable
only in the event of an initial public offering or a change in control of NLC
(the "Event"). Compensation expense will be recognized on the date of the Event
based on the difference between the exercise price of the options and the fair
value on the date of the Event.
 
  In addition, during 1997, as part of a tandem stock option grant certain
employees of NLC were granted options for a total of 5.8 million shares of
common stock of NLC, or options for a total of 1.5 million shares of General
Instrument common stock (the "GI Options"). Under the terms of the grant, the
exercise of options on either NLC or General Instrument common stock results in
the cancellation of options in the other company's common stock at a ratio of
approximately 4 shares of NLC common stock to 1 share of General Instrument
common stock. The options have a ten year life and vest over three years.
 
  Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK BASED COMPENSATION, requires the disclosure of pro forma net income (loss)
using the fair value method.
 
  The estimated fair value of an option grant is based, in part, on the
estimated term of the option. NLC options granted under the NLC Plan are not
exercisable unless an Event occurs. As a result, it is not practicable to
determine the expected term of NLC options and therefore it is not possible to
estimate the fair value of such options.
 
  Had compensation cost been determined under SFAS 123 for the GI Options under
the tandem stock option grant, the Partnership's net loss would have been
changed to the pro forma amounts indicated below:
 
<TABLE>
<S>                                                      <C>
Net loss:
 
  As reported                                            $ (81,731)
 
  Pro forma                                                (84,494)
</TABLE>
 
10. Employee Benefit Plans
 
Employees of the Partnership, who meet certain eligibility requirements, are
able to participate in the General Instrument 401(k) Plan. Employees may
contribute up to 10% of their annual compensation, subject to the legal maximum.
The Partnership, through General Instrument, contributes an amount equal to 50%
of the first 6% of the employee's salary that the employee contributes. The
Partnership's expense related to the 401(k) Plan was $.5 million for the year
ended December 31, 1998.
 
  The Partnership's employees participate in General Instrument's Pension Plan,
Post Retirement Benefit Plan and Post Employment Benefit Plan. The Partnership
expense related to these plans was $.4 million for the year ended December 31,
1998.
 
11. Obligations Under Capital Leases
 
The Partnership leases certain equipment under capital leases. Leases expire at
various dates from 1999 to 2001 and all contain purchase options.
 
  Future minimum lease payments at December 31, 1998 are as follows:
 
<TABLE>
<S>                                           <C>
Years ending December 31:
 
  1999                                        $     396
 
  2000                                              310
 
  2001                                               25
                                              ---------
 
    Total                                           731
 
Less current portion                               (396)
                                              ---------
  Total long-term capital lease obligations   $     335
                                              ---------
</TABLE>
 
12. Commitments and Contingencies
 
The Partnership leases its facilities and certain equipment under operating
leases. Leases expire at various dates from 1999 to 2006 and certain facilities
leases have renewal options.
 
  During 1998 the Partnership entered into an operating lease for one of its
buildings which expires in 2004. The lease provides for a purchase option but
does not allow for renewal options. General Instrument has guaranteed a residual
value to the lessor of approximately 82% of the underlying mortgage and equity
investment. The table of future minimum operating lease payments below excludes
any payments related to the residual guarantee. Rental expense recorded under
the lease in 1998 was $.8 million.
 
                                      F-40
<PAGE>
NOTES (Dollars in thousands, unless otherwise noted)
 
  Future minimum lease payments at December 31, 1998 are as follows:
 
<TABLE>
<S>                                      <C>
Years ending December 31:
 
  1999                                   $   3,154
 
  2000                                       2,943
 
  2001                                       2,357
 
  2002                                       2,181
 
  2003                                       2,098
 
  Thereafter                                 2,548
                                         ---------
Total                                    $  15,281
                                         ---------
</TABLE>
 
  Rent expense was $3.5 million for the year ended December 31, 1998.
 
  The Partnership has a commitment with a supplier to purchase approximately
$2.1 million of products in the 12 months following the release of the product
and approximately $4.3 million in the subsequent 12 months. In addition, the
Partnership has a commitment to purchase $2.4 million of product prior to
September 2002 with a minimum purchase of $.5 million each 12-month period
following the release of the product. The Partnership expects the release of
these products to occur during the second quarter of 1999. The Partnership has a
commitment to another supplier to purchase approximately $14.7 million of
products prior to December 2001.
 
  On May 5, 1998, the action entitled BroadBand Technologies, Inc., v. General
Instrument Corp., pending in the United States District Court for the Eastern
District of North Carolina, was dimissed with prejudice. In addition, on May 4,
1998, the action entitled Next Level Communications, Inc. v. BroadBand
Technologies, Inc., was dismissed with prejudice. These dismissals were entered
pursuant to a settlement agreement under which, among other things, the
Partnership has paid BroadBand Technologies ("BBT") $5 million, which was
expensed in 1998, and BBT and the Partnership have entered into a perpetual
cross-license of patents applied for or issued currently or during the next five
years.
 
  On March 5, 1998, an action entitled DSC Communications Corporation and DSC
Technologies Corporation v. Next Level Communications, L.P., KK Manager, LLC,
General Instrument Corporation and Spencer Trask & Co., Inc. was filed in the
Superior Court of the State of Delaware in and for New Castle County (the
"Delaware Action"). In that action, DSC alleged that in connection with the
formation of the Partnership and the transfer of the switched digital video
technology, the Partnership and KK Manager LLC misappropriated DSC's trade
secrets; that General Instrument improperly disclosed trade secrets when it
conveyed such technology to the Partnership; and that Spencer Trask & Co.
conspired to misappopriate DSC's trade secrets. The plaintiffs sought actual
damages for the defendants' purported unjust enrichment, disgorgement of
consideration, exemplary damages and attorney's fees, all in unspecified
amounts. In April 1998, General Instrument and the other defendants filed an
action in the United District Court for the Eastern District of Texas,
requesting that the federal court preliminarily and permanently enjoin DSC from
prosecuting the Delaware Action because by pursuing such action, DSC effectively
was trying to circumvent and relitigate the Texas federal court's November 1997
judgment in a previous lawsuit invloving DSC. On May 14, 1998, the United States
District Court for the Eastern District of Texas granted a preliminary
injunction preventing DSC from proceeding with the Delaware Action. That
injunction order is now on appeal to the United States Court of Appeal for the
Fifth Circuit where it has been briefed and awaits determination. On July 6,
1998, the defendants filed a motion for summary judgment with the Texas Court
requesting a permanent injunction preventing DSC from proceeding with this
litigation. As a result of the preliminary injunction, the Delaware Action has
been stayed in its entirety. The Partnership intends to vigorously contest this
action.
 
  While the ultimate outcome of these matters described above cannot be
determined, management, KK Partners LLC and General Instrument intend to
vigorously contest these actions and do not believe that the final disposition
of these matters will have a material adverse effect on the financial statements
taken as a whole.
 
                                      F-41