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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K




|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR



|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from
     to
|- |  | -------------------------------------------------------------------------------------------------------------------------------

Commission File No. 0-27877

NEXT LEVEL COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 95-3342408
(I.R.S. Employer
Identification No.)

6085 State Farm Drive
Rohnert Park, CA 94928
(Address of principal executive offices)

Registrants telephone number, including area code:   (707) 584-6820

Securities registered pursuant to Section 12(b) of the Act:



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|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Class                |  | Name of Each Exchange on Which Registered
|                              |  |                                          
|Common Stock, par value $0.01 |  | Nasdaq National Market                   



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

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. o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES o  NO x


The aggregate market value of our voting and non-voting common equity held
by non-affiliates is $19,906,515 as of June 30, 2002.

As of March 31, 2003, we have 87,260,523 outstanding shares of common
stock.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                           |  |                     
|-------------------------------------------------------------------------- |  | --------------------
|Documents                                                                  |  | Form 10-K References
|                                                                           |  |                     
|Our Definitive Proxy Statement for
our 2003 Annual Meeting of Stockholders |  | Part II and Part III



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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | ITEM 1. BUSINESS                                                                             
|             | ITEM 2. PROPERTIES                                                                           
|             | ITEM 3. LEGAL PROCEEDINGS                                                                    
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II     
|             | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS               
|             | ITEM 6. SELECTED FINANCIAL DATA                                                              
|             | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III    
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OFFICERS AND DIRECTORS           
|             | ITEM 11. EXECUTIVE COMPENSATION                                                              
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|             | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV     
|             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|EXHIBITS    
|SIGNATURES  
|EXHIBIT 23.1



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TABLE OF CONTENTS

|                                                                                                                    |  |  |    | 
|------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                                                                                              |  |  | 3  | 
|ITEM 1.      BUSINESS                                                                                               |  |  | 3  | 
|ITEM 2.      PROPERTIES                                                                                             |  |  | 13 | 
|ITEM 3.      LEGAL PROCEEDINGS                                                                                      |  |  | 13 | 
|ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                    |  |  | 16 | 
|PART II                                                                                                             |  |  | 17 | 
|ITEM 5.      MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                  |  |  | 17 | 
|ITEM 6.      SELECTED FINANCIAL DATA                                                                                |  |  | 19 | 
|ITEM 7.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                  OPERATIONS |  |  | 20 | 
|ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                               |  |  | 42 | 
|ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                            |  |  | 43 | 
|ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL                   DISCLOSURE |  |  | 65 | 
|PART III                                                                                                            |  |  | 65 | 
|ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                      |  |  | 65 | 
|ITEM 11.    EXECUTIVE COMPENSATION                                                                                  |  |  | 65 | 
|ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                          |  |  | 65 | 
|ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                          |  |  | 65 | 
|ITEM 14.    CONTROLS AND PROCEDURES                                                                                 |  |  | 65 | 
|PART IV                                                                                                             |  |  | 67 | 
|ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                        |  |  | 67 | 
|EXHIBITS                                                                                                            |  |  | 67 | 

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PART I




ITEM 1. BUSINESS

This Annual Report on Form 10-K of Next Level Communications, Inc.
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend these forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we are including this statement for purposes
of complying with these safe harbor provisions. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions, including
those in the section entitled Risk Factors in this annual report. Actual
results may vary materially from these forward-looking statements as a result
of these and other risks.

Words such as expect, anticipate, intend, plan, believe,
estimate and variations of these words and similar expressions are intended
to identify forward-looking statements. We undertake no obligations to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, unless we are required to do so by
law. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed below might not occur.

For detailed financial information, consult our financial statements
beginning on page 43.

OVERVIEW

We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, high-speed data and digital
video services over the existing copper telephone wire infrastructure. Service
providers who deploy our equipment can either offer voice, data and video
services in a single product offering or offer each service separately
depending on subscriber demand and the service providers objectives. We
believe that by installing our equipment, telephone companies and other
emerging communications service providers will be able to capitalize on, and
compete effectively in, the emerging market for integrated voice, data and
video services. Our products consist of equipment located at the telephone
companys central office or exchange, in the field and at the subscribers home
or business.

We commenced operations in July 1994 and recorded our first sale in
September 1997. From January 1998 until November 1999, we operated through
Next Level Communications L.P., which was formed as the result of the transfer
of all of the net assets, management and workforce of a wholly-owned subsidiary
of General Instrument. In November 1999, the business and assets of that
partnership were merged into Next Level Communications, Inc. as part of our
recapitalization. In November 1999, we completed an initial public offering of
our common stock, raising approximately $177.0 million in net proceeds. In
January 2000, General Instrument was acquired by Motorola, Inc., making us an
indirect subsidiary of Motorola. As a result of the transactions that occurred
in connection with our recapitalization and subsequent borrowings, preferred
stock and warrant issuances, Motorola owns 64.1 million shares of our common
stock, warrants to acquire an additional 41.3 million shares of our common
stock and 7.5 million shares of preferred stock convertible into 91.7 million
shares of our common stock constituting approximately 79.3% of our outstanding
common stock on a fully diluted basis as of December 31, 2002.

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In 2002, net loss was $78.5 million and net cash used in operating
activities was $34.1 million. As of December 31, 2002, our accumulated deficit
was $567.0 million. At March 31, 2003, we had cash and cash equivalents of
$14.1 million, after making a final payment of $9.5 million to extinguish our
Vendor Note Payable and paying approximately $5.0 million of non-recurring
expenses related to the Motorola tender offer.

During 2002, we instituted the following measures to improve cash flow:



| |  |  | We reduced our workforce twice in
2001 and by approximately 120 employees or 33% in
January 2002; these reductions, along with other cost saving measures
implemented, helped us reduce cash overhead expenses by $37.2 million
(39%) from 2001 to 2002; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we reduced inventory by
$22.4 million (36%) in 2002, generating
net cash flow of approximately $16.5 million;                                                                                                                                               

Since late 2000, we have been significantly dependent on Motorola for
funding. Loans from Motorola totaled $15.0 million in 2000 and $97.3 million
in 2001. Cash proceeds from preferred stock issuances totaled $65.0 million in
2002. We converted $42.0 million of debt due to Motorola to
preferred stock in 2002. We have a
remaining debt obligation to Motorola of $41.0 million; in October 2002 the
maturity date of this debt was extended from May 2003 to May 2006.

In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of our common stock not owned by Motorola. On
April 14, 2003 Motorola announced that it had completed its cash
tender offer and that as a result Motorola would own approximately
88.7 percent of our outstanding common stock. Motorola also stated
that it intended to convert certain of its shares of our preferred
stock into shares of our common stock to achieve a 90 percent
ownership level and that it will  then effect a short-form merger
pursuant to which all of our remaining outstanding shares (other than
dissenting shares) will be converted into the right to receive $1.18
per share. Once Motorola completes the short-form merger, we will no
longer be a publicly traded company on the Nasdaq National Market or
otherwise.

In the
last three quarters of 2002, we reduced our average negative quarterly
operating cash flow to approximately negative $4.8 million. Subject to the
effect of a significant change in our revenues on working capital, we expect
2003 cash flow from operations to be consistent with this trend (excluding the
approximately $5.0 million of tender offer expenses paid in the first quarter of 2003).
Our ability to generate positive operating cash flow is dependent on our
ability to increase sales, convert our inventory and accounts receivable to
cash, negotiate favorable terms with our vendors, effectively manage our
operating costs and continue to raise sufficient operating capital. We believe
that the combination of cash on hand, the cash flows expected to be generated
from operations and the cost savings generated by further planned expense
reductions will be sufficient to enable us to meet our financial obligations
and sustain our operations through the third quarter of 2003. We intend to
aggressively pursue additional sources of financing to support our operations
on a continuing basis.

Our equipment is designed to provide the following key benefits:

Flexible, Integrated Products. Our products are designed with the
flexibility to allow our customers to deliver voice, data and video services in
a single packaged offering or to offer them individually. This flexibility
allows telephone companies to immediately serve the varying needs of their
diverse end-user base, including residential, corporate and telecommuter
customers. By offering the flexibility inherent in an integrated system, our
products enable telephone companies to effectively time their network equipment
expenditures and rapidly introduce new services as demand warrants.

Cost-Effective Product Deployment.Our product design reduces the cost and
complexity often associated with deploying multiple services to end-users.
Because telephone companies often

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use separate equipment for each communications service, they require
multiple equipment purchases, installations, training procedures, maintenance
procedures and network management packages. In contrast, our products deliver
all services from a single system. By integrating many traditionally separate
functions, our products allow telephone companies to add services incrementally
by simply installing new modules into our existing equipment, rather than
purchasing entirely new infrastructure equipment. Additionally, our products
installed in the house or office deliver video and data services from a single
networked set-top box, thus eliminating the need for set-top boxes or modems
for different services or separately located TVs and PCs. We believe our
products provide cost savings, reduce trouble calls and ease installation
compared to other equipment that often consists of separate systems, each of
which corresponds to one service and which may not operate effectively
together.

Complete Solution For Delivery of Voice, Data and Video.By supplying
equipment for the telephone company central office, the field and the
subscribers home or office, we offer a single integrated system for the
delivery of voice, data and video services. With our products, telephone
companies initially deploying voice service can subsequently activate data
and/or video service with a simple addition and installation of equipment at
the subscribers home or office. We believe the flexibility found in our
products cannot currently be accomplished by attempting to integrate multiple
systems from multiple vendors.

Reliable and Compatible Technology.Because our products provide multiple
services, including voice, they are engineered to comply with rigorous industry
standards for reliability and safety. We have also designed our products to
operate with existing telephone company switches and billing systems, thereby
minimizing the cost of using our products.

Security.We believe that our products produce greater security compared
to cable systems that are based on shared network design in which data is
broadcast to all users simultaneously. Security has always been important to
individuals and businesses in voice transmission and is becoming increasingly
important as e-commerce applications and video-on-demand services become more
prevalent.

PRODUCTS

Our products include equipment located at a telephone companys central
office, in the field and at a subscribers home or business.

Broadband Digital Terminal. The Broadband Digital Terminal is the central
element of our product suite, providing centralized access to both broadband
and narrowband core networks and related voice, data and video services. The
Broadband Digital Terminal is typically located in a telephone companys
central office, or at a remote building basement or hut where it connects with
central office equipment including voice and data switches and billing systems.
On the subscriber side, the Broadband Digital Terminal provides high-speed
connections to remote Universal Service Access Multiplexers, Broadband Service
Access Multiplexers or Broadband Network Units that can support several
thousand telephone subscribers or combinations thereof. The Broadband Digital
Terminal has the capacity for cable and satellite competitive broadband
applications such as video-on-demand and high definition television. Also,
because the Broadband Digital Terminal supports different remote terminals,
changes to network layouts or transmission media, copper or fiber, do not
require different Broadband Digital Terminals.

Universal Service Access Multiplexer.We designed the Universal Service
Access Multiplexer to use existing copper wire to connect to a customers home
or office. This product can be connected with fiber optic cable to the
Broadband Digital Terminal. Each Universal Service Access Multiplexer can
support up to 32 video and/or data subscribers via Very High Bit Rate Digital
Subscriber Line technology, up to 48 video and/or data subscribers via
Asymmetric Digital

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Subscriber Line technology or up to 96 voice subscribers in each shelf. By
using modular components, a single Universal Service Access Multiplexer enables
multiple voice, data and video services. The Universal Service Access
Multiplexer can be deployed in the telephone companys central office or
remotely. Because the Universal Service Access Multiplexer is flexible in terms
of where it can be located in the network, as well as the services it can
support, its use can reduce both the costs and the complexity of deploying new
high-speed data and video services. A specialized version, called the
Universal Service Access Multiplexer  Single Shelf Enclosure, further reduces
these costs by providing a hardened, self-contained cabinet to easily overlay
existing digital lop carrier equipment or cost-effectively service rural
subscribers.

Broadband Service Access Multiplexer.The Broadband Service Access
Multiplexer is our latest remote terminal solution enabling the intelligent
transport of voice, video, and data over a single twisted pair to the home.
This is the first commercially available Digital Subscriber Line service shelf
that utilizes the global 998 standard for VDSL transport. The 998 standard
provides an ADSL spectrally compatible spectrum plan and is designed to provide
a means for multi-vendor equipment interoperability. The Broadband Service
Access Multiplexer can also support ADSL services. The Broadband Service
Access Multiplexer can be deployed in the telephone companys central office or
remotely. The Broadband Service Access Multiplexer provides increased density
of VDSL and/or ADSL ports per shelf, substantially decreasing the cost per
subscriber, and supports both Very High Bit Rate Digital Subscriber Line and
Asymmetric Digital Subscriber Line cards, with 12 ports per card. The capacity
is 12 line cards per shelf, totaling 144 Digital Subscriber Line ports per
Broadband Service Access Multiplexer. Transport from the Broadband Digital
Terminal to the Broadband Service Access Multiplexer is over a 622 megabit per
second Optical Distribution Unit. The high-speed transport coupled with
multicasting capability, which provides the intelligence to share the bandwidth
of a single video channel over multiple homes, reduces costs of deploying
high-speed as well as providing digital cable television competitive broadcast
services.

Broadband Network Unit.The Broadband Network Unit is used with Fiber to
the Curb installations where fiber optic cable is deployed up to a location
relatively close to the customers home or office. The Broadband Network Unit
supports voice, data and video services, and can be mounted on a telephone
pole, a pedestal or a wall. The Broadband Network Unit provides voice,
high-speed data and video service for clusters of 8 or 16 video and/or data and
24 or 36 voice subscribers. Our Broadband Network Unit is particularly suited
to situations where a new network is being built, or where existing copper wire
is being upgraded by the installation of fiber optic cable as the transmission
medium for residences or larger apartment buildings or offices. The advanced
design and environmentally secure housing of the Broadband Network Unit helps
to reduce in-field trouble calls.

N3 Residential Gateway. Our N3 Residential Gateway product is a single
set-top box that delivers integrated data and video services. One N3
Residential Gateway enables multiple televisions and PCs to be served from the
same copper line coming into the customers home or office. Traditionally, the
high cost of customer home or office equipment for broadband services has been
a limiting factor in the deployment of broadband services to multiple
televisions or personal computers. Historically, a customer would have to
obtain multiple modems or set-top boxes to support services to multiple
televisions or personal computers. In contrast, our N3 Residential Gateway
simultaneously provides two or three independent high quality digital video
streams that can be distributed throughout a home or office using standard
coaxial cable. The N3 Residential Gateway also supports enhanced telephone
services, such as an indicator on the television that a message is waiting on
the customers answering machine or service as well as on-screen caller ID. The
data port in our N3 Residential Gateway supports high-speed connectivity to the
Internet or remote work-at-home access.

N3 ETHERset.Our N3 ETHERset is a data-only, desktop device that provides
a powerful, low-cost solution for delivering high-speed Internet or data
services to subscribers in residences,

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small businesses and branch offices and the like. Individual or multiple
PCs can be connected to a single N3 ETHERset.

Element and Subscriber Management Systems and Middleware. Our products can
be managed remotely by our N3 View-1 Element Management System and our N3
View-2 Service Manager. The View-1 Element Management System enables service
providers to manage our equipment and their other systems and products. The
View-2 Service Manager enables service providers to manage delivery of voice,
data and video services to their customers. We also provide sophisticated
Middleware that manages the applications which can be provided via the N3
Residential Gateway, such as network games, walled garden Internet browsing,
and other interactive applications. An open applications interface exists to
allow other applications providers to provide their interactive applications on
the N3 Residential Gateway.

CUSTOMERS

We market and sell our products through our direct sales force to service
providers. Our largest customer, Qwest (formerly US WEST) accounted for 24%,
41% and 56% of our revenues in 2002, 2001 and 2000. In addition, we sell to a
steadily increasing number of other local, independent and international
telephone companies. During 2002, 64 customers each had purchased at least
$100,000 of our products.

We recorded our first sale to Qwest in September 1997 for deployment of
video and data service to Qwests customers in Phoenix, Arizona. In October
1998, Qwest selected our product to provide voice applications in six of the 14
states that Qwest serves. Sales to Qwest were significantly reduced in late
2001 due to an overall reduction in capital spending by Qwest. Additionally,
Qwest has slowed its purchases of our equipment while it re-evaluates its plans
regarding the deployment of VDSL across its network. Sales to Qwest in the
future are dependent upon its decision regarding the deployment of our product
and its overall capital spending plans. Qwest reported significant operating
losses in 2002, and has reported that it will restate prior period financials
for certain incorrectly recorded transactions. These factors may have
a significant adverse
impact on Qwests decision regarding the deployment of our product.

Our customers also include Bell Canada, Ben Lomand Communication,
Brandenburg Telephone Company, Cablevision, Cameron Telephone, CenturyTel,
Chibardun Telephone, Clear Lake Telephone, Craw-Kan Telephone Cooperative,
Frontier Communications, Horizon Telephone, Horry Telephone Cooperative,
Hutchinson Telephone, MTS Communications, New ULM Telecom, Paul Bunyan Rural
Telephone, South Central Rural Telephone Cooperative, Telenor, United
Telephone, West Carolina Rural Telephone Cooperative, Warwick Valley Telephone
and Wood County Telephone.

TECHNOLOGY

We believe the following key technologies have been instrumental in our
ability to provide what we believe is the worlds only integrated, complete
solution for the delivery of integrated voice, high-speed data and digital
video services over the existing telephone copper telephone wires and deep
fiber architectures such as Fiber to the Curb and Fiber to the Home.

Advanced Application Specific Integrated Circuit (ASIC) Architecture.
are custom-designed silicon circuits that are optimized for a specific task or
set of tasks. These circuits are critical because they are
performance-optimized to minimize complexity, packaging size, power dissipation
and cost. In addition, one of these circuits may be the only way to provide a
new or novel function that is not available in an off-the-shelf circuit. Our
engineers have substantial experience in the design of these circuits and have
developed a portfolio of over 50, which enables flexible delivery of voice,
data and video from a single system. We will continue to pursue additional
service and

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system level ASICs as a mechanism for protecting our intellectual property
and to achieve ongoing cost reductions.

System Design and Integration Expertise. We employ a team of experienced
system design and integration engineers in our research and development group.
These individuals provide research, design and development resources and ensure
that our products can be integrated by our customers. System integration
expertise is critical to the successful deployment of new advanced full service
telecommunications systems and services by our customers.

Wavelength Division Multiplexing Technology. Our system uses a technology
known as wavelength division multiplexing. This technology allows multiple
optical signals to be carried on the same optical fiber. In particular, this
technology is used to communicate two-way voice, data and video over a single
optical fiber. This enables our customers to save fiber costs and increase
bandwidth.

Software and Protocol Stacks.Most of the system software in our products
has been developed internally using modern design principles and processes.
Where appropriate, various third-party software packages have been integrated
into the access system. Some examples include the real-time operating system
and various protocol stack software packages.

Standards-based Architecture. We support multiple industry standards to
minimize interoperability issues and leverage industry hardware and software
capabilities, and improve time to market. On the customer side of the network,
we are working with industry standards for asymmetric digital subscriber line
and very high-speed digital subscriber line standards to support various
equipment at the customers home or business. In addition, we are providing an
open middleware environment for our family of Residential Gateway products that
enable support for various third party interactive applications.

RESEARCH AND DEVELOPMENT

We believe that our future success depends on our ability to:



| |  |  | adapt to the rapidly changing telecommunications environment;               
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | maintain our expertise in core technologies; and                            
|
| |  |  | continue meeting and anticipating the evolving needs of telephone companies.

We continually review and evaluate technological changes affecting the
telecommunications market and invest substantially in applications-based
research and development. We are committed to an ongoing program of new product
development that combines internal development efforts with strategic
relationships and licensing or marketing arrangements relating to new products
and technologies from outside sources.

We have focused our research and development expenditures for the past
several years on creating a complete solution for the delivery of voice, data
and video services using the existing infrastructure of telephone companies. We
have also concentrated on developing the associated customer premises
equipment, including our N3 Residential Gateway, and on developing our N3
View-1 Element Management Systems. In 2002, 2001 and 2000, research and
development expenses were $25.3 million, $46.9 million and $55.8 million. We
believe that our extensive experience in designing and implementing
high-quality network components has enabled us to develop integrated systems
solutions. We continually seek to improve our existing products, including
developing additional home and office products and higher speed interfaces for
our products.

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SALES AND MARKETING

We primarily market and sell our products through a direct sales force
located in North America. Sales activities have been focused primarily on
regional bell operating companies, and independent and international telephone
network operators. Because of the potential importance of our products to our
customers networks, we focus our selling efforts at many levels within each
customers organization.

We have a variety of marketing programs and initiatives to support the
sale and distribution of our products. A key factor in building brand
awareness for our products is promoting the success of our customers deploying
our products. We seek to educate telephone companies regarding the benefits of
deploying broadband-ready equipment across a diverse subscriber base. We also
build our brand name through continued publicity and referral efforts in both
media and industry-centered activities, including editorial presence in various
trade magazines, press releases, public speaking opportunities, national and
regional trade show participation, advertising, Internet-based communication
and promotion, media sponsorships and participation in industry standards
activities.

MANUFACTURING

We seek to deliver our products on time and defect-free by capitalizing on
the experience and expertise and efficiencies of strategic contract
manufacturers. Using contract manufacturers allows us to avoid costly
investment in manufacturing facilities and processes. We established a new
primary contract manufacturing relationship with Plexus Services Corporation in
2003.

We maintain only a limited in-house manufacturing capability for final
assembly, testing and integration of our products. Our internal manufacturing
expertise is focused on product design for testability, design for
manufacturability and the transfer of products from development to
manufacturing. Our contract manufacturers typically assemble an account team of
personnel representing all the essential functions to deliver products from
prototype through volume production. This team works with our design, test and
manufacturing engineers, and our quality, materials, logistics and program
management teams. Our primary contract manufacturer is certified under
international quality standards. Although our contract manufacturers manage
material procurement for the majority of the components that are incorporated
in our products, we continue to manage the evaluation and selection of certain
key components.

Our engineering team designs circuits and tests these designs using
computer simulations. When the fundamental design is stable, our contract
manufacturers make the circuits for testing. Upon completion of these tests,
vendors such as Metalink, Oki Semiconductor, Broadcom, STMicroelectronics, VLSI
(Philips) and Motorola manufacture the circuits in volume. Warranty and repair
support is performed off-site by our contract manufacturers and by us at our
Rohnert Park, California facility.

COMPETITION

The market for providing equipment for local telecommunications networks
is extremely competitive. The principal competitive factors in this market
include, or are likely to include:



| |  |  | product performance and price;                             
| | - |  | -----------------------------------------------------------
|
| |  |  | features and reliability;                                  
|
| |  |  | technical support and service;                             
|
| |  |  | relationships with phone companies and systems integrators;
|
| |  |  | compliance with industry standards;                        
|
| |  |  | compatibility with the products of other suppliers;        

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| |  |  | sales and distribution capabilities;                                                 
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | strength of brand name;                                                              
|
| |  |  | long-term cost of ownership and return on investment to
communications providers; and
|
| |  |  | general industry and economic conditions.                                            

Many of our current and potential competitors have longer operating
histories and greater name recognition and resources than we do. These
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies, and/or devote substantially more resources to
developing new products than we do. Many of our competitors have been
consolidated with larger companies and now have even greater resources to
compete with us.

Our significant current and potential competitors include Advanced Fibre
Communications, Alcatel, Allied Telesyn, Calix Networks, Catena Networks, Cisco
Systems, Lucent Technologies, Net-to-Net, Nokia, Nortel Networks, Occam
Networks, Pace Electronics, Scientific Atlanta, Siemens and our largest
stockholder, Motorola. Some of these competitors have existing relationships
with our current and prospective customers, which could give them a competitive
advantage over us as a preferred provider. In addition, we anticipate that
other large companies, such as Matsushita Electric Industrial, which markets
products under the Panasonic brand name, Microsoft, Network Computer, Philips,
Sony, STMicroelectronics and Toshiba America, will likely introduce products
that compete with our N3 Residential Gateway product in the future.

In addition, we are likely to face increasing competition from alternative
technologies. In particular, cable operators are currently deploying products
that deliver voice, high-speed data and video services over cable. Cable
service providers that offer these packaged services will give subscribers the
alternative of purchasing all communications services from a single service
provider. If these services are implemented successfully, they will compete
directly with the services offered by telephone companies using our products.

Consolidation in the telecommunications equipment industry may strengthen
our competitors position in our market. Consolidation of our competitors has
occurred, and we expect it to continue to occur in the foreseeable future.
Acquisitions may further strengthen our competitors financial, technical and
marketing resources.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright and trademark laws, and on
trade secrets, confidentiality provisions and other contractual provisions to
protect our intellectual property. These measures afford only limited
protection. We rely on patent, trademark, trade secret and copyright laws
both to protect our proprietary technology and to protect us against claims
from others. We believe that we have direct intellectual property rights or
rights under cross-licensing arrangements covering substantially all of our
material technologies. Given the technological complexity of our systems and
products, however, we cannot assure that claims of infringement will not be
asserted against us or against our customers in connection with their use of
our systems and products, nor can we assure the outcome of any such claims.

As of March 31, 2003, we have 31 granted patents in the United States and
10 granted patents in various foreign countries. Additionally, we have 20
pending U.S. patent applications and 42 pending international and foreign
patent applications.

We market our products primarily under our own name and mark. We consider
our trademarks to be valuable assets.

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SOURCES AND AVAILABILITY OF MATERIALS

We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. During 2002, we relied primarily on two
large contract manufacturers: Sanmina-SCI Systems and Flextronics Enclosures.
Beginning in 2003, we will rely primarily on Plexus Services Corp. For a
detailed discussion of these relationships and the risks associated with our
dependence upon third-party manufacturers, see Business-Manufacturing and
Risk Factors.

Some parts, components and equipment used in our products are obtained
from sole sources of supply. If our sole source suppliers fail to provide or we
fail to obtain components in sufficient quantities when required, delivery of
our products could be delayed. Additional sole-sourced components may be
incorporated into our equipment in the future. We do not have any long-term
supply contracts to ensure sources of supply. In addition, our suppliers may
enter into exclusive arrangements with our competitors, stop selling their
products or components to us at commercially reasonable prices or refuse to
sell their products or components to us at any price, which could harm our
operating results.

ENVIRONMENTAL MATTERS

Our research and development operations are subject to certain federal,
state, local and foreign environmental protection laws and regulations. These
laws and regulations relate to the use, handling, storage, discharge and
disposal of certain hazardous materials and wastes, the pre-treatment and
discharge of process waste waters and the control of process air pollutants. We
believe that we are in compliance in all material respects with applicable
environmental regulations. Compliance with new laws and regulations could
create significant compliance expenses, result in production suspension and
delay, restrictions on expansion at present locations and require the
acquisition of costly equipment. Non-compliance with laws and regulations could
result in penalties and suspension of operations.

REGULATION OF CUSTOMERS

Although our products are not now directly subject to significant
regulation by the Federal Communications Commission, (or FCC), or any other
federal or state communications regulatory agency, our customers and their
networks, into which our products are incorporated, are subject to government
regulation. Accordingly, the effects of regulation on our customers may, in
turn, affect our business, operating results and financial condition. FCC
regulatory policies affecting either the willingness or the ability of
telephone companies to offer certain services and to purchase and install our
products in their networks, or the terms on which these companies offer the
services and conduct their businesses, may impede sales of our products.

Several FCC regulatory policies may affect the degree to which or way in
which incumbent local exchange carriers, which we refer to as incumbent
carriers, principally the regional Bell operating companies, can or choose to
make integrated voice, data and video offerings available. For example, the
Telecommunications Act of 1996 requires incumbent carriers to offer their
competitors cost-based access to certain parts of their networks to enable
these competitors to provide telecommunications services. The FCC recently
issued a decision under which incumbent carriers would no longer be required to
provide competitors access to the elements of their networks used to provide
broadband services. The FCCs order has not yet been released to the public so
it is too early to determine the full impact of the decision. In addition, the
order will be appealed at the FCC and in the courts. These legal challenges
will not be resolved definitively for some time during which regulatory
uncertainty may remain.

The Commission has tentatively concluded that it intends to develop a
consistent framework for regulation of broadband services offered by cable and
telephone companies. The Commission also has tentatively concluded that
wireline broadband services are not subject to all the

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requirements that regulate the offerings of common carriers under Title II
of the Communications Act of 1934. Finally, the Commission recently decided
that broadband service provided by cable operators via a cable modem is not
subject to regulation as a telecommunications service. This ruling, combined
with the FCCs review of rules governing the incumbent carriers, indicates that
change in the regulatory climate affecting incumbent carriers is possible.
However, we will not know for certain the FCCs position until it issues orders
in these proceedings and any legal challenges have been decided, which is not
expected to occur until later this year at the earliest.

The Telecommunications Act of 1996 also requires incumbent carriers to
offer for resale, at wholesale rates, any telecommunications services that
incumbent carriers offer to customers. Existing regulations currently define
Internet access services as telecommunications services, and thus incumbent
carriers must offer such services for resale to competitors. This requirement
also is implicated by on-going FCC proceedings, but the outcome is uncertain
until the FCC issues orders in these proceedings and any legal challenges have
been resolved.

Incumbent carriers can provide video services through a structurally
separate subsidiary that is not subject to the unbundling and resale
requirements. Our equipment is designed to allow carriers to provide video,
high-speed data, and digital voice on an integrated basis. Because of the
regulatory restrictions, if incumbent carriers choose to offer video or data
services through a separate affiliate, incumbent carriers may prefer vendors
whose equipment does not provide for integration of service offerings. A
separate affiliate may choose to purchase less sophisticated equipment because
it might not be able to utilize fully our equipments integrated features. The
FCC may change the separate subsidiary requirement, but we will not know for
certain until the FCC issues an order and any legal challenges have been
resolved.

In its order approving the merger of two Bell operating companies, SBC and
Ameritech, the FCC permitted the merged entity to avoid its statutory resale
obligations on advanced services provided that such services were offered
through a separate subsidiary. Recently, however, the U.S. Court of Appeals
for the D.C. Circuit vacated, in part, the FCCs order and held that the FCC
may not permit an incumbent carrier to avoid its statutory obligations under
the Telecommunications Act of 1996 by setting up an affiliate to offer such
services.

Distribution of our N3 Residential Gateway could be adversely affected by
the FCCs navigation devices rules. Those rules require video program
distributors, including those who use our system to deliver video, to allow
set-top boxes and other navigation devices owned by customers or manufactured
by third parties to be connected to the video program distributors system. The
rules require video program distributors to disclose technical details of their
interfaces so as to permit third parties to manufacture the navigation devices
and retail customers to connect them. We believe these rules are not readily
applicable to our system because our N3 Residential Gateway is in many ways
different from a cable set-top box, and currently there is little likelihood of
an independent market for our N3 Residential Gateway separate from our entire
system. However, if these rules could be applied to our N3 Residential Gateway
or other parts of our system, our customers might be required to disclose
proprietary technical information including patented data about our technology,
to allow competing vendors to access the system.

The uncertainties caused by pending regulatory proceedings and possible
appeals of FCC decisions, and by pending legislation, could cause potential
customers to delay purchasing decisions. In addition, the outcomes of the
various regulatory proceedings and legislation may cause potential customers
not to deploy all of the services for which our products are designed or to
delay the widespread introduction of one or more of these services.

BACKLOG

Our backlog primarily consists of purchase orders for products to ship
within the next six months. At December 31, 2001 and 2002, backlog was
approximately $3.2 million and $7.9 million,

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respectively. We consider backlog to be an indicator, but not the sole
predictor, of future sales because our customers may cancel or defer orders
without penalty. Cancellation or reduction of pending purchase orders could
seriously harm our future revenues.

EMPLOYEES

As of March 31, 2003, we have a total of 249 full-time employees and 23
independent contractors. The total number of employees consists of 120 in
research and development, 10 in marketing, 33 in operations, 49 in sales and
sales support and 37 in administration. The total number of contractors
consists of two in research and development, 13 in operations, five in
marketing and sales and three in administration. Our employees are not
represented by any collective bargaining agreement with respect to their
employment, and we have never experienced an organized work stoppage.
Satisfactory relations have generally prevailed between our employees and us.
Our future success is heavily dependent upon our ability to hire and retain
qualified technical, marketing and management personnel.




ITEM 2. PROPERTIES

Our principal corporate offices are located in a company-owned building in
Rohnert Park, California. We lease one sales office, in Englewood, Colorado.
We also lease a sales support office in Englewood, Colorado and one
administrative office in Schaumburg, Illinois.

We continually evaluate our occupancy needs, particularly with respect to
the force reductions we have experienced in the past several quarters. In 2002
we incurred facility consolidation charges totaling $1.9 million: $0.9 million
related to the present value of future minimum lease payments and impaired
leasehold improvements on vacated premises and $1.0 million related to
cancellation charges on a facility expansion project. If, in the future, we
decide to further consolidate our facilities, we may incur related termination
costs.

We believe our current facilities are suitable and adequate and have
sufficient capacity to meet our current needs.




ITEM 3. LEGAL
PROCEEDINGS

Securities
Litigation.

Next Level and certain of its current or former
officers and directors (the Next Level defendants) were named as defendants
in a securities class action lawsuit filed in the United States District Court
for the Southern District of New York. This action, captioned Next Level, Inc.
Initial Public Offering Securities Litigation, also names several of the
underwriters involved in Next Levels initial public offering (IPO) as
defendants. This class action is brought on behalf of a purported class of
purchasers of Next Level common stock from the time of Next Levels IPO
(November 9, 1999) through December 6, 2000. The central allegation in this
action is that the underwriters in the Next Level IPO solicited and received
undisclosed commissions from, and entered into undisclosed arrangements with,
certain investors who purchased Next Level stock in the IPO and the
after-market. The complaint also alleges that the Next Level defendants
violated the federal securities laws by failing to disclose in the IPO
prospectus that the underwriters had engaged in these allegedly undisclosed
arrangements. (More than 300 issuers have been named in similar lawsuits.)

In July 2002, an omnibus motion to dismiss all complaints against issuers
and individual defendants affiliated with issuers (including the Next Level
defendants) was filed by the entire group of issuer defendants in these similar
actions. In October 2002, the Next Level individual defendants named in this
action were dismissed without prejudice. On February 19, 2003, the Court in
this action issued its decision on Defendants omnibus motion to dismiss. This
decision denied the motion to dismiss the Section 10(b) claim as to Next Level
(and numerous other issuer defendants), and denied the motion to dismiss the
Section 11 claim as to Next Level and virtually all of the other

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issuer-defendants. Next Level believes it has meritorious defenses and
intends to vigorously defend itself against this suit. As a result of this
belief, no liability for this suit has been recorded in the accompanying
financial statements. However, we could be forced to incur significant expenses
in the litigation, and in the event there is an adverse outcome, our business
could be harmed.

On January 28, 2002, a complaint entitled Next Level Communications, Inc.
v. Virtual Access plc was filed by us in the Superior Court of the State of
California, County of Sonoma. The complaint relates to a demand made by
Virtual Access that Next Level invest an additional $2.0 million in Virtual
Access pursuant to various investment and settlement agreements between the two
companies. The complaint by Next Level seeks declaratory relief that Next
Level has no obligation to make any further payments to Virtual Access, as well
as restitution and rescission. Virtual Access did not file a timely response
to the lawsuit and the court entered a Notice of Default in favor of Next
Level. Default judgment has not yet been sought or entered.

On May 1, 2002, the Company filed two complaints  both entitled Next
Level Communications, Inc. v. CMC Mississippi, Inc.  as adversary
proceedings in the Chapter 11 Bankruptcy of CMCs corporate parent: ACT
Manufacturing, Inc. These complaints allege that CMC, a former contract
manufacturer of Next Level products, sold us defective products and also
misappropriated Next Level-owned raw materials, all of which resulted in
damages to us of over $5.0 million. We seek to offset these damages against
CMCs claim of over $2.4 million owing from Next Level to CMC under a
Promissory Note issued in conjunction with an October 2001 settlement
agreement. CMC has counterclaimed for the amount remaining due under the
promissory note, plus interest and legal fees. On March 7, 2003, CMC filed
several motions for summary judgment which, if successful, could result in an
award requiring Next Level to pay the $2.4 million balance under the promissory
note, plus interest and fees. While we believe that our arguments for set off
and/or recoupment of our losses from CMC are strong, and that we, not CMC,
should be the eventual net recipient of an award in this dispute, and while we
would likely seek to appeal any adverse ruling, we cannot guarantee the outcome
of this litigation.

Delaware Stockholder Litigation

On January 14, 2003, alleged stockholders of Next Level filed four
separate class action complaints in the Court of Chancery of the State of
Delaware, in and for New Castle County, against Motorola, Next Level and
various directors of Next Level, captioned: (i) Barry Feldman v. J. Michael
Norris, et al., Civil Action No. 20114; (ii) Robert Bruckner v. Next Level
Communications, Inc., et al., Civil Action No. 20115; (iii) Fishoff Family
Foundation v. Michael J. Norris, et al., Civil Action No. 20118; and (iv) Mary
Gorton v. J. Michael Norris, et al., Civil Action No. 20119. Each of these
actions was brought as a putative class action on behalf of all holders of Next
Level Shares other than the defendants and persons related to or affiliated
with the defendants. The complaints in the four actions generally allege that:



| |  |  | Motorola, Next Level and the individual Next Level
directors breached their fiduciary duties as a result of the
Motorola Offer;                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Motorola Offer price is inadequate; and                                                                                                                                                                                                   
|
| |  |  | Motorola is engaging in unfair self-dealing, not acting
in good faith towards Next Levels minority stockholders and that
the Motorola Offer is a product of the conflict of interest
between Motorola and Next Levels minority stockholders.

The lawsuits seek, among other things, to recover unspecified damages and
costs and to enjoin or rescind the transactions contemplated by the Motorola
Offer.

On February 4, 2003, alleged stockholders of Next Level filed an amended
complaint in the Court of Chancery of the State of Delaware, in and for New
Castle County, against Motorola, Next Level and various directors of Next
Level, captioned: Barry Feldman v. J. Michael Norris, et al., Civil

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Action No. 20114. The amendment dismisses the members of the Independent
Committee as defendants, and, in addition to the allegations to the original
complaint, generally alleges that:



| |  |  | Motorola has engaged in disclosure violations in its
Schedule TO;                                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Motorola Offer is coercive in light of Motorolas
position on financing for Next Level;                                                                                                      
|
| |  |  | the Motorola Offer price is inadequate for additional
reasons specified in the complaint; and                                                                                                    
|
| |  |  | Motorola, Next Level and the individual Next Level
directors breached their fiduciary duties as a result of the
Motorola Offer by refusing to allow the Board to adopt a
stockholder rights plan.

On February 6, 2003, the four class action complaints originally filed on
January 13, 2003 or January 14, 2003 in the Court of Chancery of the State of
Delaware, in and for New Castle County, against Motorola, Next Level and
various directors of Next Level were consolidated under the caption: In re:
Next Level Communications Shareholders Litigation, Consolidated Civil Action
No. 20114 NC.

On March 14, 2003, Barry Feldman, for himself and on behalf of a putative
class of Next Level stockholders, filed a complaint in the Delaware Court of
Chancery in and for New Castle County, against Walter C. Clay, Alex Good, Craig
Kornblau, John McCartney, Richard D. Severns and Paul Latchford, Civil Action
No. 20195. The complaint seeks to certify a class of Next Level stockholders
and alleges the stockholders were harmed by the defendants conduct in adopting
the retention agreements with Messrs. Ide, St. Cyr, Sheppard, Weeks, Wiley and
Zar which are attached as exhibits to Next Levels Schedule 14D-9 (the
Retention Agreements). The complaint seeks injunctive relief to rescind the
Retention Agreements, damages and attorneys fees.

On March 24, 2003, Motorola and Next Level reached agreements in
principle, subject to court approval, with the class action plaintiffs to
settle the lawsuits that had been filed on behalf of Next Levels shareholders
in both Delaware and California relating to the Motorola Offer and the
Retention Agreements.

California Stockholder Litigation

On January 14, 2003, Scott Sebastian, allegedly a stockholder of Next
Level, filed a putative class action complaint in the California Superior
Court, Sonoma County, against Next Level and various Next Level directors. The
action alleges, among other claims, that: (i) Next Levels directors breached
their fiduciary duty of care by failing to properly value Next Level; (ii) Next
Levels directors would personally benefit from the success of the Motorola
Offer and, thus, their approval would constitute self-dealing; (iii) Next
Levels directors have superior information about the Motorola Offer which
enables them to profit disproportionately from it; (iv) Next Levels directors
should engage in arms-length negotiations as to the terms of the Motorola
Offer; and (v) Next Level s directors should disclose such superior
information to Next Levels stockholders. Plaintiff seeks declaratory relief,
an injunction against the consummation of the Motorola Offer, rescission of any
resultant transaction and an injunction requiring Next Levels directors to
obtain a transaction that is in the best interests of Next Levels
stockholders.

Next Level Litigation

On February 4, 2003, Next Level, Next Level Partners, LLC (the owner of
more than 1.8 million Shares and the largest stockholder of Next Level other
than Motorola), Spencer Segura and Jacqueline Segura (the respective owners of
approximately 400,000 and approximately 200,000 Shares) filed suit against
Motorola in the Court of Chancery of the State of Delaware, in and for New
Castle County. Plaintiffs allege among other things that: (i) Motorola violated
the non-disclosure agreement between Next Level and Motorola by using
confidential information from Next Level to

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plan, launch and carry out the Motorola Offer; (ii) Motorola breached its
fiduciary duty as a controlling stockholder of Next Level by using inside
information to plan, launch and carry out the Motorola Offer; (iii) the
Motorola Offer is substantively coercive because the Minority Stockholders are
not, and cannot be informed of, material information that would affect Next
Levels market value and the economic decision whether to tender; (iv) the
Motorola Offer is structurally coercive because Motorola has not explicitly
committed to purchasing Shares not tendered in a second step short form merger;
(v) the Motorola Offer is coercive because Motorola, having ensured that Next
Level has no outside financial support, has threatened that it will no longer
support Next Level as an independent company; (vi) the Motorola Offer is
subject to entire fairness review and fails that test because the offer is not
made at an adequate price and Motorola did not follow a fair process; (vii)
Motorolas refusal to consent to the Independent Committee adopting a
stockholder rights plan was a breach of fiduciary duty; (viii) Motorola
breached its fiduciary duty of disclosure by materially misstating and omitting
certain facts in the Schedule TO; (ix) certain provisions in preferred stock
held by Motorola which allegedly prevent Next Level from adopting a stockholder
rights plan (the Blocking Preferred) conflict with Section 141(a) of the
Delaware General Corporation Law and are thus invalid; and (x) the Shares held
by Next Levels officers are properly included in determining whether the
Motorola Offer meets the Minimum Tender Condition. Plaintiffs have asked the
Court of Chancery to preliminarily and permanently enjoin the Motorola Offer,
to rescind the Motorola Offer and any related transactions to the extent they
are completed, to compel Motorola to correct its defective disclosures, to
require Motorola to pay a fair price to the Next Level stockholders of its
proceeds with the Motorola Offer, to require Motorola to pay substantial
damages to Next Level, to invalidate the Blocking Preferred and to declare that
the Shares held by Next Levels officers be included in determining whether the
Motorola Offer meets the Minimum Tender Condition. On February 25, 2003, the
Court of Chancery of the State of Delaware denied Next Level Communications
request for a preliminary injunction of the Motorola Offer. Next Level intends
to pursue an expedited appeal with respect to the ruling. On February 27,
2003, the Supreme Court of the State of Delaware declined to hear Next Level
Communications application for an interlocutory appeal with respect to the
Delaware Chancery Courts ruling on February 25, 2003. On March 24, 2003, Next
Level, Next Level Partners, LLC, and Spencer and Jacquelyn Segura dismissed
this complaint with prejudice and entered into a settlement agreement with
Motorola.

Other
Matters.

From time to time, we are a party to other actions which
arise in the normal course of business. In our opinion, the ultimate
disposition of these other matters will not have a material adverse effect on
our business.




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

No matters were submitted to a vote of our stockholders during the quarter
ended December 31, 2002.

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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

During November 1999, we completed our initial public offering in which we
sold 9,775,000 shares of our common stock at a price of $20.00 per share
pursuant to a Registration Statement on Form S-1 (File No. 333-85999). Our
common stock is listed on The NASDAQ Stock Markets National Market under the
symbol NXTV. The following table sets forth the high and low closing prices
for our common stock for the periods indicated as reported on The NASDAQ
National Market.

|     |  |  |  |                |  |      |        |     |  |   |       | 
|---- |  |  |  | -------------- |  | ---- | ------ | --- |  | - | ----- | 
|Year |  |  |  |                |  | High |        | Low
|     |  |  |  |                |  |      |        |    
|2002 |  |  |  | Fourth Quarter |  | $    | 1.10   |     |  | $ | 0.58  | 
|     |  |  |  | Third Quarter  |  | $    | 1.47   |     |  | $ | 0.72  | 
|     |  |  |  | Second Quarter |  | $    | 1.91   |     |  | $ | 0.83  | 
|     |  |  |  | First Quarter  |  | $    | 3.56   |     |  | $ | 1.38  | 
|2001 |  |  |  | Fourth Quarter |  | $    | 6.44   |     |  | $ | 2.60  | 
|     |  |  |  | Third Quarter  |  | $    | 6.45   |     |  | $ | 1.40  | 
|     |  |  |  | Second Quarter |  | $    | 12.18  |     |  | $ | 3.16  | 
|     |  |  |  | First Quarter  |  | $    | 14.69  |     |  | $ | 5.02  | 
|2000 |  |  |  | Fourth Quarter |  | $    | 71.50  |     |  | $ | 10.38 | 
|     |  |  |  | Third Quarter  |  | $    | 125.56 |     |  | $ | 40.63 | 
|     |  |  |  | Second Quarter |  | $    | 128.13 |     |  | $ | 50.00 | 
|     |  |  |  | First Quarter  |  | $    | 195.75 |     |  | $ | 60.75 | 

On March 31, 2003, the last reported sale price for our common stock on
the NASDAQ National Market was $1.17 per share. At March 31, 2003, the number
of record holders of our common stock was 300.

We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
intend to retain all available funds and any future earnings for use in the
operation of our business. In addition, we are party to several agreements
with Motorola which restrict our ability to pay dividends on our common stock.

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |  |                      |  |                      |  |                          
|---------------------------------------------------------- |  | -------------------- |  | -------------------- |  | -------------------------
|                                                           |  |                      |  |                      |  | Number of securities     
|                                                           |  | Number of securities |  |                      |  | remaining available for  
|                                                           |  | to be issued upon    |  | Weighted-average     |  | future issuance under    
|                                                           |  | exercise of          |  | exercise price of    |  | equity compensation plans
|                                                           |  | outstanding options, |  | outstanding options, |  | (excluding securities    
|                                                           |  | warrants and rights  |  | warrants and rights  |  | reflected in column (a)) 
|Plan category                                              |  | (a)                  |  | (b)                  |  | (c)                      
|                                                           |  |                      |  |                      |  |                          
|Equity compensation plans approved
by security holders     |  | 69,917,868           |  | $5.83                |  | 4,675,704                
|Equity compensation plans not
approved by security holders |  | 0                    |  | 0                    |  | 0                        
|Total                                                      |  | 69,917,868           |  | $5.83                |  | 4,675,704                

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On December 18, 2002, we and Motorola, Inc. (Motorola) entered into a
Securities Purchase Agreement whereby Motorola purchased 26,506 shares of our
Series A-2 Convertible Preferred Stock (Series A-2 Preferred) at a per share
purchase price of $830.00, for a total purchase price of approximately $22
million; these shares were issued under Regulation D of the Securities Act.
The total purchase price consisted of (i) the cancellation of $10 million under
the Credit Agreement (Multi-Draw Term Loan Facility), dated as of May 16, 2001
between us and Motorola, as amended, and (ii) cash in the amount of $12
million. Each share of Series A-2 Preferred is initially convertible into
1,000 shares of our common stock; is entitled to cumulative dividends at an
annual rate of 7.5%, payable in cash or additional shares of Series A-2
Preferred; and is entitled to a liquidation preference of $2,075.00 per share
in the event of insolvency or dissolution of the Company, in the event of
certain change in control, merger or consolidation events and in the event of
sales or transfers of a material portion of our assets outside the ordinary
course of business. Holders of Series A-2 Preferred may vote their shares
together with holders of Common Stock on an as-converted to common stock basis,
and certain material actions require the consent of holders of a majority of
the Series A-2 Preferred. In connection with the issuance of the Series A-2
Preferred, we granted Motorola a warrant to purchase 7,951,807 shares of our
common stock which is currently exercisable with an exercise price of $0.83 per
share and a warrant to purchase 220,000 shares of our common stock which is
exercisable after December 18, 2007 with an exercise price of $2.00 per share.
The warrants expire on December 17, 2007 and December 17, 2012, respectively.

Also on December 18, 2002, we amended the terms of our outstanding Series
A Convertible Preferred Stock (Series A Preferred) and Series A-1 Convertible
Preferred Stock (Series A-1 Preferred) to (i) remove the provision allowing
for redemption at the option of the holder of Series A Preferred or Series A-1
Preferred, as the case may be, after June 25, 2007, and (ii) amend the events
under which the holder of Series A Preferred or Series A-1 Preferred, as the
case may be, is entitled to a liquidation preference. As amended, the Series A
Preferred and Series A-1 Preferred contain substantially identical terms as the
Series A-2 Preferred.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the historical consolidated financial
statements and notes included in this annual report.

|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |        | 
|------------------------------------------------------------------------------------------------ | ------------------------------------ | - | --------------------------------- | ------ | ---- | - | ---------- | ------ | ---- | - | ---------- | ------ |  | - | ---------- | ------- |  | - | ---------- | ------ | 
|                                                                                                 |                                      |   | 2002                              |        | 2001 |   | 2000       |        | 1999 |   | 1998      
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |           
|                                                                                                 |                                      |   | (In thousands, except share data)
|Statement of Operations Data:                                                                    |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Revenues                                                                                         |                                      | $ | 57,352                            |        |      | $ | 93,245     |        |      | $ | 150,091    |        |  | $ | 57,597     |         |  | $ | 43,830     |       
|Cost of revenues                                                                                 |                                      |   | 51,444                            |        |      |   | 157,964    |        |      |   | 125,231    |        |  |   | 51,557     |         |  |   | 43,433     |       
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Gross profit (loss)                                                                              |                                      |   | 5,908                             |        |      |   | (64,719    | )      |      |   | 24,860     |        |  |   | 6,040      |         |  |   | 397        |       
|Operating Expenses:                                                                              |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|                                                                                                 | Research and development             |   |                                   | 25,307 |      |   |            | 46,868 |      |   |            | 55,834 |  |   |            | 48,454  |  |   |            | 47,086 | 
|                                                                                                 | Selling, general and administrative  |   |                                   | 33,574 |      |   |            | 53,349 |      |   |            | 46,907 |  |   |            | 30,511  |  |   |            | 26,248 | 
|                                                                                                 | Asset impairments and disposals, net |   |                                   | 2,208  |      |   |            | 8,431  |      |   |            |       |  |   |            |        |  |   |            |       | 
|                                                                                                 | Litigation                           |   |                                   |       |      |   |            |       |      |   |            |       |  |   |            |        |  |   |            | 5,000  | 
|                                                                                                 | Non-cash compensation charge         |   |                                   |       |      |   |            |       |      |   |            | 2,384  |  |   |            | 128,284 |  |   |            |       | 
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Total operating expenses                                                                         |                                      |   | 61,089                            |        |      |   | 108,648    |        |      |   | 105,125    |        |  |   | 207,249    |         |  |   | 78,334     |       
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Operating loss                                                                                   |                                      |   | (55,181                           | )      |      |   | (173,367   | )      |      |   | (80,265    | )      |  |   | (201,209   | )       |  |   | (77,937    | )     
|Interest income (expense), net                                                                   |                                      |   | (22,793                           | )      |      |   | (14,454    | )      |      |   | 5,575      |        |  |   | (3,564     | )       |  |   | (3,776     | )     
|Other expense, net                                                                               |                                      |   | (537                              | )      |      |   | (20,785    | )      |      |   | (148       | )      |  |   | (299       | )       |  |   | (18        | )     
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Net loss                                                                                         |                                      |   | (78,511                           | )      |      |   | (208,606   | )      |      |   | (74,838    | )      |  |   | (205,072   | )       |  |   | (81,731    | )     
|Preferred stock accretion and dividends                                                          |                                      |   | (23,406                           | )      |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Net loss available to common shareholders                                                        |                                      |   | (101,917                          | )      |      |   | (208,606   | )      |      |   | (74,838    | )      |  |   | (205,072   | )       |  |   | (81,731    | )     
|                                                                                                 |                                      |   |                                   |        |      |   |            |        |      |   |            |        |  |   |            |         |  |   |            |       
|Basic and diluted net loss per common
share (pro forma in 1999 and 1998)                         |                                      | $ | (1.18                             | )      |      | $ | (2.45      | )      |      | $ | (0.91      | )      |  | $ | (2.78      | )       |  | $ | (1.08      | )     
|Shares used to compute basic and diluted
net loss per common share ( pro forma in
1999 and 1998) |                                      |   | 86,368,288                        |        |      |   | 85,277,764 |        |      |   | 81,929,663 |        |  |   | 71,597,834 |         |  |   | 69,967,053 |       

|                                                                   |  |   |                |  |      |   |         |   |      |   |         |  |  |   |         |  |  |   |         |   | 
|------------------------------------------------------------------ |  | - | -------------- |  | ---- | - | ------- | - | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | - | 
|                                                                   |  |   | December 31,  
|                                                                   |  |   |               
|                                                                   |  |   | 2002           |  | 2001 |   | 2000    |   | 1999 |   | 1998   
|                                                                   |  |   |                |  |      |   |         |   |      |   |        
|                                                                   |  |   | (In thousands)
|Balance Sheet Data:                                                |  |   |                |  |      |   |         |   |      |   |         |  |  |   |         |  |  |   |         |  
|Cash and cash equivalents                                          |  | $ | 33,394         |  |      | $ | 20,580  |   |      | $ | 35,863  |  |  | $ | 128,752 |  |  | $ | 28,983  |  
|Working capital                                                    |  |   | 58,611         |  |      |   | 47,785  |   |      |   | 85,265  |  |  |   | 147,948 |  |  |   | 38,564  |  
|Total assets                                                       |  |   | 132,031        |  |      |   | 154,035 |   |      |   | 275,716 |  |  |   | 267,811 |  |  |   | 97,771  |  
|Long-term obligations, net of current portion                      |  |   | 87,213         |  |      |   | 104,428 |   |      |   | 15,000  |  |  |   | 25,199  |  |  |   | 81,275  |  
|Total stockholders equity (deficit) / partners
capital (deficit) |  |   | 11,251         |  |      |   | (8,299  | ) |      |   | 158,749 |  |  |   | 206,228 |  |  |   | (14,769 | )

19



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##### Table of Contents



The following table sets forth unaudited statement of operations data for
our eight most recent quarters in the period ended December 31, 2002. This
unaudited information has been prepared on the same basis as the annual
financial statements and includes all adjustments, consisting of normal
recurring items (In thousands, except per share data)



|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |       |  
|-------------------------------------------------- | ------------------ | - | ------------------ | ----- | ---------- | - | ------------- | ----- | ------------ | - | ------------ | ----- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                                                   |                    |   | Three Months Ended |       | Year Ended
|                                                   |                    |   |                    |       |           
|                                                   |                    |   | March 31,          |       | June 30,   |   | September 30, |       | December 31, |   | December 31,
|                                                   |                    |   | 2002               |       | 2002       |   | 2002          |       | 2002         |   | 2002        
|                                                   |                    |   |                    |       |            |   |               |       |              |   |             
|Total revenues                                     |                    | $ | 14,078             |       |            | $ | 16,778        |       |              | $ | 12,344       |       |   | $ | 14,152  |       |   | $ | 57,352   |      
|Gross profit (loss)                                |                    |   | 1,833              |       |            |   | 2,666         |       |              |   | 987          |       |   |   | 422     |       |   |   | 5,908    |      
|R&D                                                |                    |   | 8,211              |       |            |   | 5,319         |       |              |   | 5,545        |       |   |   | 6,232   |       |   |   | 25,307   |      
|SG&A                                               |                    |   | 9,233              |       |            |   | 8,686         |       |              |   | 7,693        |       |   |   | 7,962   |       |   |   | 33,574   |      
|Impairments and
asset disposals                    |                    |   |                   |       |            |   |              |       |              |   | 1,934        |       |   |   | 274     |       |   |   | 2,208    |      
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Total operating
expenses                           |                    |   | 17,444             |       |            |   | 14,005        |       |              |   | 15,172       |       |   |   | 14,468  |       |   |   | 61,089   |      
|Operating loss                                     |                    |   | (15,611            | )     |            |   | (11,339       | )     |              |   | (14,185      | )     |   |   | (14,046 | )     |   |   | (55,181  | )    
|Interest income
(expense), net                     |                    |   | (5,617             | )     |            |   | (9,231        | )     |              |   | (6,218       | )     |   |   | (1,727  | )     |   |   | (22,793  | )    
|Other income
(expense), net                        |                    |   | (290               | )     |            |   | (548          | )     |              |   | (53          | )     |   |   | 355     |       |   |   | (537     | )    
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Net loss                                           |                    |   | (21,518            | )     |            |   | (21,118       | )     |              |   | (20,456      | )     |   |   | (15,418 | )     |   |   | (78,511  | )    
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Accretion and
dividends payable
on preferred stock |                    |   | (463               | )     |            |   | (1,160        | )     |              |   | (2,218       | )     |   |   | (19,565 | )     |   |   | (23,406  | )    
|Basic and diluted                                  |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Net loss available to
common shareholders          |                    | $ | (21,981            | )     |            | $ | (22,278       | )     |              | $ | (22,674      | )     |   | $ | (34,983 | )     |   | $ | (101,917 | )    
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Shares outstanding                                 |                    |   | 85,933             |       |            |   | 86,255        |       |              |   | 86,436       |       |   |   | 86,838  |       |   |   | 86,368   |      
|                                                   | Basic and diluted  |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |       |  
|                                                   | Net loss per share |   | $                  | (0.26 | )          |   | $             | (0.26 | )            |   | $            | (0.26 | ) |   | $       | (0.40 | ) |   | $        | (1.18 | )
|                                                   |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |       |  
|----------------------------------------- | ------------------ | - | ------------------ | ----- | ---------- | - | ------------- | ----- | ------------ | - | ------------ | ----- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                                          |                    |   | Three Months Ended |       | Year Ended
|                                          |                    |   |                    |       |           
|                                          |                    |   | March 31,          |       | June 30,   |   | September 30, |       | December 31, |   | December 31,
|                                          |                    |   | 2001               |       | 2001       |   | 2001          |       | 2001         |   | 2001        
|                                          |                    |   |                    |       |            |   |               |       |              |   |             
|Total revenues                            |                    | $ | 28,738             |       |            | $ | 31,904        |       |              | $ | 20,198       |       |   | $ | 12,406  |       |   | $ | 93,245   |      
|Gross profit (loss)                       |                    |   | 6,098              |       |            |   | (66,038       | )     |              |   | 2,629        |       |   |   | (7,407  | )     |   |   | (64,719  | )    
|R&D                                       |                    |   | 14,095             |       |            |   | 12,858        |       |              |   | 11,788       |       |   |   | 8,126   |       |   |   | 46,868   |      
|SG&A                                      |                    |   | 14,510             |       |            |   | 14,838        |       |              |   | 12,932       |       |   |   | 11,070  |       |   |   | 53,349   |      
|Impairments and
asset disposals           |                    |   |                   |       |            |   | 796           |       |              |   |             |       |   |   | 7,635   |       |   |   | 8,431    |      
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Total operating
expenses                  |                    |   | 28,605             |       |            |   | 28,492        |       |              |   | 24,720       |       |   |   | 26,831  |       |   |   | 108,648  |      
|Operating loss                            |                    |   | (22,507            | )     |            |   | (94,530       | )     |              |   | (22,091      | )     |   |   | (34,238 | )     |   |   | (173,367 | )    
|Interest income
(expense), net            |                    |   | 108                |       |            |   | (3,192        | )     |              |   | (5,441       | )     |   |   | (5,929  | )     |   |   | (14,454  | )    
|Other income
(expense), net               |                    |   | 1                  |       |            |   | (4,413        | )     |              |   | (236         | )     |   |   | (16,136 | )     |   |   | (20,785  | )    
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Net loss                                  |                    |   | (22,398            | )     |            |   | (102,135      | )     |              |   | (27,768      | )     |   |   | (56,303 | )     |   |   | (208,606 | )    
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Basic and diluted                         |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Net loss available to
common shareholders |                    | $ | (22,398            | )     |            | $ | (102,135      | )     |              | $ | (27,768      | )     |   | $ | (56,303 | )     |   | $ | (208,606 | )    
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      
|Shares outstanding                        |                    |   | 84,628             |       |            |   | 85,233        |       |              |   | 85,473       |       |   |   | 85,762  |       |   |   | 85,278   |      
|                                          | Basic and diluted  |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |       |  
|                                          | Net loss per share |   | $                  | (0.26 | )          |   | $             | (1.20 | )            |   | $            | (0.32 | ) |   | $       | (0.66 | ) |   | $        | (2.45 | )
|                                          |                    |   |                    |       |            |   |               |       |              |   |              |       |   |   |         |       |   |   |          |      






Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We design and market broadband communications equipment that enables
telephone companies and other communications service providers to
cost-effectively deliver a full suite of voice, data and video services over
the existing copper wire telephone infrastructure. We commenced operations in
July 1994 and recorded our first sale in September 1997. From January 1998
until November 1999, we operated through Next Level Communications L.P., which
was formed in connection with the transfer of all of the net assets, management
and workforce of a wholly-owned subsidiary of General Instrument. In November
1999, the business and assets of that partnership were merged into Next Level
Communications, Inc. as part of our recapitalization. In January 2000, General
Instrument was acquired by Motorola, Inc., making us an indirect subsidiary of
Motorola.

We generate our revenues primarily from sales of our equipment. A small
number of customers have accounted for a large part of our revenues to date,
and we expect this concentration to continue in the future. Qwest accounted
for 24%, 41% and 56% of our total revenues in 2002, 2001 and 2000,
respectively. Our agreements with our largest customers do not obligate the
customers to purchase any products. In addition, our significant customer
agreements generally

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contain fixed-price provisions. As a result, our ability
to generate a profit on these contracts depends upon our ability to produce and
market our products at costs lower than these fixed prices.

The timing of our revenues is difficult to predict because of the length
and variability of the sales cycle for our products. Customers view the
purchase of our products as a significant and strategic decision. As a result,
customers typically undertake significant evaluation, testing and trial of our
products before deploying them. This evaluation process frequently results in a
lengthy sales cycle, typically ranging from nine months to more than a year.
While our customers are evaluating our products and before they place an order,
if at all, we may incur substantial sales and marketing expenses and expend
significant management efforts.

Beginning in 2001, the global telecommunications market deteriorated,
resulting in a reduction in capital spending by our customers. This trend
continued in 2002. Additional capital spending reductions may occur during
2003. Reasons for this reduction include the general economic slowdown,
network overcapacity, customer bankruptcies, network build-out delay and
limited capital availability. As a result, our sales and results of operations
have been and may continue to be adversely affected. The significant slowdown
in capital spending has created uncertainty as to the level of demand in our
target markets. As a result of the uncertainty and variations in our markets,
accurately forecasting future results, earnings and cash flow is increasingly
difficult.

In
January 2003, Motorola initiated an unsolicited tender offer for all
of the shares of our common stock not owned by Motorola. On
April 14, 2003 Motorola announced that it had completed its cash
tender offer and that as a result Motorola would own approximately
88.7 percent of our outstanding common stock. Motorola also
stated that it intended to convert certain of its shares of our
preferred stock into shares of our common stock to achieve a
90 percent ownership level and that it will then effect a
short-form merger pursuant to which all of our remaining outstanding
shares (other than dissenting shares) will be converted into the
right to receive $1.18 per share. Once Motorola completes the
short-form merger, we will no longer be a publicly traded company on
the Nasdaq National Market or otherwise.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. Our preparation of these consolidated financial
statements requires us to make judgments and estimates that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from such
estimates under different assumptions or conditions. The following summarizes
our critical accounting policies and significant estimates used in preparing
our consolidated financial statements:

Revenue Recognition We recognize revenue when contractual obligations
have been satisfied, title and risk of loss have been transferred to the
customer and collection of the resulting receivable is reasonably assured.
Generally, we recognize revenue from equipment sales upon shipment. In cases
where title and risk of loss pass upon delivery, we recognize revenue from
equipment sales upon receipt by the customer. Revenue from installation
services is recognized when the services have been completed and acceptance by
the customer has occurred. Typically (over 85% of our sales transactions),
customers do not purchase our installation services. However, in circumstances
where customers purchase our installation services, those services are included
with equipment purchases as part of a multiple element arrangement. Fair value
of equipment is based on the sales prices offered to customers that purchase
only equipment and revenue is generally recognized upon shipment. The
installation services are separately priced at a rate approximately equivalent
to that charged by third party vendors (i.e. outside parties that provide
similar installation services) and the portion of the contract price relating
to installation services is deferred until the installation is complete and
accepted by the customer. Installation services do not involve a significant
change to the features or capabilities of the equipment or building complex
interfaces or connections; the equipment is a standard product (i.e. does not
require customer specific modification); and installation does not
significantly alter the equipments capabilities. Revenue from field trials is
recognized when the trial has been completed and full payment has been
received. We accrue a provision for estimated sales returns as a reduction of
revenue at the time of revenue recognition.

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##### Table of Contents



Accrued Warranty We accrue the estimated cost of product warranties at
the time revenues are recognized. While we engage in product quality programs
and processes, including actively monitoring and evaluating the quality of our
contract manufacturers, our warranty obligation is affected by actual warranty
costs including material usage and service delivery costs incurred in
correcting a product failure. If actual product failure rates, material usage
or service delivery costs differ from our estimates, revisions to the estimated
warranty liability will be required. We perform ongoing evaluations of the
adequacy of our product warranty reserve. Warranty reserve activity is
detailed as follows (in millions):

|                        |      |  |           |     |          |  |       |     |         |  |     |     |  |  |  |     | 
|----------------------- | ---- |  | --------- | --- | -------- |  | ----- | --- | ------- |  | --- | --- |  |  |  | --- | 
|                        |      |  | Beginning |     |          |  |       |     | Actual  |  | End
|                        |      |  | of year   |     | Accruals |  | Costs |     | of year
|                        |      |  |           |     |          |  |       |     |        
|Year ended December 31: |      |  |           |     |          |  |       |     |         |  |     |     |  |  |  |    
|                        | 2000 |  |           | 2.8 |          |  |       | 5.7 |         |  |     | 2.9 |  |  |  | 5.6 | 
|                        | 2001 |  |           | 5.7 |          |  |       | 3.8 |         |  |     | 4.6 |  |  |  | 4.9 | 
|                        | 2002 |  |           | 4.8 |          |  |       | 2.6 |         |  |     | 3.1 |  |  |  | 4.3 | 

Employee Stock-based Compensation We grant stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. We account for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees and Financial Accounting
Standards Board interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation (FIN 44). We account for stock-based awards to
nonemployees in accordance with Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation and Emerging Issues
Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

Under SFAS No. 123, had the Company recorded compensation expense based on
the estimated grant date fair value for awards based on grants under the Plans
and the tandem stock grant, the Companys net loss and net loss per share would
have changed.

Inventories We are required to state our inventories at the lower of
cost or market. In assessing the ultimate realization of inventories, we are
required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. Our reserve requirements
generally increase as our projected demand requirements decrease due to market
conditions, technological and product life cycle changes, and strategic
direction, such as discontinuances of product lines, as well as declining
market conditions. As a result, we incurred inventory charges of approximately
$5.9 million, $76.8 million and $9.0 million during fiscal 2002, 2001 and 2000,
respectively. Additionally, during the first quarter of 2003, as we
began to consolidate inventories and production to a new primary
contract manufacturer, we initiated a thorough quality review of our
raw materials on hand, the results of which have not yet been
finalized. At December 31, 2002 and 2001, inventories were $40.3 million and
$62.6 million, respectively. It is possible that additional inventory
charges may occur in the future if there is a further decline in
market conditions or if additional restructuring actions are taken.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Costs Associated with Exit or Disposal Activities.In June
2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 146, or SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue (EITF) No. 94-3. We
adopted the provisions of
SFAS 146 for restructuring activities initiated after December 31, 2002.
SFAS 146 requires that the

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liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF No.
94-3, a liability for an exit cost was recognized at the date of our commitment
to an exit plan. SFAS 146 also establishes that the liability should initially
be measured and recorded at fair value. Accordingly, SFAS 146 may affect the
timing of recognizing future restructuring costs as well as the amounts
recognized.

Accounting for Stock-Based Compensation.In December 2002, the FASB
issued Statement of Financial Accounting Standards No. 148, or SFAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure  an
Amendment of FASB Statement No. 123, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. In the fourth quarter of 2002, we adopted the disclosure provisions
of SFAS 148.

Accounting and Disclosure Requirements for Guarantees.In November 2002,
the FASB issued FASB Interpretation No. 45, or FIN 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors year-end. We do not
believe the adoption of FIN No. 45 will have a material impact on our
consolidated financial condition.

Revenue Arrangements with Multiple Deliverables.In November 2002, the
EITF reached a consensus on EITF Issue No. 00-21, or EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF No. 00-21 will be effective for
fiscal periods beginning after June 15, 2003. We have not yet determined the
impact of the adoption of EITF No. 00-21 on our results of operations or
financial position.

RESULTS OF OPERATIONS

Comparison of 2002 to 2001

Revenues.Total revenues in 2002 decreased to $57.4 million from $93.2
million in 2001. The decrease was primarily due to a decrease in equipment
sales to Qwest. An equipment revenue analysis by channel is detailed in the
following chart. Our equipment revenue is analyzed using three channels:
Independent operating companies (IOC), major carriers which currently include
Qwest and other North American regional bell operating companies (MAJOR
CARRIERS) and other customers which include, among others, multiple service
organizations and international customers (OTHER).

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|                                 |  |      |      |      |  |   |      | 
|-------------------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|CHANNEL                          |  | 2002 |      | 2001
|                                 |  |      |      |     
|IOC                              |  | $    | 40.7 |      |  | $ | 48.1 | 
|MAJOR CARRIERS (PRIMARILY QWEST) |  |      | 16.2 |      |  |   | 38.3 | 
|OTHER  EQUIPMENT                |  |      | 0.5  |      |  |   | 4.6  | 
|SOFTWARE                         |  |      |     |      |  |   | 2.2  | 
|                                 |  |      |      |      |  |   |      | 
|TOTAL EQUIPMENT REVENUE          |  | $    | 57.4 |      |  | $ | 93.2 | 
|                                 |  |      |      |      |  |   |      | 

Sales to Qwest were significantly reduced in 2002 due to an overall
reduction in capital spending by Qwest. Additionally, Qwest has slowed its
purchases of our equipment while it re-evaluates its plans regarding the
deployment of VDSL across its network. Sales to Qwest in the future are
dependent upon its decision regarding the deployment of our product and its
overall capital spending plans. Qwest reported significant operating losses in
2002, and has reported that it will restate prior period financials for certain
incorrectly recorded transactions. These factors may have a
significant adverse impact on Qwests
decision regarding the deployment of our product.

Sales to IOCs and our other customers decreased in 2002 due to a general
slowdown in the telecommunications industry and the resulting reduction of our
customers capital expenditures.

We expect to continue to derive substantially all of our revenues from
sales of equipment to regional bell operating companies and local, foreign and
independent telephone companies for the foreseeable future. Revenue levels in
future quarters will depend significantly upon Qwests and other major
carriers future decisions and general economic conditions, as well as whether
and how quickly our existing customers roll out broadband services in their
coverage areas and whether and how quickly we obtain new customers.

Cost of Revenues. Total cost of revenues decreased to $51.4 million in
2002 from $158.0 million in 2001. The decrease in our cost of revenues in 2002
was primarily attributable to reduced sales of equipment in 2002 and inventory
charges taken in the prior year totaling $76.8 million related to excess
inventory, obsolescence and lower of cost or market adjustments. Excluding the
inventory charges in 2001, cost of revenues in 2001 were $81.2 million.

At December 31, 2002, we had inventories of $40.3 million. At each
reporting period we perform a detailed review of raw material and finished
goods inventories on hand, components under purchase commitments, and a
detailed analysis of our sales forecasts and product end-of-life estimates, to
determine whether any inventory charges are required. During 2002, we recorded
inventory charges totaling $5.9 million based upon our analysis.

Our gross margin decreased to 10.3% in 2002 from 13.0% in 2001
(excluding inventory write-down related charges). The decline in our gross
margin percentage was primarily related to spreading the manufacturing overhead
elements of product cost over reduced sales volumes.

Our gross margins are affected by a number of factors including, but not
limited to, overall sales volume, customer mix, volume discounts, product mix,
excess inventory, obsolete inventory, the timing and size of orders received,
the availability of adequate supplies of key components and assemblies and cost
reduction programs. Because various customer groups order different product
mixes and have different volume pricing discounts, gross profit will vary as a
result of changes in our customer order flow. Individual products have
different profit margins and, therefore, the mix of products sold has an impact
on the margins generated by those sales. The size of discounts given to a
customer may vary depending on the type and size of the sales order. Our
ability to successfully implement cost reduction programs affects fixed and
variable costs that impact profit

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margins. In a rapidly changing industry, introduction of new products
using new technologies may result in existing inventory becoming obsolete,
requiring such obsolete inventory to be expensed.

Research and development.Research and development expenses decreased to
$25.3 million in 2002 from $46.9 million in 2001. The decrease in the research
and development expenses was primarily due to cost cutting measures, including
a reduction in research and development personnel, implemented in the current
year. In the near term, research and development expenses could increase
slightly, primarily due to costs associated with new product introductions.

Selling, general and administrative.Selling, general and administrative
expenses decreased to $33.6 million in 2002 from $53.3 million in 2001. The
decrease was primarily due to cost-cutting measures, including a reduction in
selling, general and administrative personnel. In addition, the 2001 period
included $6.5 million in goodwill amortization of which there was none in 2002.

Asset impairments and disposals, net.Asset impairment and disposals,
net, was $2.2 million in 2002 and related primarily to facility consolidation
charges. Charges of $0.9 million represented the present value of future
minimum lease payments and impaired leasehold improvements on vacated premises
and $1.1 million related to cancellation charges on a facility expansion
project.

Asset impairments and disposals in 2001 were $8.4 million and consisted of
(i) the write-off of goodwill related to SoftProse of $8.4 million, (ii) loss
on disposal of property, plant and equipment of $2.6 million and (iii) the gain
on sale of our software product line of $2.6 million.

Interest income (expense), net. Interest expense, net increased to $22.8
million in 2002 from $14.5 million in 2001. The increase is primarily
attributable to an increase in cash and non-cash interest related to our credit
agreement with Motorola and is detailed in the following table.

|                                       |                                      |                   |       |       |   |   |       |       |  
|-------------------------------------- | ------------------------------------ | ----------------- | ----- | ----- | - | - | ----- | ----- | -
|(In millions)                          |                                      | Fiscal Year Ended
|                                       |                                      | December 31,     
|                                       |                                      | 2002              |       | 2001 
|                                       |                                      |                   |       |      
|Motorola Credit Facility
Cash interest |                                      | $                 | (3.7  | )     |   | $ | (2.5  | )    
|                                       | Noncash interest  recurring         |                   |       | (11.2 | ) |   |       | (10.5 | )
|                                       | Noncash interest  non-recurring (1) |                   |       | (5.3  | ) |   |       |      |  
|Mortgage interest                      |                                      |                   | (1.5  | )     |   |   | (0.3  | )    
|Vendor note payable interest           |                                      |                   | (1.5  | )     |   |   | (1.8  | )    
|Other interest income (expense)        |                                      |                   | 0.4   |       |   |   | 0.6   |      
|                                       |                                      |                   |       |       |   |   |       |      
|                                       |                                      | $                 | (22.8 | )     |   | $ | (14.5 | )    
|                                       |                                      |                   |       |       |   |   |       |      



---

|(1) |  | Non-recurring noncash interest is related to conversions of debt to
equity that took place in June and September 2002 (See Note 7 to the
consolidated financial statements). Noncash interest is expected to decrease
in future periods as the entire remaining warrant discount of $6.5 million
related to the Motorola credit facility was treated as a dividend upon
extension of the facilitys maturity date from May 16, 2003 to May 16, 2006
(see Note 5 to the consolidated financial statements). This extension occurred
on October 22, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investment impairments and other expense, net.Investment impairments and
other expense were $0.5 in 2002 and primarily related to $0.4 million in
warrant issuance expense (see Note 8 to the consolidated financial statements).
Investment impairments and other expense in 2001 was $20.8 million, and was
primarily related to the write-down of certain long-term investments in Virtual
Access of $13.0 million, $4.0 million in Outreach Communications and $3.0
million in Expanse Networks, Inc.

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Preferred stock accretion and dividends.Preferred stock accretion and
dividends in 2002 was $23.4 million and related to
the issuance of Preferred Stock to Motorola in February 2002, June 2002,
September 2002 and December 2002 and the fourth quarter restructuring of such
preferred stock in December 2002 (see Note 7 to the consolidated financial
statements). There was no accretion or dividends payable on preferred stock
in 2001 as there was no preferred stock outstanding in that period.

Comparison of 2001 to 2000

Revenues.Total revenues in 2001 decreased to $93.2 million from $150.1
million in 2000. The decrease was primarily due to a decrease in equipment
sales to Qwest. An equipment revenue analysis by channel is detailed in the
following chart. Our equipment revenue is analyzed using three channels:
Independent operating companies (IOC), major carriers which currently include
Qwest and other North American regional bell operating companies (MAJOR
CARRIERS) and other customers which include, among others, multiple service
organizations and international customers (OTHER).

|                                 |  |      |      |      |  |   |       | 
|-------------------------------- |  | ---- | ---- | ---- |  | - | ----- | 
|CHANNEL                          |  | 2001 |      | 2000
|                                 |  |      |      |     
|IOC                              |  | $    | 48.1 |      |  | $ | 56.0  | 
|MAJOR CARRIERS (PRIMARILY QWEST) |  |      | 38.3 |      |  |   | 84.8  | 
|OTHER                            |  |      | 4.6  |      |  |   | 5.5   | 
|SOFTWARE                         |  |      | 2.2  |      |  |   | 3.8   | 
|                                 |  |      |      |      |  |   |       | 
|TOTAL EQUIPMENT REVENUE          |  | $    | 93.2 |      |  | $ | 150.1 | 
|                                 |  |      |      |      |  |   |       | 

Sales to Qwest were significantly reduced in 2001 due to an overall
reduction in capital spending by Qwest. Additionally, Qwest has slowed its
purchases of our equipment while it re-evaluates its plans regarding the
deployment of VDSL across its network. Sales to IOCs and our other customers
decreased in 2001 due to a general slowdown in the telecommunications industry
and the resulting reduction of our customers capital expenditures.

Cost of Revenues. Total cost of revenues increased to $158.0 million in
2001 from $125.2 million in 2000. The increase in our cost of revenues in 2001
was primarily attributable to inventory charges taken in the year totaling
$76.8 million related to excess inventory, obsolescence and lower of cost or
market adjustments. Included in 2001 and 2000 cost of revenues are inventory
charges totaling $76.8 million and $9.0 million. Excluding the inventory
charges, cost of revenues were $81.2 million and $116.2 million in 2001 and
2000. The 2001 decrease was primarily due to lower sales of equipment.

2001 Inventory Write-down.

To meet forecasted demand and reduce the anticipated component supply
constraints that had existed in the past, in late 2000 we increased inventory
levels for certain components and entered into purchase commitments for certain
components with long lead times. However, in the quarter ended June 30, 2001,
our actual sales, as well as our estimates of forecasted sales in 2001 and 2002
for our current generation of products declined significantly. As a result,
inventory related charges were required and were calculated based upon (i) the
substantial completion of the negotiation process with our contract
manufacturers and their suppliers and our other vendors regarding purchase
commitments and cancellations made by us, (ii) the inventory levels in excess
of forecasted demand and (iii) our estimates of salvage or recovery value for
each raw material or finished good on an item by item basis. We do not
currently anticipate that the excess inventory included in this provision will
be used based on our current demand forecast. At December 31,

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2001, we updated our estimates and recorded an additional inventory
charge. These write-downs were included in cost of revenues in 2001 and
consisted of the following (in millions):

|                                                                                         |  |   |      | 
|---------------------------------------------------------------------------------------- |  | - | ---- | 
|Excess quantities of raw materials on hand or under purchase
commitments, net of salvage |  | $ | 36.9 | 
|Excess quantities of
finished goods on hand, net of salvage                              |  |   | 10.8 | 
|Obsolescence                                                                             |  |   | 14.5 | 
|Cancellation charges on purchase commitments                                             |  |   | 5.2  | 
|Lower of cost or market write-down on current generation
product platform                |  |   | 9.4  | 
|                                                                                         |  |   |      | 
|Total                                                                                    |  | $ | 76.8 | 
|                                                                                         |  |   |      | 

Significant estimates included in the calculation of the inventory
write-downs above include forecasted demand for our products, sales prices for
residential gateways and other finished goods and estimated salvage or recovery
value for excess raw materials and finished goods. Actual results could differ
from those estimates, and therefore additional inventory write-downs may be
necessary in future periods.

2000 Inventory Write-down.

During 2000, we recorded a $9.0 million inventory write-down primarily
related to a lower of cost or market adjustment to certain residential gateway
products and other obsolescence provisions.

Excluding the inventory charges in both 2001 and 2000, our gross margin
percentage decreased to 13% in 2001 from 23% in 2000. The decline in our gross
margin percentage was primarily related to spreading the manufacturing overhead
elements of product cost over reduced sales volumes.

Research and development.Research and development expenses decreased to
$46.9 million in 2001 from $55.8 million in 2000. The decrease in the research
and development expenses was primarily due to cost cutting measures, including
a reduction in research and development personnel, implemented in 2001. We
reduced our workforce in October 2001 by approximately 15%.

Selling, general and administrative.Selling, general and administrative
expenses increased to $53.3 million in 2001 from $46.9 million in 2000. The
increase was attributable to increased goodwill amortization arising from the
purchase of SoftProse in July 2000 and higher recruiting and relocation
expenses in the first half of 2001. We reduced our workforce in October 2001
by approximately 15%.

Non-cash compensation charge.Substantially all of our employees in 1999
were granted contingently exercisable stock options that became options to
purchase our common stock upon our recapitalization in 1999. In addition,
tandem stock options were granted in January 1997 to some of our employees. As
a result, non-cash compensation expense was recognized upon the completion of
our initial public offering based on the difference between the exercise price
of these options and the initial public offering price of our common stock.
The non-cash compensation expense related to these option grants in 2000 was
$2.4 million. There was no such expense in 2001.

Asset impairments and disposals, net.Asset impairment and disposals,
net, of $8.4 million in 2001 consisted of (i) the write-off of goodwill related
to SoftProse of $8.4 million, (ii) loss on disposal of property, plant and
equipment of $2.6 million and (iii) the gain on sale of our software product
line of $2.6 million.

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Interest income (expense), net. Interest expense, net was $14.5 million
in 2001. Interest income, net was $5.6 million in 2000. Interest expense in
2001 included non-cash interest expense of $10.4 million related to our loan
agreement with Motorola. Interest income, net in 2000 related primarily to
interest earned on our initial public offering proceeds.

Investment impairments and other expense, net.Investment impairments and
other expense, net in 2001 was $20.8 million, and was primarily related to the
write-down of certain long-term investments in Virtual Access of $13.0 million,
$4.0 million in Outreach Communications and $3.0 million in Expanse Networks,
Inc.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities decreased to $34.1 million in 2002,
from $127.8 million in 2001 and $103.3 million in 2000. The improvement of
cash used in operating activities reflects the favorable impact on cash flow of
our operating expense reductions, which decreased from $108.6 million in 2001
and $105.1 million in 2000 to $61.1 million in 2002, serving to more than
offset the unfavorable impact of the reduction in revenues of $35.9 million
from 2001 to 2002 and $92.7 million from 2000 to 2002. Cash
flows of $10.1
million generated by positive working capital changes in 2002 primarily related
to a $16.5 million reduction in inventories. The use of cash in 2001 primarily
related to a $42.7 million increase in inventories and a $25.1 million
reduction in accounts payable, partially off-set by a $17.0 million decrease in
accounts receivable. Noncash changes in the 2001 period included the
conversion of $14.3 million in vendor payables and $10.0 million in vendor
purchase commitments into a note payable. The use of cash in 2000 was
primarily due to a $73.2 million increase in inventories and a $20.6 million
increase in accounts receivable, partially off-set by a $40.1 million increase
in accounts payable.

Net cash used in investing activities was $2.0 million in 2002 and related
entirely to capital expenditures. Net cash provided by investing activities in
2001 was $17.8 million; this amount was primarily attributable to the sale of
marketable securities, partially off-set by capital expenditures as well as an
additional $8.0 million investment in Virtual Access. In 2001, we also
received $4.9 million for the sale of our software product line. Net cash used
by investing activities was $12.5 million in 2000 and primarily related to
$15.5 million in capital expenditures and $15.0 million in investments in
Expanse Networks, Inc., OutReach Communications L.L.C. and Virtual Access,
partially off-set by the sale of $18.0 million in marketable securities.

Net cash provided by financing activities was $48.9 million in 2002, $94.7
million in 2001 and $22.9 million in 2000. The 2002 amount primarily related
to the proceeds received in connection with the issuance of $65.0 million of
preferred stock to Motorola in February, June, September and December 2002.
This amount was partially off-set by $15.6 million of repayments on borrowings
that related to our vendor note payable and our mortgage note payable. The 2001
amount is primarily related to borrowings of $83.0 million from Motorola,
mortgage proceeds of $20.0 million and $14.3 million in proceeds related to our
Tax Sharing Agreement with Motorola. The 2001 amount was partially off-set by
the repayment of a $25.0 million note. The 2000 amount was primarily related
to $15.0 million in proceeds related to the Tax Sharing Agreement with Motorola
and $9.3 million related to the issuance of common stock in connection with the
exercise of stock options.

Vendor Note Payable During the year ended December 31, 2002, we made
principal and interest payments totaling $18.0 million under our vendor note
payable. The remaining principal and interest payment of $9.5 million was paid
on March 31, 2003.

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Contractual Obligations- The following table sets forth our contractual
obligations, including interest, as of December 31, 2002 (in millions):

|                              |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |       |      |   |     |   |   |   |      |   |   |   |       |      |      | 
|----------------------------- | ----------------------------------- | ------------------------- | ---- | ---------------------- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---------- | ---- | ----- | ---- | - | --- | - | - | - | ---- | - | - | - | ----- | ---- | ---- | 
|                              |                                     |                           |      | Payments Due by Period
|                              |                                     |                           |      |                       
|                              |                                     |                           |      | 2003                   |     | 2004 |     | 2005 |     | 2006 |     | 2007 |     | Thereafter |      | Total
|                              |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |      
|Vendor Note Payable (1)       |                                     | $                         | 9.5  |                        |     |      |    |      |     |      |    |      |     |            |     |       |      |   |    |   |   |   |     |   |   | $ | 9.5   |     
|Motorola Debt                 |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |       |      |   |     |   |   |   |      |   |   |   |       |     
|                              |                                     | Note Payable (2)          |      |                        | 2.2 |      |     | $    | 2.2 |      |     | $    | 2.2 |            |      | $     | 41.8 |   |     |   |  |   |      |   |  |   |       |      | 48.4 | 
|                              |                                     | Tax Sharing Liability (3) |      |                        |    |      |     |      |    |      |     |      |    |            |      |       | 29.3 |   |     |   |  |   |      |   |  |   |       |      | 29.3 | 
|Mortgage Debt (4)             |                                     |                           | 2.5  |                        |     |      | 2.5 |      |     |      | 2.5 |      |     |            | 2.5  |       |      | $ | 2.5 |   |   | $ | 14.6 |   |   |   | 27.1  |     
|Off-Balance Sheet Commitments |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |       |      |   |     |   |   |   |      |   |   |   |       |     
|                              | Vendor Purchase
Commitments (5) (6) |                           |      | 10.0                   |     |      |     |     |     |      |     |     |     |            |      |      |      |   |     |  |   |   |      |  |   |   |       | 10.0 |     
|                              | Operating Leases (7)                |                           |      | 1.2                    |     |      |     | 1.2  |     |      |     | 1.2  |     |            |      | 0.8   |      |   |     |  |   |   |      |  |   |   |       | 4.4  |     
|                              |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |       |      |   |     |   |   |   |      |   |   |   |       |     
|Total Contractual Obligations |                                     | $                         | 25.4 |                        |     | $    | 5.9 |      |     | $    | 5.9 |      |     | $          | 74.4 |       |      | $ | 2.5 |   |   | $ | 14.6 |   |   | $ | 128.7 |     
|                              |                                     |                           |      |                        |     |      |     |      |     |      |     |      |     |            |      |       |      |   |     |   |   |   |      |   |   |   |       |     



---

|(1) |  | Due (and paid) March 31, 2003.                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | On October 22, 2002, maturity was extended from May 16, 2003 to May 16, 2006.                                                                                                                                                   
|   
|(3) |  | Due in 2006 if Motorola does not achieve expected tax benefits. Maturity will be accelerated
in whole or in part if certain conditions (such as our completion of a debt or equity offering
greater than $25.0 million) are met.
|   
|(4) |  | Annual principal and interest payments required plus $4.9 million balloon payment
due in 2011.                                                                                                                                  
|   
|(5) |  | Represents commitments as of December 31, 2002, with various suppliers
to purchase certain raw materials and finished goods.                                                                                                    
|   
|(6) |  | In addition to the amounts in the table, we have recently entered negotiations
with a vendor to settle or eliminate a long-standing purchase commitment with a maximum
exposure of approximately $7.0 million.                  
|   
|(7) |  | Future minimum lease payments under non-cancelable operating leases for certain
facilities and equipment.                                                                                                                       

In 2002, net loss was $78.5 million and net cash used in operating
activities was $34.1 million. As of December 31, 2002, our accumulated deficit
was $567.0 million. At March 31, 2003, we had cash and cash equivalents of
$14.1 million, after making a final payment of $9.5 million to extinguish our
Vendor Note Payable and paying approximately $5.0 million of non-recurring
expenses related to the Motorola tender offer.

During 2002, we instituted the following measures to improve cash flow:



| |  |  | We reduced our workforce by approximately 120 employees or 33% in
January 2002; this reduction, along with other cost saving measures
implemented, helped us reduce cash overhead expenses by $37.2 million
(39%) from 2001 to 2002; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we reduced inventory by $22.4 million (36%) in 2002, generating
net cash flow of approximately $16.5 million;                                                                                                                           

Since late 2000, we have been significantly dependent on Motorola for
funding. Loans from Motorola totaled $15.0 million in 2000 and $97.3 million
in 2001. Cash proceeds from preferred stock issuances totaled $65.0 million in
2002. We converted $42.0 million of debt due to Motorola to
preferred stock in 2002. We have a
remaining debt obligation to Motorola of $41.0 million; in October 2002 the
maturity date of this debt was extended from May 2003 to May 2006.

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In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of our common stock not owned by Motorola. On
April 14, 2003 Motorola announced that it had completed its cash
tender offer and that as a result Motorola would own approximately
88.7 percent of our outstanding common stock. Motorola also stated
that it intended to convert certain of its shares of our preferred
stock into shares of our common stock to achieve a 90 percent
ownership level and that it will then effect a short-form merger
pursuant to which all of our remaining outstanding shares (other than
dissenting shares) will be converted into the right to receive $1.18
per share. Once Motorola completes the short-form merger, we will no
longer be a publicly traded company on the Nasdaq National Market or
otherwise.

In the
last three quarters of 2002, we reduced our average quarterly
negative operating cash flow to approximately negative $4.8 million. Subject to the
effect of a significant change in our revenues on working capital, we expect
2003 cash flow from operations to be consistent with this trend (excluding the
approximately $5.0 million of tender offer expenses paid in the first quarter of 2003).
Our ability to generate positive operating cash flow is dependent on our
ability to increase sales, convert our inventory and accounts receivable to
cash, negotiate favorable terms with our vendors, effectively manage our
operating costs and continue to raise sufficient operating capital. We believe
that the combination of cash on hand, the cash flows expected to be generated
from operations and the cost savings generated by further planned expense
reductions will be sufficient to enable us to meet our financial obligations
and sustain our operations through the third quarter of 2003. We intend to
aggressively pursue additional sources of financing to support our operations
on a continuing basis.

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RISK FACTORS IF MOTOROLA DOES
NOT COMPLETE THE MERGER

In
January 2003, Motorola initiated an unsolicited tender offer for all
of the shares of our common stock not owned by Motorola. On
April 14, 2003 Motorola announced that it had completed its cash
tender offer and that as a result Motorola would own approximately
88.7 percent of our outstanding common stock. Motorola also stated
that it intended to convert certain of its shares of our preferred
stock into shares of our common stock to achieve a 90 percent
ownership level and that it will then effect a short-form merger
pursuant to which all of our remaining outstanding shares (other than
dissenting shares) will be converted into the right to receive $1.18
per share. Once Motorola completes the short-form merger, we will no
longer be a publicly traded company on the Nasdaq National Market or
otherwise.

If
Motorola does not complete the merger, we will be subject to the
following risks, which you should carefully consider.

The Companys 2002
Financial Statements by a Going Concern Opinion from its
independent Accountants; this Going Concern Opinion Could have a
Significant Adverse Effect on the Companys Ability to Sell its
Products to Existing Customers and to Gain New Customers for its
Products

The opinion of the Companys
independent accountants on the Companys 2002 financial
statements is subject to a going concern qualification
and states that the Companys operations and cash position raise
substantial doubt about its ability to continue as a going concern
through 2003. The Companys existing customers may be unwilling
to continue to purchase products from a company the financial
statements of which are subject to a going concern qualification.
Potential new customers may also be unwilling to even discuss
purchases of products with a company the financial statements of
which are subject to a going concern qualification. For these
reasons, the going concern qualification may have a material adverse
effect on the Companys existing business and prospects for the
future.

We have been financially dependent on Motorola and any change in their level of
commitment could have an adverse impact on us.

Since late 2000, we have been significantly dependent on Motorola for
funding. Loans from Motorola totaled $15.0 million in 2000 and $97.3 million
in 2001. Preferred stock issuances for cash proceeds totaled $65.0 million in 2002. We have a
remaining debt obligation to Motorola of $41.0 million; in October 2002 the
maturity date of this debt was extended from May 2003 to May 2006.

In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of our common stock not owned by Motorola. While the tender offer has been outstanding, our ability to secure
outside financing has been significantly inhibited. In the event that the
short-form merger is not consummated, we intend to actively
seek additional financing, but there can be no assurance that we will be
successful in our efforts to obtain additional funding sources. In this
regard, Motorola has certain veto rights and other rights and preferences with
respect to its debt and equity holdings in us that Motorola will need to waive
or amend in order for us to complete any such financing, and there can be no
assurance that Motorola will continue to fund our operations or agree to waive or amend any of such rights. In
addition, any financing that may be obtained by us may be significantly
dilutive to our existing stockholders.

If we do not obtain additional capital funding, we may not be able to continue
operations.

In 2002, net loss was $78.5 million and net cash used in operating
activities was $34.1 million. As of December 31, 2002, our accumulated deficit
was $567.0 million. At March 31, 2003, we had cash and cash equivalents of
$14.1 million, after making a final payment of $9.5 million to extinguish our
Vendor Note Payable and paying approximately $5.0 million of non-recurring
expenses related to the Motorola tender offer.

In the last three quarters of 2002, we reduced our average quarterly
negative operating cash flow to approximately negative $4.8 million. Subject to the
effect of a significant change in our revenues on working capital, we expect
2003 cash flow from operations to be consistent with this trend (excluding the
approximately $5.0 million of tender offer expenses paid in the first quarter of 2003).
Our ability to generate positive operating cash flow is dependent on our
ability to increase sales, convert our inventory and accounts receivable to
cash, negotiate favorable terms with our vendors, effectively manage our
operating costs and continue to raise sufficient operating capital. We believe
that the combination of cash on hand, the cash flows expected to be generated
from operations and the cost savings generated by further planned expense
reductions will be sufficient to enable us to meet our financial obligations
and sustain our operations through the third quarter of 2003. We intend to
aggressively pursue additional sources of financing to support our operations
on a continuing basis.

Motorola may exercise significant influence over our business and affairs and
our stockholder votes and, for its own reasons, could prevent transactions
which our other stockholders may view as favorable.

Prior to
the consummation of its tender offer, Motorola beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) approximately 89.5% of
the outstanding shares of our common stock as of March 31, 2003;
and it announced that an additional 13.3 million shares were
tendered to Motorola in the tender offer. Motorola also
has designated two directors on our board. As a result, Motorola will be able
to exercise significant influence over all matters relating to our business and
affairs, including approval of significant corporate transactions, which could
delay or

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prevent someone from acquiring or merging with us and could prevent you
from receiving a premium for your shares.

In the
event that the merger is not consummated, we do not know whether Motorolas plans for our business and
affairs will be different than our existing plans and whether any changes that
may be implemented under Motorolas control will be beneficial or detrimental
to our other stockholders.

Motorola may have interests that conflict with the best interests of our other
stockholders and us and may cause us to forgo opportunities or take actions
that disproportionately benefit Motorola as our principal stockholder.

It is possible that Motorola could be in a position involving a conflict
of interest with us. In addition, individuals who are officers or directors of
Motorola and of us may have fiduciary duties to both companies. For example, a
conflict may arise if Motorola were to engage in activities or pursue corporate
opportunities that may overlap with our business. These conflicts could harm
our business and operating results. Our certificate of incorporation contains
provisions intended to protect Motorola as our principal stockholder in these situations.
These provisions limit the legal remedies of other stockholders.

If we fail to meet the continued listing requirements of the Nasdaq Stock
Market, our stock could be delisted.

Our stock is currently listed on the Nasdaq National Market. The Nasdaq
Stock Markets Marketplace Rules impose certain minimum financial requirements
on us for the continued listing of our stock.

Currently we are in compliance with all Nasdaq National Market listing
requirements. If we are out of compliance in the future with Nasdaq listing
requirements, we may take actions in order to achieve compliance, which may
include a transfer to the Nasdaq Small Cap Market and/or a reverse split of our
common stock. If we are delisted and cannot obtain listing on another major
market or exchange, our stocks liquidity would suffer, and we would likely
experience reduced analyst coverage and investor interest. Such factors may
result in a decrease in our stocks trading price. Delisting also may restrict
us from issuing additional securities or securing additional financing.

We have incurred net losses and negative cash flow for our entire history and
we expect to incur future losses and negative cash flow.

We incurred net losses of $78.5 million in 2002, and we expect to continue
to incur net losses in future quarters. Our ability to achieve profitability
will depend on the successful design, development, testing, introduction,
marketing and sale of our broadband equipment products. We expect to continue
to incur significant product development, sales and marketing, and
administrative expenses. In addition, we depend in part on cost reductions to
improve gross profit margins because the fixed-price nature of most of our
long-term customer agreements prevents us from increasing prices. We may not be
successful in reducing our costs or in selling our products in sufficient
volumes to realize cost benefits from our manufacturers. There is no guarantee
that we can achieve sufficient revenues or gross profit margin improvements to
achieve profitability.

The loss of or reduction in business from Qwest could cause our sales to fall
significantly.

Qwest accounted for 24% and 41% of total revenues in 2002 and 2001. Our
agreements with our customers are cancelable by these customers on short
notice, without penalty, do not obligate the customers to purchase any products
and are not exclusive. Sales to Qwest have been reduced from 2001 to 2002 due
to an overall reduction in capital spending by Qwest. Additionally,

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Qwest has slowed its purchases of our equipment while it re-evaluates its
plans regarding the deployment of VDSL across its network. Sales to Qwest in
the future are dependent upon its decision regarding the deployment of our
product and its overall capital spending plans. Qwest reported significant
operating losses in 2002, and has reported that it will restate prior period
financials for certain incorrectly recorded transactions. These factors may
have an adverse impact on Qwests decision regarding the deployment of our product.
Any continued significant reduction in purchases of our equipment by Qwest
could have a material adverse effect on us.

A significant market for our products may not develop if telephone companies do
not successfully deploy broadband services such as high-speed data and video.

Telephone companies have only recently begun widely offering high-speed
data services, and most telephone companies have not offered video services at
all. Sales of our products largely depend on the increased use and widespread
adoption of broadband services and the ability of our customers to market and
sell broadband services, including video services, to their customers. Certain
critical issues concerning use of broadband services are unresolved and will
likely affect their use. These issues include security, reliability, speed and
volume, cost, government regulation and the ability to operate with existing
and new equipment. Unless more large telephone companies make the strategic
decision to enter the market for providing broadband services, a significant
market for our products may not develop. In this regard, announced capital
expenditures by most telephone companies decreased from 2001 to 2002.

A number of factors may lead customers to delay or forego deployment, which
would hinder our ability to meet our business objectives.

Our customers have delayed deployments in the past and may delay
deployments in the future. Factors that could cause telephone companies not to
deploy, to delay deployment of, or to fail to deploy successfully the services
for which our products are designed include the following:



| |  |  | general economic conditions and telephone company capital spending plans;                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | industry consolidation;                                                                                                                                                                 
|
| |  |  | regulatory uncertainties and delays;                                                                                                                                                    
|
| |  |  | varying quality of telephone companies network infrastructure
and cost of infrastructure upgrades and maintenance;                                                                     
|
| |  |  | inexperience of telephone companies in obtaining access to
video programming content from third-party providers;                                                                        
|
| |  |  | inexperience of telephone companies in providing broadband
services and the lack of sufficient technical expertise and personnel
to install products and implement services effectively;
|
| |  |  | uncertain subscriber demand for broadband services; and                                                                                                                                 
|
| |  |  | inability of telephone companies to predict return on their
investment in broadband capable infrastructure and equipment.                                                               

Unless our products are successfully deployed by telephone companies in
the near term, we will not be able to achieve our business objectives and
increase our revenues.

We expect our quarterly revenues and operating results to fluctuate, and these
fluctuations may make our stock price volatile.

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Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly in the future. As a result, we
believe that quarter-to-quarter comparisons of our operating results may not be
meaningful. Fluctuations in our quarterly revenues or operating results may
cause volatility in the price of our stock. It is likely that in some future
quarter our operating results may be below the expectations of public market
analysts and investors, which may cause the price of our stock to fall.
Factors likely to cause variations in our quarterly revenues and operating
results include:



| |  |  | delays or cancellations of any orders by Qwest, which accounted
for approximately 24% of our revenues in 2002, or by any other
customer accounting for a significant portion of our revenues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | variations in the timing, mix and size of orders and shipments
of our products throughout a quarter or year;                                                                                 
|
| |  |  | new product introductions by us or by our competitors;                                                                                                                                       
|
| |  |  | the timing of upgrades of telephone companies infrastructure;                                                                                                                               
|
| |  |  | general economic conditions and variations in capital spending
budgets of telephone companies; and                                                                                           
|
| |  |  | increased expenses, whether related to sales and marketing,
product development or administration.                                                                                           

Because most of our operating expenses are fixed in the short term, we may
not be able to quickly reduce spending if our revenues are lower than we had
projected and our results of operations could be harmed.

Consolidation among telephone companies may reduce our sales.

Consolidation in the telecommunications industry may cause delays in the
purchase of our products and cause a reexamination of strategic and purchasing
decisions by our customers. In addition, we may lose relationships with key
personnel within a customers organization due to budget cuts, layoffs, or
other disruptions following a consolidation.

Because our sales cycle is lengthy and variable, the timing of our revenue is
difficult to predict, and we may incur sales and marketing expenses with no
guarantee of a future sale.

Customers view the purchase of our products as a significant and strategic
decision. As a result, customers typically undertake significant evaluation,
testing and trial of our products before deployment. This evaluation process
frequently results in a lengthy sales cycle, typically ranging from nine months
to more than a year. Before a customer places an order, we may incur
substantial sales and marketing expenses and expend significant management
efforts. In addition, product purchases are frequently subject to unexpected
administrative, processing and other delays on the part of our customers. This
is particularly true for customers for whom our products represent a very small
percentage of their overall purchasing activities. As a result, sales
forecasted to be made to a specific customer for a particular quarter may not
be realized in that quarter; and this could result in lower than expected
revenues in that quarter.

Government regulation of our customers and related uncertainty could cause our
customers to delay the purchase of our products.

The Federal Communications Commission (FCC) has announced that, except
in limited circumstances, it will not require incumbent carriers to offer their
competitors access to the facilities

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and equipment used to provide high-speed data services. Nevertheless,
other regulatory and judicial proceedings relating to telephone companies
obligations to provide elements of their network to competitors are pending.
The FCC also requires incumbent carriers to permit competitive carriers to
collocate certain of their equipment with the local switching equipment of the
incumbents.

Despite the FCCs recent decision to deregulate the facilities and
equipment used to provide high-speed data and video services, telephone
companies may not wish to make expenditures for infrastructure and equipment
required to provide broadband services until the FCCs decision becomes final,
which may not be for several years.

The FCC has also issued a ruling that classified cable modem service as an
interstate information service that is subject to FCC jurisdiction but not
subject to common carrier regulation. As a result, such services are not
currently regulated by the FCC and should not be subject to separate state and
local regulation. This ruling may improve the competitive position of cable
providers who compete with our customers who provide wireline-based broadband
services. There is also currently a pending rulemaking proceeding in which the
FCC proposes to classify broadband Internet access services provided by
wireline-based telephone companies as interstate information services.

We cannot predict when or how these various regulatory issues will be
decided. The uncertainties caused by the above described regulatory
proceedings may cause telephone companies to delay purchasing decisions at
least until the proceedings and any related judicial appeals are completed.
The outcomes of these regulatory proceedings, as well as other FCC regulation,
may cause telephone companies not to deploy services for which our products are
designed or to further delay deployment.

Our customers and potential customers will not purchase our products if they do
not have the infrastructure necessary to use our products.

The copper wire infrastructures over which telephone companies may deliver
voice, data and video services using our products vary in quality and
reliability. As a result, some of these telephone companies may not be able to
deliver a full set of voice, data and video services to their customers,
despite their intention to do so, and this could harm our sales. Even after
installation of our products, we remain highly dependent on telephone companies
to continue to maintain their infrastructure so that our products will operate
at a consistently high performance level. Infrastructure upgrades and
maintenance may be costly, and telephone companies may not have the necessary
financial resources. This may be particularly true for our smaller customers
and potential customers such as independent telephone companies and domestic
local telephone companies. If our current and potential customers
infrastructure is inadequate, we may not be able to generate anticipated
revenues from them.

If competing technologies that offer alternative solutions to our products
achieve widespread acceptance, the demand for our products may not develop.

Technologies that compete with our products include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If these alternative
technologies are chosen by our existing and potential customers, our business,
financial condition and results of operations could be harmed. In particular,
cable operators are currently deploying products that will be capable of
delivering voice, high-speed data and video services over cable, including
products from Motorola, our principal stockholder. Our technology may not be
able to compete effectively against these technologies on price, performance or
reliability.

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Our customers or potential customers that also offer cable-based services
may choose to purchase cable-based technologies. Cable service providers that
offer not only data and video but also telephony over cable systems will give
subscribers the alternative of purchasing all communications services from a
single communications service provider, allowing the potential for more
favorable pricing and a single point of contact for bill payment and customer
service. If these services are implemented successfully over cable
connections, they will compete directly with the services offered by telephone
companies using our products. In addition, several telephone companies have
commenced the marketing of video services over direct broadcast satellite while
continuing to provide voice and data services over their existing copper wire
infrastructure. If any of these services are accepted by consumers, the demand
for our products may not develop and our ability to generate revenues will be
harmed.

We face intense competition in providing equipment for telecommunications
networks from larger and more established companies, and we may not be able to
compete effectively with these companies.

Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical, marketing and distribution resources than we do. These competitors
may undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products
than we are able to, which could result in the loss of current customers and
impair our ability to attract potential customers.

Our significant current competitors include Advanced Fibre Communications,
Alcatel, Cisco Systems, Efficient Networks, Ericsson, Lucent Technologies,
Nokia, Nortel Networks, BAE Systems, Scientific Atlanta, Siemens and our
largest stockholder, Motorola, as well as emerging companies that are
developing new technologies. Some of these competitors have existing
relationships with our current and prospective customers. In addition, we
anticipate that other large companies, such as Matsushita Electric Industrial
which markets products under the Panasonic brand name, Microsoft, Network
Computer, Philips, Sony, STMicroelectronics and Toshiba America will likely
introduce products that compete with our N(3) Residential Gateway product in
the future. Our customer base may be attracted by the names and resources of
these large, well-known companies and may prefer to purchase products from them
instead of us.

Consolidation of our competitors may cause us to lose customers and negatively
affect our sales.

Consolidation in the telecommunications equipment industry may strengthen
our competitors positions in our market, cause us to lose customers and hurt
our sales. For example, Alcatel acquired DSC Communications, Lucent acquired
Ascend Communications and BAE Systems, CNI Division, formerly GEC Marconi,
acquired RELTEC. Acquisitions such as these may strengthen our competitors
financial, technical and marketing resources and provide them access to
regional Bell operating companies and other potential customers. Consolidation
may also allow some of our competitors to penetrate new markets that we have
targeted, such as domestic local, independent and international telephone
companies. This consolidation may negatively affect our ability to increase
revenues.

If we do not respond quickly to changing customer needs and frequent new
product introductions by our competitors, our products may become obsolete.

Our position in existing markets or potential markets could be eroded
rapidly by product advances. The life cycles of our products are difficult to
estimate. Our growth and future financial performance will depend in part upon
our ability to enhance existing products and develop and introduce new products
that keep pace with:

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| |  |  | the increasing use of the Internet;                                              
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | the growth in remote access by telecommuters;                                    
|
| |  |  | the increasingly diverse distribution sources for high quality digital video; and
|
| |  |  | other industry and technological trends.                                         

We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost-effectively develop new
products that respond to new technologies and customer needs, the demand for
our products may fall and we could lose revenues.

Certain key personnel are critical to our business and the loss of their
services could disrupt our operations and our customer relationships.

Our engineering and product development teams are critical in developing
our products and have developed important relationships with our regional Bell
operating company customers and their technical staffs. The loss of any of
these key personnel could harm our operations and customer relationships.

Our limited ability to protect our intellectual property may affect our ability
to compete, and we could lose customers.

We rely on a combination of patent, copyright and trademark laws, and on
trade secrets and confidentiality provisions and other contractual provisions
to protect our intellectual property. There is no guarantee that these
safeguards will protect our intellectual property and other valuable
confidential information. If our methods of protecting our intellectual
property in the United States or abroad are not adequate, our competitors may
copy our technology or independently develop similar technologies and we could
lose customers. In addition, the laws of some foreign countries do not protect
our proprietary rights as fully as do the laws of the United States. If we
fail to adequately protect our intellectual property, it would be easier for
our competitors to sell competing products, which could harm our business.

Third-party claims regarding intellectual property matters could cause us to
stop selling our products, license additional technology or pay monetary
damages.

From time to time, third parties, including our competitors and customers,
have asserted patent, copyright and other intellectual property rights to
technologies that are important to us. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in our
market grows and the functionality of products overlaps, and our products may
currently infringe on one or more United States or international patents. The
results of any litigation are inherently uncertain. In the event of an adverse
result in any litigation with third parties that could arise in the future, we
could be required:



| |  |  | to pay substantial damages, including paying treble damages if
we are held to have willfully infringed;
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | to halt the manufacture, use and sale of infringing products;                                          
|
| |  |  | to expend significant resources to develop non-infringing technology; and/or                           
|
| |  |  | to pay significant sums to obtain licenses to the infringing technology.                               

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Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or
at all. In addition, litigation frequently involves substantial expenditures
and can require significant management attention, even if we ultimately
prevail. In addition, we indemnify our customers for patent infringement
claims, and we may be required to obtain licenses on their behalf, which could
subject us to significant additional costs.

We depend on third-party manufacturers and any disruption in their manufacture
of our products would harm our operating results.

We contract for the manufacture of all of our products and have limited
in-house manufacturing capabilities. We currently rely primarily on one large
contract manufacturer: Plexus Services Corp. The efficient operation of our
business will depend, in large part, on our ability to have Plexus and other
companies manufacture our products in a timely manner, cost-effectively and in
sufficient volumes, while maintaining consistent quality. As our business
grows, Plexus and other contract manufacturing companies may not have the
capacity to keep up with the increased demand. Any manufacturing disruption
could impair our ability to fulfill orders and could cause us to lose revenue
and/or customers.

We may be required to write down
the value of our inventories in the future, which could be harmful to
our operating results.

In
assessing the ultimate realization of inventories, we are required to
make judgments as to future demand requirements and compare these
with the current or committed inventory levels. Our reserve
requirements generally increase as our projected demand requirements
decrease due to market conditions, technological and product life
cycle changes, and strategic direction, such as discontinuances of
product lines. As a result, we incurred inventory charges of
approximately $5.9 million, $76.8 million and
$9.0 million during fiscal 2002, 2001, and 2000, respectively.
Additionally, during the first quarter of 2003, as we began to
consolidate inventories and production to a new primary contract
manufacturer, we initiated a thorough quality review of our raw
materials on hand, the results of which have not yet been finalized.
At December 31, 2002 and 2001, inventories were
$40.3 million and $62.6 million, respectively. It is
possible that significant changes in required inventory reserves may
continue to occur in the future, especially if there is a further
decline in market conditions or a change in product transition plans.

Our manufacturers may not be able to deliver our products on time, at favorable
prices, or in sufficient quantities.

Although we currently have a one-year contracts in place with Plexus
Services Corp., that contract does not absolutely guarantee product
availability, firmly fix product costs or ensure the extension of credit. If
Plexus and/or our other manufacturers are unable or unwilling to continue
manufacturing our products in required volumes, we will have to identify
acceptable alternative manufacturers, which could take in excess of three
months. It is possible that a source may not be available to us when needed or
be in a position to satisfy our production requirements at acceptable prices
and on a timely basis. If we cannot find alternative sources for the
manufacture of our products, we will not be able to meet existing demand. As a
result, we may lose existing customers, and our ability to gain new customers
may be significantly constrained.

Our inability to produce sufficient quantities of our products because of our
dependence on components from key sole suppliers could result in delays in the
delivery of our products and could harm our revenues.

Some parts, components and equipment used in our products are obtained
from sole sources of supply. If our sole source suppliers fail to provide or
we fail to obtain components in sufficient quantities when required, delivery
of our products could be delayed resulting in decreased revenues. Additional
sole-sourced components may be incorporated into our equipment in the future.
We do not currently have any long-term supply contracts to ensure sources of
supply. In addition, our suppliers may enter into exclusive arrangements with
our competitors, stop selling their products or components to us at
commercially reasonable prices or refuse to sell their products or components
to us at any price, which could harm our operating results.

The occurrence of any defects, errors or failures in our products could result
in delays in installation, product returns and other losses to us or to our
customers or end users.

Our products are complex and may contain undetected defects, errors or
failures. These problems have occurred in our products in the past and
additional problems may occur in our products in the future and could result in
the loss of or delay in market acceptance of our products. In addition, we
expect additional defects, errors and failures as our business expands from
trials to commercial deployment at certain customers. We will have limited
experience with the problems that could arise with any new products that we
introduce. Further, our customer agreements

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generally include a longer warranty for defects than our manufacturing
agreements. These defects could result in a loss of sales and additional costs
and liabilities to us as well as damage to our reputation and the loss of our
customers.

We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenues.

We hope to increase the marketing and sales of our products
internationally. International operations are generally subject to inherent
risks and challenges that could harm our operating results, including:



| |  |  | unexpected changes in telecommunications regulatory requirements;                      
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | limited number of telephone companies operating internationally;                       
|
| |  |  | expenses associated with developing and customizing our products for foreign countries;
|
| |  |  | tariffs, quotas and other import restrictions on telecommunications equipment;         
|
| |  |  | longer sales cycles for our products;                                                  
|
| |  |  | fluctuating exchange rates affecting costs, pricing and revenues; and                  
|
| |  |  | compliance with international standards that differ from domestic standards.           

To the extent that we generate international sales in the future, any
negative effects on our international business could harm our business,
operating results and financial condition.

The price of our common stock has been and may continue to be highly volatile.

The stock markets have in general, and with respect to high technology
companies, including us, in particular, recently experienced extreme stock
price and volume volatility, often unrelated to the financial performance of
particular companies. The price at which our common stock will trade in the
future is likely to also be highly volatile and may fluctuate substantially due
to factors such as:



| |  |  | actual or anticipated fluctuations in our operating results;                        
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | changes in or our failure to meet securities analysts expectations;                
|
| |  |  | announcements of technological innovations by us or our competitors;                
|
| |  |  | introduction of new products and services by us or our competitors;                 
|
| |  |  | limited public float of our common stock;                                           
|
| |  |  | conditions and trends in the telecommunications and other technology industries; and
|
| |  |  | general economic and market conditions.                                             

Sales of shares of our common stock by existing stockholders could cause the
market price of our common stock to drop significantly.

As of March 31, 2003, Motorola owned 64.1 million shares of our common
stock, 7.5 million shares of preferred stock convertible into 91.7 million
shares of common stock and warrants to

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purchase an additional
41.3 million shares of our common stock. In addition, Motorola
has announced that an additional 13.3 million shares were
tendered to Motorola in its tender offer. If Motorola or any of our other
stockholders sells substantial amounts of common stock, including shares issued
upon exercise of outstanding options and warrants, in the public market, the
market price of the common stock could fall. In addition, any distribution of
shares of our common stock by Motorola to its stockholders could also have an
adverse effect on the market price.

Motorola and its transferees are entitled to registration rights pursuant to which they may
require that we register their shares under the Securities Act of 1933.

In addition, as of March 31, 2003, there were outstanding options to
purchase approximately 20.0 million shares of our common stock. Subject to
vesting provisions and, in the case of our affiliates, volume and manner of
sale restrictions, the shares of common stock issuable upon the exercise of our
outstanding employee options will be eligible for sale into the public market
at various times.

Anti-takeover provisions in our charter documents and Delaware law, along with
retention agreements with certain key employees, could prevent or delay a
change in control of our company that a stockholder may consider favorable.

Several provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:



| |  |  | authorizing the issuance of preferred stock without stockholder approval;                                                                                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providing for a classified board of directors with staggered, three-year terms;                                                                                                            
|
| |  |  | prohibiting cumulative voting in the election of directors;                                                                                                                                
|
| |  |  | restricting business combinations with interested stockholders;                                                                                                                            
|
| |  |  | limiting the persons who may call special meetings of stockholders;                                                                                                                        
|
| |  |  | prohibiting stockholder action by written consent;                                                                                                                                         
|
| |  |  | establishing advance notice requirements for nominations for
election to the board of directors and for proposing matters that can
be acted on by stockholders at stockholder meetings; and
|
| |  |  | requiring super-majority voting to effect amendments to our
certificate of incorporation and bylaws.                                                                                       

Some of these provisions do not currently apply to Motorola and its
affiliates.

In addition, certain key employees, including President and CEO J. Michael
Norris and his six direct reports, have employment contracts and/or retention
agreements containing change-of-control provisions which potential acquirers
may find unfavorable.

Any or all of the above could prevent or delay a change in control of our
company that a stockholder may consider favorable.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is limited to interest rate fluctuation.
Interest on our debt to Motorola is variable, payable monthly and is determined
on either the base rate, as defined in the agreement, plus 2% or the Eurodollar
rate plus 3 1/2% (4.9% at December 31, 2002). If interest rates increased by
10% (0.5% change in interest rate), our interest expense on this debt would
increase by approximately $0.2 million. We do not engage in any hedging
activities, and we do not use derivatives or equity investments for cash
investment purposes.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

|                                                                                                                                                   |  |  |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report                                                                                                                       |  |  | 44 | 
|                                                                                                                                                   |  |  |    | 
|Consolidated Statements of Operations  Years ended December 31, 2002, 2001 and 2000                                                               |  |  | 45 | 
|                                                                                                                                                   |  |  |    | 
|Consolidated Balance Sheets  December 31, 2002 and 2001                                                                                           |  |  | 46 | 
|                                                                                                                                                   |  |  |    | 
|Consolidated
Statements of redeemable convertible preferred stock and Stockholders Equity (Deficit) -Years ended December 31, 2002, 2001 and 2000 |  |  | 47 | 
|                                                                                                                                                   |  |  |    | 
|Consolidated Statements of Cash Flows  Years ended December 31, 2002, 2001 and 2000                                                               |  |  | 48 | 
|                                                                                                                                                   |  |  |    | 
|Notes to Consolidated Financial Statements                                                                                                         |  |  | 49 | 

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and
Stockholders of Next Level Communications, Inc.:

We have audited the accompanying consolidated balance sheets of Next Level
Communications, Inc. and subsidiary (the Company) (a
majority-owned subsidiary of Motorola, Inc.) as of December 31, 2002 and 2001 and the
related consolidated statements of operations, redeemable convertible
preferred stock, stockholders equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2002. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements 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 Next Level
Communications, Inc. and subsidiary as
of December 31, 2002 and 2001 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States
of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Companys recurring losses from operations raise
substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Deloitte & Touche LLP

San Francisco, California
April 15, 2003

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Next Level Communications, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000
(In Thousands, except per share data)

|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |         |         |         | 
|------------------------------------------------------------------ | ------------------------------------ | --------- | ------------------------ | ------ | ----------------------- | ------ | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | 
|                                                                   |                                      |           |                          |        | Year Ended December 31,
|                                                                   |                                      |           |                          |        |                        
|                                                                   |                                      |           |                          |        | 2002                    |        | 2001     |         | 2000  
|Revenues                                                           |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   |                                      | Equipment |                          | $      | 57,352                  |        |          | $       | 91,030 |         |         | $       | 146,314 |        
|                                                                   |                                      | Software  |                          |        |                        |        |          |         | 2,215  |         |         |         | 3,777   |        
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   |                                      |           | Total Revenues           |        |                         | 57,352 |          |         |        | 93,245  |         |         |         | 150,091 | 
|Cost of Revenues                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   | Equipment                            |           |                          | 51,444 |                         |        |          | 157,837 |        |         |         | 125,090 |        
|                                                                   | Software                             |           |                          |       |                         |        |          | 127     |        |         |         | 141     |        
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   |                                      |           | Total Cost of Revenues   |        |                         | 51,444 |          |         |        | 157,964 |         |         |         | 125,231 | 
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|GROSS PROFIT (LOSS)                                                |                                      |           | 5,908                    |        |                         |        | (64,719  | )       |        |         | 24,860  |        
|OPERATING EXPENSES                                                 |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   | Research & development               |           |                          | 25,307 |                         |        |          | 46,868  |        |         |         | 55,834  |        
|                                                                   | Selling, general and administrative  |           |                          | 33,574 |                         |        |          | 53,349  |        |         |         | 46,907  |        
|                                                                   | Asset impairments and disposals, net |           |                          | 2,208  |                         |        |          | 8,431   |        |         |         |        |        
|                                                                   | Non-cash compensation charge         |           |                          |       |                         |        |          |        |        |         |         | 2,384   |        
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|                                                                   |                                      |           | Total operating expenses |        |                         | 61,089 |          |         |        | 108,648 |         |         |         | 105,125 | 
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|OPERATING LOSS                                                     |                                      |           | (55,181                  | )      |                         |        | (173,367 | )       |        |         | (80,265 | )      
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|INTEREST INCOME (EXPENSE), NET                                     |                                      |           | (22,793                  | )      |                         |        | (14,454  | )       |        |         | 5,575   |        
|INVESTMENT IMPAIRMENTS                                             |                                      |           |                         |        |                         |        | (20,000  | )       |        |         |        |        
|OTHER EXPENSE, NET                                                 |                                      |           | (537                     | )      |                         |        | (785     | )       |        |         | (148    | )      
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|NET LOSS                                                           |                                      |           | (78,511                  | )      |                         |        | (208,606 | )       |        |         | (74,838 | )      
|PREFERRED STOCK ACCRETION AND DIVIDENDS                            |                                      |           | (23,406                  | )      |                         |        |         |         |        |         |        |        
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                          |                                      | $         | (101,917                 | )      |                         | $      | (208,606 | )       |        | $       | (74,838 | )      
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|BASIC AND DILUTED NET LOSS PER
COMMON SHARE                        |                                      | $         | (1.18                    | )      |                         | $      | (2.45    | )       |        | $       | (0.91   | )      
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        
|SHARES USED TO COMPUTE BASIC AND DILUTED NET
LOSS PER COMMON SHARE |                                      |           | 86,368                   |        |                         |        | 85,278   |         |        |         | 81,930  |        
|                                                                   |                                      |           |                          |        |                         |        |          |         |        |         |         |        

See notes to consolidated financial statements.

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Next Level Communications, Inc.
Consolidated Balance Sheets
December 31, 2002 and 2001
(In Thousands, except share data)

|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |      |          |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---------------------------------------------- | -------- | ------------ | ------- | ---- | -------- | ------ | ------- | -
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          | December 31,
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |             
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          | 2002         |         | 2001
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | ASSETS                                         |          |              |         |      |          |        |         |  
|Current Assets                                       |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            | Cash and cash equivalents                                                                  |                                                 | $                                              | 33,394   |              |         | $    | 20,580   |       
|                                                     |                                                                                                                                            | Trade receivables, less allowance for doubtful accounts of $1,028
and $1,332, respectively |                                                 |                                                | 9,799    |              |         |      | 15,989   |       
|                                                     |                                                                                                                                            | Other receivables                                                                          |                                                 |                                                | 3,852    |              |         |      | 3,373    |       
|                                                     |                                                                                                                                            | Inventories                                                                                |                                                 |                                                | 40,267   |              |         |      | 62,645   |       
|                                                     |                                                                                                                                            | Prepaid expenses and other                                                                 |                                                 |                                                | 4,866    |              |         |      | 3,104    |       
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | Total current assets                           |          |              | 92,178  |      |          |        | 105,691 |  
|Property and equipment, net                          |                                                                                                                                            |                                                                                            | 38,249                                          |                                                |          |              | 46,740  |     
|Long-term investments and other assets               |                                                                                                                                            |                                                                                            | 1,604                                           |                                                |          |              | 1,604   |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | Total Assets                                   |          | $            | 132,031 |      |          | $      | 154,035 |  
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |          |              |         |      |          |        |         |  
|Current Liabilities                                  |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            | Accounts payable                                                                           |                                                 | $                                              | 8,832    |              |         | $    | 13,938   |       
|                                                     |                                                                                                                                            | Accrued liabilities                                                                        |                                                 |                                                | 14,361   |              |         |      | 19,213   |       
|                                                     |                                                                                                                                            | Notes and loans payable                                                                   
|                                                     |                                                                                                                                            |                                                                                            | Note payable to vendor                          |                                                | 8,734    |              |         |      | 24,340   |       
|                                                     |                                                                                                                                            |                                                                                            | Note payable  current portion of mortgage note |                                                |          | 1,159        |         |      |          |       |        
|                                                     |                                                                                                                                            | Deferred revenue                                                                           |                                                 |                                                | 481      |              |         |      | 415      |       
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | Total current liabilities                      |          |              | 33,567  |      |          |        | 57,906  |  
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|Long-term obligations                               
|                                                     |                                                                                                                                            | Due to Motorola                                                                           
|                                                     |                                                                                                                                            |                                                                                            | Note payable, net of discount                   |                                                |          | 40,954       |         |      |          | 55,984 |        
|                                                     |                                                                                                                                            |                                                                                            | Tax sharing agreement liability                 |                                                |          | 29,346       |         |      |          | 29,346 |        
|                                                     |                                                                                                                                            | Mortgage note, net of discount                                                             |                                                 |                                                | 16,913   |              |         |      | 19,098   |       
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | Total long term liabilities                    |          |              | 87,213  |      |          |        | 104,428 |  
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|Commitments and contingencies (Note 12)              |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|Stockholders Equity (Deficit)                       |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     | Preferred
stock  $.01 par value ($75), 10,000,000 shares authorized
7,452,818 issued and outstanding                                      |                                                                                            |                                                 | 102,097                                        |          |              |         |     |         
|                                                     | Common stock  $.01 par value, 400,000,000 shares authorized, 87,054,663
and 85,869,316 common shares issued and outstanding, respectively |                                                                                            |                                                 | 803                                            |          |              |         | 791  |         
|                                                     |                                                                                                                                            | Additional paid-in-capital                                                                 |                                                 |                                                | 475,378  |              |         |      | 479,426  |       
|                                                     |                                                                                                                                            | Accumulated deficit                                                                        |                                                 |                                                | (567,027 | )            |         |      | (488,516 | )     
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 | Total Stockholders Equity (Deficit)           |          |              | 11,251  |      |          |        | (8,299  | )
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     
|Total Liabilities and Stockholders Equity (Deficit) |                                                                                                                                            | $                                                                                          | 132,031                                         |                                                |          | $            | 154,035 |     
|                                                     |                                                                                                                                            |                                                                                            |                                                 |                                                |          |              |         |     

See notes to consolidated financial statements.

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Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Equity (Deficit)
Years Ended December 31, 2002, 2001 and 2000
(In Thousands)

|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |      |        |  | 
|------------------------------------------------------------------------ | ------------------------------------------- | ------------------------------------------------------------------------------ | ------- | ---------------------- |  | ------ | ------ | ------ | ----- | ------ | --------- | ------ | ----- | --------------- | ---------- | ------------ | -------- | ------- | ----------- |  |  | - | ------- | ---- | ------ | - | ------ | - | ---- | - | -------- | - |  | - | -------- | ---- | ------ |  | 
|                                                                         |                                             |                                                                                |         | Redeemable Convertible |  |        | Common |        | Stock |        | Preferred |        | Stock |                 | Additional |              | Deferred |         | Accumulated |  |  |   |        
|                                                                         |                                             |                                                                                |         | Preferred Stock        |  | Shares |        | Amount |       | Shares |           | Amount |       | Paid-In Capital |            | Compensation |          | Deficit | Total       | 
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             | 
|Balance, December 31, 1999                                               |                                             |                                                                                |         |                        |  |        | 79,752 |        |       | $      | 754       |        |       |                 |            |              |          |         |             |  |  | $ | 412,930 |      |        | $ | (2,384 | ) |      | $ | (205,072 | ) |  | $ | 206,228  |     
|Issuance of common stock in
connection with:                             |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|                                                                         |                                             | Exercise of stock options
and employee stock purchase plan                     |         |                        |  |        |        |        | 2,183 |        |           |        | 21    |                 |            |              |          |         |             |  |  |   |         |      | 9,230  |   |        |   |      |   |          |   |  |   |          |      | 9,251  | 
|                                                                         |                                             | Exercise of warrants                                                           |         |                        |  |        |        |        | 2,369 |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |      |       | 
|                                                                         |                                             | Acquisition of SoftProse                                                       |         |                        |  |        |        |        | 139   |        |           |        | 1     |                 |            |              |          |         |             |  |  |   |         |      | 16,861 |   |        |   | (365 | ) |          |   |  |   |          |      | 16,497 | 
|                                                                         | Additional
initial public offering expenses |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         | (898 | )      |   |        |   |      |   |          |   |  |   |          | (898 | )     
|Amortization of deferred compensation                                    |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   | 2,509  |   |      |   |          |   |  |   | 2,509    |     
|Net loss                                                                 |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   | (74,838  | ) |  |   | (74,838  | )   
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Balance, December 31, 2000                                               |                                             |                                                                                |         |                        |  |        | 84,443 |        |       |        | 776       |        |       |                 |            |              |          |         |             |  |  |   | 438,123 |      |        |   | (240   | ) |      |   | (279,910 | ) |  |   | 158,749  |     
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Issuance of common stock in
connection with:                             |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|                                                                         |                                             | Exercise of stock options
and employee stock purchase plan                     |         |                        |  |        |        |        | 1,426 |        |           |        | 15    |                 |            |              |          |         |             |  |  |   |         |      | 2,774  |   |        |   |      |   |          |   |  |   |          |      | 2,789  | 
|Issuance of warrants to Motorola                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 38,123  |      |        |   |        |   |      |   |          |   |  |   | 38,123   |     
|Stock-based compensation and other                                       |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 406     |      |        |   |        |   |      |   |          |   |  |   | 406      |     
|Amortization of deferred compensation                                    |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   | 240    |   |      |   |          |   |  |   | 240      |     
|Net loss                                                                 |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   | (208,606 | ) |  |   | (208,606 | )   
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Balance, December 31, 2001                                               |                                             |                                                                                |         |                        |  |        | 85,869 |        |       |        | 791       |        |       |                 |            |              |          |         |             |  |  |   | 479,426 |      |        |   |       |   |      |   | (488,516 | ) |  |   | (8,299   | )   
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Issuance of common stock in
connection with:                             |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|                                                                         |                                             | Exercise of stock options,
401(K) Stock Match and
employee stock purchase plan |         |                        |  |        |        |        | 1,186 |        |           |        | 12    |                 |            |              |          |         |             |  |  |   |         |      | 1,001  |   |        |   |      |   |          |   |  |   |          |      | 1,013  | 
|Issuance of convertible redeemable preferred stock                       |                                             | $                                                                              | 64,931  |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Issuance of warrants to Motorola- redeemable
convertible preferred Stock |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 13,709  |      |        |   |        |   |      |   |          |   |  |   | 13,709   |     
|Beneficial Conversion Feature- Preferred Stock                           |                                             |                                                                                | 6,360   |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Preferred stock accretion                                                |                                             |                                                                                | 2,933   |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 0        |     
|Dividend of Beneficial Conversion Feature                                |                                             |                                                                                | 5,923   |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 0        |     
|Dividends on redeemable convertible preferred stock                      |                                             |                                                                                | 3,460   |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 0        |     
|Dividends on preferred stock                                             |                                             |                                                                                | (83,607 | )                      |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 290     |      |        |   |        |   |      |   |          |   |  |   | 290      |     
|Conversion on elimination of redemption feature                          |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 | 7,426      |              |          | $       | 83,607      |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 83,607   |     
|Issuance of preferred stock to Motorola                                  |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 | 27         |              |          |         | 15,915      |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 15,915   |     
|Beneficial Conversion Feature- Preferred Stock                           |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         | 2,575       |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   | 2,575    |     
|Issuance of warrants to Motorola- Preferred Stock                        |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 3,510   |      |        |   |        |   |      |   |          |   |  |   | 3,510    |     
|Dividend of Beneficial Conversion Feature                                |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 2,575   |      |        |   |        |   |      |   |          |   |  |   | 2,575    |     
|Revaluation of warrants on Motorola note payable                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | (3,987  | )    |        |   |        |   |      |   |          |   |  |   | (3,987   | )   
|Warrants issued on extension of Motorola note payable                    |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 1,706   |      |        |   |        |   |      |   |          |   |  |   | 1,706    |     
|Stock-based compensation and other                                       |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | 554     |      |        |   |        |   |      |   |          |   |  |   | 554      |     
|Dividends to preferred stockholder                                       |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   | (23,406 | )    |        |   |        |   |      |   |          |   |  |   | (23,406  | )   
|Net loss                                                                 |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   | (78,511  | ) |  |   | (78,511  | )   
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     
|Balance, December 31, 2002                                               |                                             |                                                                                |        |                        |  |        | 87,055 |        |       | $      | 803       |        |       |                 | 7,453      |              |          | $       | 102,097     |  |  | $ | 475,378 |      |        | $ |       |   |      | $ | (567,027 | ) |  | $ | 11,251   |     
|                                                                         |                                             |                                                                                |         |                        |  |        |        |        |       |        |           |        |       |                 |            |              |          |         |             |  |  |   |         |      |        |   |        |   |      |   |          |   |  |   |          |     

See notes to consolidated financial statements.

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Next Level Communications, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000

|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |         |          |   |    | 
|---------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------ | -------------------------- | ------- | ---- | ------- | -------- | -------- | ---- | ------- | ------- | -------- | - | -- | 
|(In Thousands)                                       |                                                                               | Years ended December 31,                                                     
|                                                     |                                                                               |                                                                              
|                                                     |                                                                               |                                                                               |        |                            |         | 2002 |         | 2001     |          | 2000
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |     
|OPERATING ACTIVITIES                                 |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     | Net loss                                                                      |                                                                               | $      | (78,511                    | )       |      | $       | (208,606 | )        |      | $       | (74,838 | )       
|                                                     | Adjustments to reconcile net loss to net cash used in
operating activities:   |                                                                               |        |                            |         |      |         |          |          |      |         |         |         
|                                                     |                                                                               | Inventory charges                                                             |        |                            | 5,885   |      |         |          | 76,816   |      |         |         | 9,000    |  
|                                                     |                                                                               | Impairment of investments and property and equipment                          |        |                            | 1,371   |      |         |          | 24,094   |      |         |         |         |  
|                                                     |                                                                               | Impairment of goodwill                                                        |        |                            |        |      |         |          | 8,452    |      |         |         |          |  
|                                                     |                                                                               | Other                                                                         |        |                            | 579     |      |         |          | 536      |      |         |         | 2,624    |  
|                                                     |                                                                               | Depreciation and amortization                                                 |        |                            | 9,509   |      |         |          | 17,649   |      |         |         | 13,813   |  
|                                                     |                                                                               | Amortization of discount on note payable to Motorola                          |        |                            | 16,526  |      |         |          | 10,427   |      |         |         |         |  
|                                                     |                                                                               | Stock issued in connection with 401(k) Plan                                   |        |                            | 404     |      |         |          |         |      |         |         |         |  
|                                                     |                                                                               | Equity in net loss of investee                                                |        |                            |        |      |         |          | 635      |      |         |         |         |  
|                                                     |                                                                               | Gain on sale of software product line                                         |        |                            |        |      |         |          | (2,576   | )    |         |         |         |  
|                                                     | Changes in assets and liabilities:                                            |                                                                               |        |                            |         |      |         |          |          |      |         |         |         
|                                                     |                                                                               | Trade receivables                                                             |        |                            | 6,170   |      |         |          | 17,004   |      |         |         | (20,558  | )
|                                                     |                                                                               | Inventories                                                                   |        |                            | 16,493  |      |         |          | (42,697  | )    |         |         | (73,211  | )
|                                                     |                                                                               | Other assets                                                                  |        |                            | (2,241  | )    |         |          | (809     | )    |         |         | (782     | )
|                                                     |                                                                               | Accounts payable                                                              |        |                            | (5,106  | )    |         |          | (25,089  | )    |         |         | 40,106   |  
|                                                     |                                                                               | Accrued liabilities and deferred revenue                                      |        |                            | (5,224  | )    |         |          | (3,642   | )    |         |         | 532      |  
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     |                                                                               | Net cash used in operating activities                                         |        |                            | (34,145 | )    |         |          | (127,806 | )    |         |         | (103,314 | )
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|INVESTING ACTIVITIES                                 |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     | Purchases of property and equipment                                           |                                                                               |        | (1,950                     | )       |      |         | (5,045   | )        |      |         | (15,515 | )       
|                                                     | Proceeds from sale (purchases) of marketable securities, net                  |                                                                               |        |                           |         |      |         | 25,000   |          |      |         | 18,044  |         
|                                                     | Purchase of long-term investments                                             |                                                                               |        |                           |         |      |         | (8,000   | )        |      |         | (14,988 | )       
|                                                     | Proceeds from sale of software product line                                   |                                                                               |        |                           |         |      |         | 4,875    |          |      |         |        |         
|                                                     | Return of capital from long-term investment                                   |                                                                               |        |                           |         |      |         | 1,000    |          |      |         |        |         
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     |                                                                               | Net cash (used in) provided by investing activities                           |        |                            | (1,950  | )    |         |          | 17,830   |      |         |         | (12,459  | )
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|FINANCING ACTIVITIES                                 |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     | Proceeds from Motorola financings:                                            |                                                                               |        |                            |         |      |         |          |          |      |         |         |         
|                                                     |                                                                               | Proceeds
from issuance of redeemable convertible preferred stock and warrants |        |                            | 53,000  |      |         |          |         |      |         |         |         |  
|                                                     |                                                                               | Proceeds from issuance of preferred stock and warrants                        |        |                            | 12,000  |      |         |          |          |      |         |         |          |  
|                                                     |                                                                               | Note payable and warrants                                                     |        |                            |        |      |         |          | 82,954   |      |         |         |         |  
|                                                     |                                                                               | Tax sharing agreement                                                         |        |                            |        |      |         |          | 14,346   |      |         |         | 15,000   |  
|                                                     | Proceeds from mortgage                                                        |                                                                               |        |                           |         |      |         | 20,000   |          |      |         |        |         
|                                                     | Repayment of mortgage                                                         |                                                                               |        | (1,089                     | )       |      |         | (176     | )        |      |         |        |         
|                                                     | Repayment of capital lease obligations                                        |                                                                               |        |                           |         |      |         | (330     | )        |      |         | (617    | )       
|                                                     | (Repayment of) proceeds from borrowings                                       |                                                                               |        | (15,605                    | )       |      |         | (25,000  | )        |      |         | 148     |         
|                                                     | Issuance of common stock and other                                            |                                                                               |        | 603                        |         |      |         | 2,899    |          |      |         | 9,251   |         
|                                                     | Initial public offering expenses, net                                         |                                                                               |        |                           |         |      |         |         |          |      |         | (898    | )       
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     |                                                                               | Net cash provided by financing activities                                     |        |                            | 48,909  |      |         |          | 94,693   |      |         |         | 22,884   |  
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|Net (decrease) increase in cash and cash equivalents |                                                                               |                                                                               | 12,814 |                            |         |      | (15,283 | )        |          |      | (92,889 | )      
|Cash and cash equivalents, beginning of period       |                                                                               |                                                                               | 20,580 |                            |         |      | 35,863  |          |          |      | 128,752 |        
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|Cash and cash equivalents, end of period             |                                                                               | $                                                                             | 33,394 |                            |         | $    | 20,580  |          |          | $    | 35,863  |        
|                                                     |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|NONCASH INVESTING AND FINANCING ACTIVITIES           |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     | Conversion of Motorola note payable to convertible redeemable preferred stock |                                                                               |        | 32,000                     |         |      |         |         |          |      |         |        |         
|                                                     | Conversion
of Motorola Note payable to preferred stock                        |                                                                               |        | 10,000                     |         |      |         |          |          |      |         |         |         
|                                                     | Conversion of vendor payables and commitments into note payable               |                                                                               |        |                           |         |      |         | 24,340   |          |      |         |        |         
|                                                     | Amount held in escrow for software product line sale                          |                                                                               |        |                           |         |      |         | 575      |          |      |         |        |         
|                                                     | Acquisition of SoftProse  issuance of common stock                           |                                                                               |        |                           |         |      |         |         |          |      |         | 16,862  |         
|                                                     |                                                                               |                                                                               |        | - liabilities assumed, net |         |      |        |          |          |      |        |         |          |   | 91 | 
|SUPPLEMENTAL CASH FLOW INFORMATION                   |                                                                               |                                                                               |        |                            |         |      |         |          |          |      |         |        
|                                                     | Cash paid for interest                                                        |                                                                               |        | 7,709                      |         |      |         | 2,614    |          |      |         | 630     |         
|                                                     | Cash paid for income taxes                                                    |                                                                               |        | 152                        |         |      |         | 163      |          |      |         | 43      |         

See notes to consolidated financial statements.

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NEXT LEVEL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | ORGANIZATION AND BUSINESS
|-- |  | -------------------------

Next Level Communications, Inc. (the Company), a Delaware corporation
headquartered in Rohnert Park, California, is a leading provider of broad-band
communications systems that enable telephone companies and other emerging
communications service providers to cost-effectively deliver voice, data and
video services over the existing copper wire telephone infrastructure.

The entity which became the Company was originally incorporated as a
California corporation in 1994. In September 1995, the California corporation
was acquired by General Instrument Corporation (General Instrument). On
November 9, 1999, the Company issued 9,775,000 shares of common stock at $20.00
per share for net proceeds of $177.0 million in an initial public offering (the
Offering). In January 2000, General Instrument was acquired by Motorola,
Inc.

In 2002, net loss was $78.5 million and net cash used in operating
activities was $34.1 million. As of December 31, 2002, the Companys
accumulated deficit was $567.0 million. At March 31, 2003, the Company had
cash and cash equivalents of $14.1 million, after making a final payment of
$9.5 million to extinguish the Companys Vendor Note Payable and paying
approximately $5.0 million of non-recurring expenses related to the Motorola
tender offer.

During 2002, the Company instituted the following measures to improve cash
flow:



| |  |  | the Company reduced its workforce
twice in 2001 and in January 2002; these reductions, along with other cost saving
measures implemented, helped the Company reduce operating expenses
by $47.6 million (44%) from 2001 to 2002; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Company reduced inventory by $22.4 million (36%) in 2002,
generating net cash flow of approximately $16.5 million;                                                                                                              

Since late 2000, the Company has been significantly dependent on Motorola
for funding. Loans from Motorola totaled $15.0 million in 2000 and $97.3
million in 2001. Cash proceeds
from preferred stock issuances totaled $65.0 million
in 2002. The Company converted $42.0 million of debt due to
Motorola to preferred stock in 2002. The
Company has a remaining debt obligation to Motorola of $41.0 million; in
October 2002 the maturity date of this debt was extended from May 2003 to May
2006.

In the last three quarters of 2002, the Company reduced its average
quarterly negative operating cash flow to approximately negative $4.8 million. Subject
to the effect of a significant change in our revenues on working capital,
management expects 2003 cash flow from operations to be consistent

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with this trend (excluding the
approximately $5.0 million of tender offer expenses
paid in the first quarter of 2003). The Companys ability to generate
positive operating cash flow is dependent on its ability to increase sales,
convert its inventory and accounts receivable to cash, negotiate favorable
terms with its vendors, effectively manage its operating costs and continue to
raise sufficient operating capital. Management believes that the combination
of cash on hand, the cash flows expected to be generated from operations and
the cost savings generated by further planned expense reductions will be
sufficient to enable the Company to meet its financial obligations and sustain
its operations through the third quarter of 2003. Management intends to
aggressively pursue additional sources of financing to support its operations
on a continuing basis, if necessary.

In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of the Companys common stock not owned by Motorola.
On April 14, 2003 Motorola announced that it had completed its
cash tender offer and that as a result Motorola would own
approximately 88.7 percent of the Companys outstanding common stock.
Motorola also stated that it intended to convert certain of its
shares of the Companys preferred stock into shares of the
Companys common stock to achieve a 90 percent ownership
level and that it will then effect a short-form merger pursuant to
which all of our remaining outstanding shares (other than dissenting shares) will
be converted into the right to receive $1.18 per share. Once
Motorola completes the short-form merger, the Company will no longer
be a publicly traded company on the Nasdaq National Market or
otherwise.

In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of the Companys common stock not owned by Motorola.
On April 14, 2003 Motorola announced that it had completed its
cash tender offer and that as a result Motorola would own
approximately 88.7 percent of the Companys outstanding common stock.
Motorola also stated that it intended to convert certain of its
shares of the Companys preferred stock into shares of the
Companys common stock to achieve a 90 percent ownership
level and that it will then effect a short-form merger pursuant to
which all of our remaining outstanding shares (other than dissenting shares) will
be converted into the right to receive $1.18 per share. Once
Motorola completes the short-form merger, the Company will no longer
be a publicly traded company on the Nasdaq National Market or
otherwise.



|2. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------

Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the year. Significant estimates include the
inventory write-down and loss on purchase commitments (see Note 3) and
long-term investment and property and equipment write-downs (see Note 8).
Actual results could differ from those estimates.

Principles of Consolidation- These consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, SoftProse,
Inc. (no impact on 2002 results). All significant intercompany transactions
and balances have been eliminated.

Revenue Recognition- The Company recognizes revenue when contractual
obligations have been satisfied, title and risk of loss have been transferred
to the customer and collection of the resulting receivable is reasonably
assured. Generally, the Company recognizes revenue from equipment sales upon
shipment. In cases where title and risk of loss pass upon delivery, the
Company recognizes revenue from equipment sales upon receipt by the customer.
Revenue from installation services is recognized when the services have been
completed and acceptance by the customer has occurred. Typically (over 85% of
the Companys sales transactions), customers do not purchase the Companys
installation services. However, in circumstances where customers purchase the
Companys installation services, those services are included with equipment
purchases as part of a multiple element arrangement. Fair value of equipment is
based on the sales prices offered to customers that purchase only equipment and
revenue is generally recognized upon shipment. The installation services are
separately priced at a rate approximately equivalent to that charged by third
party vendors (i.e. outside parties that provide similar installation services)
and the portion of the contract price relating to installation services is
deferred until the installation is complete and accepted by the customer.
Installation services do not involve a significant change to the features or
capabilities of the equipment or building complex interfaces or connections;
the equipment is a standard product (i.e. does not require customer specific
modification); and installation does not significantly alter the equipments
capabilities. Revenue from field trials is recognized when the trial has been
completed and full payment has been received. The Company accrues a provision
for estimated sales returns as a reduction of revenue at the time of revenue
recognition.

The Company accrues a provision for estimated sales returns and product
warranty costs at the time of revenue recognition. Deferred revenue relates to
advance payments received on equipment sales contracts in advance of revenue
recognition.

Software license revenues are recognized when software revenue recognition
criteria have been met, pursuant to Statement of Position 97-2, Software
Revenue Recognition, as revised. License revenue is recognized when a
noncancelable license agreement has been signed, delivery has occurred, the
fees are fixed and determinable and collection is probable. The portion of

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revenues from new license agreements which relate to the Companys obligations
to provide customer support are deferred, based upon the price charged for
customer support when it is sold separately, and recognized ratably over the
maintenance period. Revenue from the renewal of customer support contracts is
recognized ratably over the term of the agreement. The Company sold its
software product line in October 2001. Accordingly, the Company has no
deferred software license revenue at December 31, 2002 and 2001.

Product Warranty- The Company provides for the estimated costs to fulfill
customer warranty obligations upon the recognition of the related equipment
revenue. Actual warranty costs incurred are charged against the warranty
reserve when paid. The Company performs ongoing evaluations of the adequacy of
its product warranty reserve. Warranty reserve activity is detailed as follows
(in millions):

|                        |      |  |            |     |          |  |      |     |         |  |     |     |            |  |  |     | 
|----------------------- | ---- |  | ---------- | --- | -------- |  | ---- | --- | ------- |  | --- | --- | ---------- |  |  | --- | 
|                        |      |  | Balance at |     |          |  |      |     |         |  |     |     | Balance at
|                        |      |  | Beginning  |     |          |  |      |     | Actual  |  | End
|                        |      |  | of year    |     | Accruals |  | Cost |     | of year
|                        |      |  |            |     |          |  |      |     |        
|Year ended December 31: |      |  |            |     |          |  |      |     |         |  |     |     |            |  |  |    
|                        | 2000 |  |            | 2.8 |          |  |      | 5.7 |         |  |     | 2.9 |            |  |  | 5.6 | 
|                        | 2001 |  |            | 5.7 |          |  |      | 3.8 |         |  |     | 4.6 |            |  |  | 4.9 | 
|                        | 2002 |  |            | 4.8 |          |  |      | 2.6 |         |  |     | 3.1 |            |  |  | 4.3 | 

Research and Development Costs- Research and development costs are
charged to operations as incurred.

Stock-Based Compensation- The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees and Financial Accounting
Standards Board interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation (FIN 44). The Company accounts for stock-based
awards to nonemployees in accordance with Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and
Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.

In December 2002, the FASB
issued Statement of Financial Accounting Standards No. 148, or SFAS 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
Amendment of FASB Statement No. 123, which provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. In the fourth quarter of 2002, the Company adopted the disclosure
provisions of SFAS 148.

Under SFAS No. 123, had the Company recorded compensation expense based on
the estimated grant date fair value for awards based on grants under the Plans
and the tandem stock grant, the Companys net loss and net loss per share would
have changed. The amounts below represent the pro forma amounts for fiscal
2002, 2001 and 2000 (in millions, except for per share amounts):

|                                                               |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |  
|-------------------------------------------------------------- |  |  |  |  |  | - | ------ | - |  |  |  |  |  | - | ------ | - |  |  |  |  |  | - | ------ | -
|                                                               |  |  |  |  |  |   | 2002   |   |  |  |  |  |  |   | 2001   |   |  |  |  |  |  |   | 2000   |  
|                                                               |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |  
|Net loss available to common shareholders,
as reported         |  |  |  |  |  | $ | (101.9 | ) |  |  |  |  |  | $ | (208.6 | ) |  |  |  |  |  | $ | (74.8  | )
|Add
stock compensation determined using intrinsic method       |  |  |  |  |  |   |       |   |  |  |  |  |  |   | 0.2    |   |  |  |  |  |  |   | 2.5    |  
|Less stock compensation determined using
the fair value method |  |  |  |  |  |   | (35.8  | ) |  |  |  |  |  |   | 7.4    |   |  |  |  |  |  |   | (165.1 | )
|                                                               |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |   |  |  |  |  |  |   |        |  
|Pro forma net loss, as adjusted                                |  |  |  |  |  |   | (137.7 | ) |  |  |  |  |  |   | (201.0 | ) |  |  |  |  |  |   | (237.4 | )
|Diluted net loss per share                                     |  |  |  |  |  | $ | (1.18  | ) |  |  |  |  |  | $ | (2.45  | ) |  |  |  |  |  | $ | (0.91  | )
|Pro forma diluted loss per share, as adjusted                  |  |  |  |  |  | $ | (1.59  | ) |  |  |  |  |  | $ | (2.36  | ) |  |  |  |  |  | $ | (2.90  | )

The
following weighted average assumptions are included in the estimated
fair value calculations of grants for the stock option and stock
purchase programs:

|                                |  |  |  |  |  |  |       |   |  |  |  |  |  |  |       |   |  |  |  |  |  |  |       |  
|------------------------------- |  |  |  |  |  |  | ----- | - |  |  |  |  |  |  | ----- | - |  |  |  |  |  |  | ----- | -
|                                |  |  |  |  |  |  | 2002  |   |  |  |  |  |  |  | 2001  |   |  |  |  |  |  |  | 2000  |  
|                                |  |  |  |  |  |  |       |   |  |  |  |  |  |  |       |   |  |  |  |  |  |  |       |  
|Expected
dividend yields        |  |  |  |  |  |  | 0     | % |  |  |  |  |  |  | 0     | % |  |  |  |  |  |  | 0     | %
|Expected
stock price volatility |  |  |  |  |  |  | 123.0 | % |  |  |  |  |  |  | 118.0 | % |  |  |  |  |  |  | 103.0 | %
|Risk
free interest rate         |  |  |  |  |  |  | 3.8   | % |  |  |  |  |  |  | 4.8   | % |  |  |  |  |  |  | 6.1   | %
|Expected
term (years)           |  |  |  |  |  |  | 4.0   |   |  |  |  |  |  |  | 4.0   |   |  |  |  |  |  |  | 4.0   |  

In
2002 the Company issued 0.4 million warrants to purchase common
stock to Motorola in concession
for providing a waiver relative to its preferred stock (see Note 7 to the
consolidated financial statements) and 0.2

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million warrants to purchase common
stock to a customer in connection with a non-cancelable purchase order.
The fair value of the warrants issued to Motorola,
($0.4 million) was expensed as incurred. The fair value of the
warrants issued to a customer ($0.2 million) will be expensed
over the life of the contract.

Cash and 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.

Inventoriesare stated at the lower of cost, determined on a first-in,
first-out basis, or market.

Inventory Valuation Analysis- At each reporting period the Company
performs a detailed review of raw material and finished goods inventories on
hand, components under purchase commitments and a detailed analysis of our
sales forecasts and product end of life estimates, to determine whether any
inventory charges are required.

Property and Equipment- Property 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 range from 20 years for
buildings, the shorter of five to ten years or the lease term for leasehold
improvements and two to seven years for machinery and equipment.

Long-term investments- Long-term investments represent preferred stock
and other equity holdings in nonpublic companies. The Company accounts for its
long term investments under the cost method when the Companys interest in the
investee is less than 20%; and under the equity method when the Companys
interest is greater than 20% or the Company has significant influence. Under
the equity method the Company recognizes its pro-rata share of the investees
earnings/losses in the period in which they occur. At December 31, 2002,
long-term investments represent equity holdings in one nonpublic company.

Impairment of Long-Lived Assets- The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of that asset may not be recoverable. When the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount, an impairment
loss is recorded to reduce the carrying amount to fair value.

Income taxes- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for
Income Taxes, which prescribes the use of the asset and liability method
whereby deferred tax asset or liability account balances are calculated at the
balance sheet date using current tax laws and rates in effect. Valuation
allowances are established when necessary to reduce deferred tax assets when it
is more likely than not that a portion or all of the deferred tax assets will
not be realized. For the period from January 6, 2000 to May 17, 2000 the
Companys results of operations were included in the consolidated federal
income tax return of Motorola. Federal income taxes for that period of time
are provided in accordance with an intercompany tax sharing agreement, whereby
income taxes or credits for the Company are reported as if the Company filed a
separate federal income tax return (see Note 14).

Net Loss Per Share- Basic net loss per share excludes dilution and is
computed by dividing net loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted net loss
per share is computed based on the weighted average number of common shares
outstanding plus the dilutive effect of outstanding stock options and warrants.
Diluted net loss per common share was the same as basic net loss per common
share for all periods presented since the effect of any potentially dilutive
common stock equivalents is excluded, as they are anti-dilutive. Net loss
available to common shareholders includes preferred stock dividends and
accretion for 2002.

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

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of these instruments. The fair value of notes payable is based upon current
interest rates for debt instruments with comparable maturities and
characteristics. It is not practicable to determine the fair value of the long
term debt to Motorola due to the related party nature of the borrowings.

Comprehensive Loss- 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.
Comprehensive loss was the same as net loss for all periods presented.

Concentration of Risk- One customer comprised 24%, 41% and 56% of the
Companys total revenues in 2002, 2001 and 2000, respectively. The loss of
this customer or any substantial reduction in orders by this customer could
have a material adverse affect on the Companys operating results.
Additionally, the Company 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 Company could
adversely impact future results.

The Company performs ongoing credit evaluations of its customers and
generally does not require collateral from its customers. The Company
maintains allowances for potential losses, and has not incurred any significant
losses to date. Allowance for doubtful accounts activity consists of (in
millions):

|                        |      |  |            |      |            |  |            |      |         |  |            |       |   |  |  |      | 
|----------------------- | ---- |  | ---------- | ---- | ---------- |  | ---------- | ---- | ------- |  | ---------- | ----- | - |  |  | ---- | 
|                        |      |  | Balance at |      | Additions  |  |            |      |         |  | Balance at
|                        |      |  | Beginning  |      | Charged    |  |            |      |         |  | End       
|                        |      |  | of year    |      | to Expense |  | Write-offs |      | of year
|                        |      |  |            |      |            |  |            |      |        
|Year ended December 31: |      |  |            |      |            |  |            |      |         |  |            |       |   |  |  |     
|                        | 2000 |  |            | 1.34 |            |  |            | 0.01 |         |  |            | (0.02 | ) |  |  | 1.33 | 
|                        | 2001 |  |            | 1.33 |            |  |            |     |         |  |            |      |   |  |  | 1.33 | 
|                        | 2002 |  |            | 1.33 |            |  |            | 0.02 |         |  |            | (0.32 | ) |  |  | 1.03 | 

New Accounting Pronouncements-

Accounting for Costs Associated with Exit or Disposal Activities.In June
2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 146, or SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue (EITF) No. 94-3. The
Company adopted the provisions of SFAS 146 for restructuring activities
initiated after December 31, 2002. SFAS 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of the Companys commitment to an exit plan. SFAS 146
also establishes that the liability should initially be measured and recorded
at fair value. Accordingly, SFAS 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.

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Accounting and Disclosure Requirements for Guarantees.In November 2002,
the FASB issued FASB Interpretation No. 45, or FIN 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors year-end. The Company
does not believe the adoption of FIN No. 45 will have a material impact on its
consolidated financial condition.

Revenue Arrangements with Multiple Deliverables.In November 2002, the
EITF reached a consensus on EITF Issue No. 00-21, or EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF No. 00-21 will be effective for
fiscal periods beginning after June 15, 2003. We have not yet determined the
impact of the adoption of EITF No. 00-21 on our results of operations or
financial position.

Reclassifications- Certain 2001 and 2000 amounts have been reclassified
to conform to the 2002 presentation.



|3. |  | INVENTORIES
|-- |  | -----------

Inventories at December 31, 2002 and December 31, 2001 consisted of (in
millions):

|                |  |              |      |              |  |   |      | 
|--------------- |  | ------------ | ---- | ------------ |  | - | ---- | 
|                |  | December 31, |      | December 31,
|                |  | 2002         |      | 2001        
|                |  |              |      |             
|Raw materials   |  | $            | 20.8 |              |  | $ | 26.2 | 
|Work-in-process |  |              | 1.3  |              |  |   | 1.7  | 
|Finished goods  |  |              | 18.2 |              |  |   | 34.7 | 
|                |  |              |      |              |  |   |      | 
|Total           |  | $            | 40.3 |              |  | $ | 62.6 | 
|                |  |              |      |              |  |   |      | 

At each reporting period the Company performs a detailed review of raw
material and finished goods inventories on hand, components under purchase
commitments, and a detailed analysis of its sales forecasts and product
end-of-life estimates, to determine whether any inventory write-downs are
required. Based on this detailed analysis, inventory write-downs totaling
$5.9 million, $76.8 million and $9.0 million were recorded in 2002, 2001 and
2000 respectively.

During 2001, the Company recorded inventory write-downs totaling $76.8
million. To meet forecasted demand and reduce the anticipated component supply
constraints that had existed in the past, the Company had increased inventory
levels for certain components and entered into purchase commitments for certain
components with long lead times. However, in the quarter ended June 30,

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2001,
the Companys actual sales, as well as its estimates of forecasted sales in
2001 and 2002, for its current generation of products declined significantly.
As a result, inventory related charges of $72.0 million were required and were
calculated based upon (i) the substantial completion of the
negotiation process with the Companys contract manufacturers and their
suppliers and the Companys other vendors regarding purchase commitments and
cancellations made by the Company, (ii) the inventory levels in excess of
forecasted demand and (iii) the Companys estimates of salvage or recovery
value for each raw material or finished good on an item by item basis. The
Company does not currently anticipate that the excess inventory included in
this provision will be used based on the Companys current demand forecast. At
December 31, 2001, the Company updated its estimates and recorded additional
charges of $4.8 million. Such write-downs were included in cost of revenues in
2001 and consisted of the following (in millions):

|                                                                                                   |  |   |      | 
|-------------------------------------------------------------------------------------------------- |  | - | ---- | 
|Excess quantities of raw
materials on hand or under purchase commitments, net of estimated salvage |  | $ | 36.9 | 
|Excess quantities of finished goods
on hand, net of estimated salvage                              |  |   | 10.8 | 
|Obsolescence                                                                                       |  |   | 14.5 | 
|Cancellation charges on purchase commitments                                                       |  |   | 5.2  | 
|Lower of cost or market write-down on current generation
product platform                          |  |   | 9.4  | 
|                                                                                                   |  |   |      | 
|Total                                                                                              |  | $ | 76.8 | 
|                                                                                                   |  |   |      | 



|4. |  | PROPERTY AND EQUIPMENT
|-- |  | ----------------------

Property and equipment at December 31 consisted of (in millions):

|                                               |       |   |       |      |      |   |       |      | 
|---------------------------------------------- | ----- | - | ----- | ---- | ---- | - | ----- | ---- | 
|                                               |       |   | 2002  |      | 2001
|                                               |       |   |       |      |     
|Land                                           |       | $ | 2.5   |      |      | $ | 2.8   |     
|Building                                       |       |   | 29.5  |      |      |   | 22.9  |     
|Machinery and equipment                        |       |   | 46.6  |      |      |   | 52.2  |     
|Leasehold improvements                         |       |   | 5.4   |      |      |   | 6.6   |     
|                                               |       |   |       |      |      |   |       |     
|                                               | Total |   |       | 84.0 |      |   |       | 84.5 | 
|Less accumulated depreciation and amortization |       |   | (45.7 | )    |      |   | (37.8 | )   
|                                               |       |   |       |      |      |   |       |     
|Property and equipment, net                    |       | $ | 38.3  |      |      | $ | 46.7  |     
|                                               |       |   |       |      |      |   |       |     

In 2002, leasehold improvements of approximately $0.5 million were written
off in connection with a facility consolidation.



|5. |  | NOTES PAYABLE
|-- |  | -------------

Vendor Note Payable -

At December 31, 2001, the Company had a $24.3 million note payable to a
vendor. The note bears interest at 10% per year. During 2002, principal and
interest payments totaling $18.0 million were made under the Companys vendor
note payable the note. The remaining principal and interest payment of $9.5
million was paid on March 31, 2003.

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Note Payable to Motorola -

During 2001 the Company entered into a note agreement with Motorola for
$83.0 million, with an original maturity date of May 16, 2003. Interest is
payable monthly and is determined (at Motorolas option) on either the base
rate, as defined in the agreement, plus 2% or the Eurodollar rate plus 3 1/2%
(interest rate in effect at December 31, 2002 was 4.9%).

In connection with the note agreement the Company granted warrants to
purchase up to 10.0 million shares of the Companys common stock; 7.5 million
warrants have an exercise price of $7.39 per share, and 2.5 million warrants
to purchase common stock have an exercise price of $4.29 per share. Warrants to purchase 7.0 million
shares of the Companys common stock were immediately exercisable and the
remaining 3.0 million warrants became exercisable as follows:



| |  |  | 1.0 million shares became exercisable on May 17, 2002, as all
borrowings under the note agreement were not repaid by that date;                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On May 30, 2002 the Company and Motorola amended the note to provide
that the remaining 2.0 million shares become fully vested and
exercisable.

The
value related to the 3.0 million warrants was subject to
adjustment for changes in the fair value of the Companys stock until a measurement date was reached (i.e.: the warrants became fully
vested and exercisable), at which time the value of the warrants was fixed.
During 2002 the Company recorded a $4.0 million adjustment to the value of the
warrants as an increase in the carrying value of the debt.

All warrants were exercisable at December 31, 2002. The Company allocated
the fair value of the warrants as a discount to the note payable. The Company
was amortizing the discount under the effective interest method up to the
original maturity date (May 16, 2003) of the related note. During the year
ended December 31, 2002 the Company amortized $11.2 million of the discount,
which has been recorded as interest expense in the accompanying statement of
operations. In connection with the debt to equity conversions in June and
September, 2003 (see Note 7 to the consolidated financial
statements), $5.3 million of associated warrant discount was recognized as interest expense upon
conversion. The fair value of the warrants was estimated using the
Black-Scholes option pricing model with the following assumptions: no
dividends; risk free interest rate of 4.6%; volatility 101%; and an estimated
life of four years.

On October 22, 2002, the Company and Motorola agreed to amend the note to
extend the maturity date from May 16, 2003 to May 16, 2006. The extension was
accounted for as an extinguishment of debt with a related party under EITF
96-19 and APB 26. Accordingly, the remaining unamortized warrant discount of
$6.5 million on the $51.0 million then outstanding under the note was accounted
for as a dividend to a stockholder. As consideration for the extension, the
Company granted to Motorola a warrant to purchase 3.0 million shares of common
stock with an exercise price of $0.76, which represented the average closing
price of the Companys stock over the five days prior to the agreement. The
fair value of the warrants ($1.7 million) was treated as a cost associated with
debt extinguishment, and as a result, was also accounted for as a dividend to a
stockholder.

As of December 31, 2002, $41.0 million remained outstanding under the
Motorola note payable.

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The note agreement with Motorola contains various covenants, including
compliance with net worth requirements, and restrictions on additional
indebtedness, capital expenditures, and payment of dividends.

Tax sharing and allocation agreement with Motorola-

In December 2000, the Company received a $15.0 million advance from
Motorola related to a tax sharing and allocation agreement. During 2001 the
Company received an additional $17.3 million in January 2001 and the Tax
Sharing Agreement (the Tax Sharing Agreement) was finalized in February 2001.
The amount advanced to the Company of $32.3 million was based on an estimate
of the present value of income tax benefits to Motorola from the inclusion of
the Companys operating losses for the period from January 6, 2000 to May 17,
2000 in Motorolas consolidated tax return. On October 10, 2001, the Company
received a revised calculation of the estimated present value of income tax
benefits to Motorola based upon actual net losses that were included in
Motorolas 2000 tax return. The revised amount was $29.3 million. Under the
original agreement, the Company was required to repay the $3.0 million
difference by October 15, 2001. On October 15, 2001, the Note Payable to
Motorola was amended to include this $3.0 million. To the extent Motorola does
not achieve the expected tax benefits by September 30, 2006 the Company must
repay any difference.

In the event of a debt or equity security offering or a sale of assets in
excess of $25.0 million, the first $25.0 million of proceeds may be retained by
the Company; the next $25.0 million (between $25.0 million and $50.0 million)
of such proceeds will be allocated at least one-third to repay the Companys
obligations under the Companys Tax Sharing Agreement and the balance may be
retained by the Company; the next $25.0 million of such proceeds (between $50.0
million and $75.0 million) will be allocated at least one-half to repay the
Companys obligations under the Tax Sharing Agreement and the balance may be
retained by the Company; amounts of such proceeds in excess of $75.0 million
must be used 100% first to repay the Companys obligations under the Tax
Sharing Agreement (to the extent of such obligations) and then to repay and
reduce the amount owed under the note agreement.

Mortgage Note Payable -

On October 30, 2001, the Company received $20.0 million under a mortgage
loan collateralized by a Company-owned office building. The loan is amortized
over 12 years with a ten-year repayment period and bears interest at an annual
fixed rate of 7.51%. Future principal payments are as follows: 2003  $1.3
million; 2004  $1.3 million; 2005  $1.4 million; 2006  $1.5 million; 2007 -
$1.6 million; thereafter  $11.9 million. The unpaid principal balance, plus
accrued interest thereon is due and payable on November 1, 2011.

The mortgage was guaranteed by Motorola. In consideration for the
guarantee, the Company granted to Motorola warrants to purchase up to 400,000
shares of common stock with an exercise price of $3.82 per share. The fair
value of the warrants ($0.7 million) was recorded as a discount to the mortgage
loan with a corresponding increase to additional paid-in capital. The fair
value of the warrants was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividends; risk free interest rate of
4.3%; volatility 101%; and a contractual life of five years.

The Company is amortizing the discount under the effective interest method
up to the maturity date of the related mortgage. During the year ended
December 31, 2002 and 2001 the Company amortized $.06 and $.01 million of the
discount, which has been reflected as interest expense in the accompanying
statement of operations.

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|6. |  | ACCRUED LIABILITIES
|-- |  | -------------------

Accrued liabilities at December 31 consisted of (in millions):

|                                     |  |      |      |      |  |   |      | 
|------------------------------------ |  | ---- | ---- | ---- |  | - | ---- | 
|                                     |  | 2002 |      | 2001
|                                     |  |      |      |     
|Accrued payroll and related expenses |  | $    | 3.7  |      |  | $ | 5.6  | 
|Warranty reserve                     |  |      | 4.3  |      |  |   | 4.9  | 
|Interest                             |  |      | 0.7  |      |  |   | 1.8  | 
|Accrued future lease payments        |  |      | 0.4  |      |  |   |     | 
|Other                                |  |      | 5.3  |      |  |   | 6.9  | 
|                                     |  |      |      |      |  |   |      | 
|Total                                |  | $    | 14.4 |      |  | $ | 19.2 | 
|                                     |  |      |      |      |  |   |      | 



|7. |  | PREFERRED STOCK ISSUANCES TO MOTOROLA, INC.
|-- |  | -------------------------------------------

On
February 20, June 25 and September 26, the Company
issued to Motorola, Inc. (Motorola) 7,426 thousand shares of redeemable convertible
preferred stock (Series A and A-1) and on
December 18, 2002 the Company issued 27 thousand shares of
convertible preferred stock (Series A-2). Through these issuances a total of 7.5 million preferred
shares were issued with a total value of $107.0 million. These shares are
convertible into 91.7 million common shares at a weighted average common share
equivalent price per share of $1.17. In addition to the preferred shares, the
Company issued warrants to purchase 27.6 million common shares at a weighted
average price per share of $1.34. The preferred shares and warrants were
issued in connection with receipt of cash proceeds of $65.0 million and
conversion of $42.0 million in notes payable. The total amounts were allocated
between preferred shares and warrants based on their relative fair values. The
allocation of value to the preferred shares resulted in a recognition of a
beneficial conversion feature for certain of the preferred shares. As a
result, the Company recorded the preferred shares at
$80.8 million ($64.9 million Series A and A-1;
$15.9 million Series A-2), the
warrants at $17.2 million ($13.7 million Series A and
A-1; $3.5 million Series A-2) and the beneficial conversion feature at $8.9
million ($6.3 million Series A and A-1; $2.6 million
Series A-2). The fair values of the warrants ($23.6 million) were estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividends; risk free interest rate in effect (from 2.68% to 4.6%) and
volatility percent calculation (from 101% to 107%) at the time of issuance; and
the contractual life of the warrants.

Each share of Series A preferred (February issuance) is convertible into
two shares of common stock; each share of Series A-1 preferred (June and
September issuances) is convertible into 100 shares of common stock and each
share of Series A-2 (December issuance) is convertible into 1000 shares of
common stock. Series A, Series A-1 and Series A-2 preferred shares
(Preferred) are entitled to cumulative dividends at an annual rate of 7.5%
payable in cash or additional shares of Preferred. During 2002, the Company
recorded $3.8 million for the payment of dividends as an increase in the
carrying value of the preferred stock. In the event of insolvency or
dissolution of the Company, certain change in control, merger or consolidation
events, or sales or transfers of a material portion of the Companys assets
outside the ordinary course of business, each share of Preferred is entitled to
a liquidation preference equal to 250% of the Preferreds initial purchase
price.

Prior
to December 18, 2002, the redeemable convertible preferred shares contained a redemption
feature, such that holders of a majority of the redeemable convertible Preferred could require the
Company to redeem the Preferred on or after the five year anniversary of
issuance at a per share redemption price equal to 120% of the Preferreds
initial purchase price. On December 18th, 2002 the terms of the Preferred were
changed to eliminate the redemption feature. The Preferred shares were issued
for cash and in connection with conversions of outstanding notes payable with
Motorola. Upon the conversion of the note payable amounts into Preferred
shares, the Company recorded additional interest expense for any remaining
unamortized discount related to this portion of the note payable. In
connection with the issuance of the Preferred, the Company granted Motorola
warrants to purchase additional shares of the Companys common stock. The
warrants issued in exchange for cash are exercisable

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immediately and expire
five years from the date of issuance. Warrants issued for debt to equity
conversions and redemption waivers become exercisable five years from the date
of the preferred issuance and expire ten years from the date of the preferred
issuance.

Prior
to December 18, 2002, the Company was accreting the redeemable
convertible preferred shares
to their stated redemption price. The Company accreted $2.9 million on all
outstanding Series A and A-1 Preferred in 2002, which has been reflected as an
increase in the carrying value of the preferred stock. Upon the elimination of the redemption feature for
the Series A and A-1 and issuance of the Series A-2 preferred
shares, the portion of the discount related to the beneficial conversion
feature of $8.5 million was recognized through equity as a preferred dividend.

$35 Million Financing Commitment -

On March 29, 2002, Motorola agreed to make available to the Company up to
$35.0 million in financing. During 2002, the Company issued preferred stock
for all amounts available under this commitment.

Letter of Certification -

On April 22, 2002, in connection with the Company maintaining compliance
under the Nasdaq National Market listing requirements, Motorola provided to
Nasdaq a Letter of Certification pursuant to which Motorola agreed (i) to
waive, through November 1, 2002, Motorolas right of redemption under Section
B(2) of the Certificate of Designation of the Series A Preferred in the event
of a change of control or sale of a material portion of the Companys assets
and (ii) not to transfer the Series A Preferred unless the transferee agrees in
writing to be bound by the waiver. This waiver by Motorola allowed the Company
to classify the preferred stock that had been issued to Motorola as equity for
purposes of meeting the net tangible asset listing requirement which required
the Company to maintain, at a minimum, a net tangible worth of $4.0 million.
As consideration for the Letter of Certification, the Company issued to
Motorola fully-vested and non-forfeitable warrants to purchase common stock,
exercisable five years from the date of the letter, with an exercise price of
$2.00 per share and expiring on April 22, 2012, as follows: (i) 100,000
warrants for the Letter of Certification and the overall contingent
re-structuring; and (ii) 300,000 warrants for the waiver of the redemption in
the event of a change of control relating to the $30.0 million Series A
Preferred issued to Motorola in February 2002.

The fair value of the warrants ($0.4 million) was reflected as an increase
in the carrying value of the preferred stock on the date of issuance. The fair
value of the warrants was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividends; risk free interest rate of
4.6%; volatility 101%; and a contractual life of ten years.



|8. |  | IMPAIRMENTS AND DISPOSALS OF ASSETS AND INVESTMENTS
|-- |  | ---------------------------------------------------

Asset Impairment and disposals, net, in 2002 and 2001 consisted of the
following (in millions):

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|                                                            |  |      |     |      |  |   |      |  
|----------------------------------------------------------- |  | ---- | --- | ---- |  | - | ---- | -
|                                                            |  | 2002 |     | 2001
|                                                            |  |      |     |     
|Facility Consolidation Charges                              |  | $    | 1.9 |      |  |   |     |  
|Impairment of goodwill                                      |  |      |    |      |  | $ | 8.4  |  
|Loss on disposal of property and equipment and other assets |  |      |    |      |  |   | 2.6  |  
|Gain on sale of product line                                |  |      |    |      |  |   | (2.6 | )
|Other                                                       |  |      | 0.3 |      |  |   |      |  
|                                                            |  |      |     |      |  |   |      |  
|Asset impairment and disposals, net                         |  | $    | 2.2 |      |  | $ | 8.4  |  
|                                                            |  |      |     |      |  |   |      |  

In 2002, facility consolidation charges of $0.9 million represented the
present value of future minimum lease payments and impaired leasehold
improvements on vacated premises and $1.0 million related to cancellation
charges on a facility expansion project.

In 2001, the Company wrote off the remaining goodwill of $8.4 million
related to the 2000 SoftProse acquisition based on the Companys annual
assessment of the recoverability of goodwill. At December 31, 2002, the
Company determined that remaining goodwill of $0.2 million was stated at its
estimated fair value.

In 2001, the Company sold its software product line for net proceeds of
$5.5 million. The Company recorded a gain on the sale of $2.6 million.

Investment impairments of $20.0 million in 2001 consisted of (in millions):

|                                                         |  |   |      | 
|-------------------------------------------------------- |  | - | ---- | 
|Write-off of investment in Virtual Access, PLC           |  | $ | 13.0 | 
|Write-off of investment in Expanse Networks, Inc.        |  |   | 3.0  | 
|Write-down of investment in Outreach Communications, LLC |  |   | 4.0  | 
|                                                         |  |   |      | 
|Asset impairment and disposals                           |  | $ | 20.0 | 
|                                                         |  |   |      | 

As of December 31, 2001, the Company determined that the estimated fair
value of its investments in Virtual Access and Expanse Networks was zero and
the decline from their carrying amounts was other than temporary, and
accordingly wrote off the entire interests in 2001. In addition, the
investment in Outreach was reduced to estimated fair value in 2001.



|9. |  | NET LOSS PER SHARE
|-- |  | ------------------

As of December 31, 2002, 2001 and 2000, the Company had securities
outstanding that could potentially dilute basic earnings per share in the
future, but were excluded from the computation of diluted net loss per share,
as their effect would have been anti-dilutive, given the Companys losses.
Such outstanding securities consisted of the following (in millions):

|                                   |  |              |      |      |  |      |      |  |  |  |      | 
|---------------------------------- |  | ------------ | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2002         |      | 2001 |  | 2000
|                                   |  |              |      |      |  |     
|Motorola warrants                  |  |              | 41.3 |      |  |      | 7.4  |  |  |  | 0.0  | 
|Other stockholder warrants         |  |              | 5.8  |      |  |      | 5.6  |  |  |  | 6.8  | 
|Outstanding employee stock options |  |              | 22.8 |      |  |      | 16.0 |  |  |  | 20.2 | 
|                                   |  |              |      |      |  |      |      |  |  |  |      | 
|Total                              |  |              | 69.9 |      |  |      | 29.0 |  |  |  | 27.0 | 
|                                   |  |              |      |      |  |      |      |  |  |  |      | 

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|10. |  | EMPLOYEE STOCK PLANS
|--- |  | --------------------

1999 Stock Plan

Options to purchase 5,400,000 shares of common stock were granted under
the 1999 Stock Plan. These options vest with respect to 25% of the shares
after 12 months of service and the remaining 75% in equal monthly installments
over the next 36 months of service and expire not later
than 10 years after the date of grant. No future awards under the 1999
Stock Plan are expected to be made.

1999 Equity Incentive Plan

Options to purchase 17,400,000 shares of common stock are available for
grant under the 1999 Equity Incentive Plan. Depending on the grant, shares
vest over either a three or four-year period with a pro rata portion vesting
after one year of service and the remaining shares vesting in equal monthly
installments over the remaining months of service. Options expire not later
than 10 years after the date of grant.

During 2001, the Company issued non-qualified stock options to consultants
to purchase 26,000 shares of common stock at prices between $2.60 and $3.35.
The options all vested within the quarter they were issued. The fair value of
the options issued was $.05 million, was recorded as compensation expense, and
was estimated using the Black-Scholes option pricing model with the following
assumptions: no dividends, risk-free interest rate of 4.3%, volatility of 101%,
and a contractual life of 5 years.

During 2001, the Company extended the contractual life of certain options
held by terminated employees. In accordance with FIN 44, the modification
resulted in a new measurement date for these options. As such, the Company
recorded an expense of $0.2 million, as determined by the excess of market
value of the Companys common shares over the exercise price of the modified
options.

Stock Option Exchange Program

In August 2001, the Company implemented a stock option exchange program in
which certain employees could exchange options with an exercise price greater
than or equal to $40.00 per share for new options to be granted at least six
months and one day from the date of cancellation at the then fair market value.
As a result, 5,500,000 options were cancelled in connection with the program.
Eligible employees received a one-for-one option re-grant on February 11, 2002
at an exercise price equal to the market price on the replacement grant date of
$2.06. Total shares re-granted under the program in 2002 were 4,700,000. The
Company did not incur any compensation expense relative to this stock option
exchange program.

The following table summarizes activity relating to the NLC Stock Plan
(including those granted as part of the tandem stock option grant) and the 1999
Stock Plan and 1999 Equity Incentive Plan (the Plans):

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|                                                         |  |                |        |                  |  |   |       | 
|-------------------------------------------------------- |  | -------------- | ------ | ---------------- |  | - | ----- | 
|                                                         |  | Shares         |        | Weighted Average
|                                                         |  | (in thousands) |        | Exercise Price  
|                                                         |  |                |        |                 
|Balance at December 31, 1999 (6,799 exercisable shares)  |  |                | 14,907 |                  |  | $ | 16.43 | 
|Granted (fair value of $49.61)                           |  |                | 8,735  |                  |  |   | 64.20 | 
|Canceled                                                 |  |                | (1,600 | )                |  |   | 60.05 | 
|Exercised                                                |  |                | (1,865 | )                |  |   | 2.04  | 
|                                                         |  |                |        |                  |  |   |       | 
|Balance at December 31, 2000 (7,297 exercisable shares)  |  |                | 20,177 |                  |  | $ | 34.98 | 
|Granted (fair value of $6.26)                            |  |                | 4,966  |                  |  |   | 7.99  | 
|Canceled                                                 |  |                | (8,170 | )                |  |   | 59.81 | 
|Exercised                                                |  |                | (1,022 | )                |  |   | 1.15  | 
|                                                         |  |                |        |                  |  |   |       | 
|Balance at December 31, 2001 (7,906 exercisable shares)  |  |                | 15,951 |                  |  | $ | 15.99 | 
|Granted (fair value of $1.40)                            |  |                | 10,189 |                  |  |   | 1.76  | 
|Canceled                                                 |  |                | (3,066 | )                |  |   | 8.79  | 
|Exercised                                                |  |                | (300   | )                |  |   | 1.12  | 
|                                                         |  |                |        |                  |  |   |       | 
|Balance at December 31, 2002 (13,082 exercisable shares) |  |                | 22,774 |                  |  | $ | 10.50 | 
|                                                         |  |                |        |                  |  |   |       | 

The following table summarizes information about options granted under the
Plans and outstanding at December 31, 2002:

|         |                 |                |               |                  |                |          |                |              |          |          |                |       |          |      |  |        |       |       |   |       |       |      | 
|-------- | --------------- | -------------- | ------------- | ---------------- | -------------- | -------- | -------------- | ------------ | -------- | -------- | -------------- | ----- | -------- | ---- |  | ------ | ----- | ----- | - | ----- | ----- | ---- | 
|         |                 |                |               |                  | Outstanding    |          | Exercisable   
|         |                 |                |               |                  |                |          |               
|         |                 |                |               |                  | Number         |          | Weighted       |              | Weighted |          | Number         |       | Weighted
|         |                 |                |               |                  | Outstanding at |          | Average        |              | Average  |          | Exercisable at |       | Average 
|Exercise |                 | December 31,   |               | Remaining        |                | Exercise |                | December 31, |          | Exercise
|Prices   |                 | 2002           |               | Contractual Life |                | Price    |                | 2002         |          | Price   
|         |                 | (in thousands) |               | (in years)       |                |          | (in thousands) |              |          |          |               
|        
|         |                 |                | $0.58 - $0.85 |                  |                | 2,847    |                |              |          | 5.2      |                |       | $        | 0.83 |  |        |       | 2,482 |   |       | $     | 0.85 | 
|         |                 |                | $0.87 - $1.29 |                  |                | 2,008    |                |              |          | 7.4      |                |       | $        | 1.15 |  |        |       | 849   |   |       | $     | 1.11 | 
|         |                 |                | $1.38 - $2.06 |                  |                | 7,562    |                |              |          | 7.9      |                |       | $        | 1.88 |  |        |       | 2,324 |   |       | $     | 2.05 | 
|         |                 |                | $2.16 - $2.69 |                  |                | 82       |                |              |          | 8.2      |                |       | $        | 2.52 |  |        |       | 47    |   |       | $     | 2.54 | 
|         |                 |                | $3.41 - $4.61 |                  |                | 177      |                |              |          | 7.8      |                |       | $        | 4.33 |  |        |       | 77    |   |       | $     | 4.32 | 
|         |                 |                | $5.13
- $7.29 |                  |                | 360      |                |              |          | 6.1      |                |       | $        | 5.56 |  |        |       | 251   |   |       | $     | 5.67 | 
|         |                 | $8.10 - $11.31 |               |                  | 6,958          |          |                |              | 6.9      |          |                | $     | 9.88     |      |  |        | 5,164 |       |   | $     | 10.03 |     
|         | $12.31 - $18.00 |                |               | 651              |                |          |                | 7.9          |          |          | $              | 13.25 |          |      |  | 327    |       |       | $ | 13.28 |      
|         | $19.63 - $23.38 |                |               | 5                |                |          |                | 7.0          |          |          | $              | 20.07 |          |      |  | 3      |       |       | $ | 20.39 |      
|         | $30.88 - $35.56 |                |               | 24               |                |          |                | 5.8          |          |          | $              | 34.04 |          |      |  | 16     |       |       | $ | 34.35 |      
|         | $51.25 - $66.38 |                |               | 1,759            |                |          |                | 6.9          |          |          | $              | 63.38 |          |      |  | 1,298  |       |       | $ | 63.27 |      
|         | $80.56 - $80.56 |                |               | 341              |                |          |                | 6.3          |          |          | $              | 80.56 |          |      |  | 244    |       |       | $ | 80.56 |      
|         |                 |                |               |                  |                |          |                |              |          |          |                |       |          |      |  |        |       |       |   |      
|         | $0.85 - $161.25 |                |               | 22,774           |                |          |                | 7.1          |          |          | $              | 10.50 |          |      |  | 13,082 |       |       | $ | 12.86 |      
|         |                 |                |               |                  |                |          |                |              |          |          |                |       |          |      |  |        |       |       |   |      

1999 Employee Stock Purchase Plan

In 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the
Purchase Plan) under which 1,000,000 shares of the Companys common stock
were reserved for issuance.

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All employees are eligible to participate. Eligible employees may begin
participating in the 1999 Employee Stock Purchase Plan at the start of any
offering period each of which lasts 24 months. Overlapping offering periods
start on May 1 and November 1 of each year. Under the
 Purchase Plan eligible employees may purchase the Companys common stock
at a price that is the lower of 85% of either the fair market value at the
beginning of the offering period or the fair market value at the end of the
period.

During 2002 and 2001, the Company issued 387,243 and 396,500 shares of
common stock under the Purchase Plan.



|11. |  | EMPLOYEE BENEFIT PLANS
|--- |  | ----------------------

In January 2000, the Company adopted the Next Level Communications 401(k)
Plan (NLC Plan) to which employees could contribute up to 12% of the
employees salary subject to the legal maximum. Through February, 2002, the
Company contributed a cash amount equal to 100% of the first 5% of the
employees salary that the employee contributes. In an effort to conserve
cash, the Company discontinued the cash matching contributions. In July, 2002,
the Company began contributing a company stock amount equal to 100% of the
first 5% of the employees salary that the employee contributes. The Companys
expense related to the NLC Plan was $0.6 million, $1.5 million and $1.4 million
in 2002, 2001 and 2000, respectively.



|12. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------

The Company leases certain of its facilities and equipment under
non-cancelable operating leases. Leases expire at various dates from 2003 to
2006 and certain facility leases have renewal options.

Future minimum lease payments at December 31, 2002 under operating leases
are as follows (in millions):

|                          |      |   |     |     | 
|------------------------- | ---- | - | --- | --- | 
|Years ending December 31: |      |   |     |    
|                          | 2003 |   | $   | 1.2 | 
|                          | 2004 |   |     | 1.2 | 
|                          | 2005 |   |     | 1.2 | 
|                          | 2006 |   |     | 0.8 | 
|                          |      |   |     |    
|Total                     |      | $ | 4.4 |    
|                          |      |   |     |    

Rent expense was $2.5 million, $3.0 million and $1.7 million in 2002, 2001
and 2000, respectively.

The Company has commitments with various suppliers to purchase
approximately $9.9 million of components in 2002.



|13. |  | LEGAL PROCEEDINGS
|--- |  | -----------------

The
Company has a dispute with a previous contract manufacturer. On
May 1, 2002, the Company filed two complaints  both
entitled Next Level Communications, Inc. v. CMC Mississippi,
Inc.  as adversary proceedings in the
Chapter 11 Bankruptcy of CMCs corporate parent: ACT
Manufacturing, Inc. These complaints allege that CMC, a former
contract manufacturer of the Companys products, sold the Company
defective products and also misappropriated the Companys owned
raw materials, all of which resulted in damages to the Company of
over $5.0 million. The Company seeks to offset these damages
against CMCs claim of over $2.4 million owing from the
Company to CMC in conjunction with an
October 2001 settlement agreement. CMC has counterclaimed for the
amount remaining due under the promissory note, plus interest and
legal fees. On March 7, 2003, CMC filed several motions for
summary judgment which, if successful, could result in an award
requiring the Company to pay the $2.4 million, plus interest and fees. The Company believes that
its arguments for set off and/or recoupment of its losses from CMC
are strong, and that the Company, not CMC, should be the eventual net
recipient of an award in this dispute, but there can be no assurance as to the outcome on this litigation.

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14.    INCOME TAXES

For the period from November 10, 1999 through January 5, 2000, the Company
was a corporation filing its tax return on a stand-alone basis. As a result
of the acquisition by Motorola of General Instrument, from January 6, 2000
through May 17, 2000, the Companys taxable loss was included in the
consolidated federal tax return of Motorola. Subsequent to May 17, 2000,
due to the exercise of various warrants and stock options, Motorolas
ownership interest in the Company declined below 80% and the Company was no
longer eligible to be included in Motorolas consolidated federal tax return
and will file its federal income tax return on a stand-alone basis.

During 2002 certain capital transactions occurred as described in Footnote
7, which may have caused the Company to become an affiliate of Motorola
within the definition of the Internal Revenue Code. Upon meeting the
definition of an affiliate for federal income tax purposes and with the
approval of the Internal Revenue Service (IRS), the company may be included
in the Motorola consolidated federal income tax return. Application for
permission to be included in the Motorola consolidated federal income tax
return has not been requested. Absent the approval of the IRS, the company
will continue to file separate federal income tax returns until 2006.

The Companys deferred income tax assets as of December 31, 2002 and 2001
consist of the following in thousands (000s):

|                        |                                               |                                                      |          |         |         |      |          |         |         |   |          |        |         | 
|----------------------- | --------------------------------------------- | ---------------------------------------------------- | -------- | ------- | ------- | ---- | -------- | ------- | ------- | - | -------- | ------ | ------- | 
|                        |                                               |                                                      |          | 2002    |         | 2001 |          | 2000   
|                        |                                               |                                                      |          |         |         |      |          |        
|Deferred tax assets:    |                                               |                                                      |          |         |         |      |          |         |         |   |          |       
|                        | Federal and state net operating losses        |                                                      | $        | 158,210 |         |      | $        | 111,348 |         |   | $        | 69,100 |        
|                        | Research and development credits              |                                                      |          | 7,709   |         |      |          | 7,282   |         |   |          | 1,600  |        
|                        | Capitalized research and development costs    |                                                      |          | 9,251   |         |      |          | 15,185  |         |   |          | 31,800 |        
|                        | Stock option compensation                     |                                                      |          | 167     |         |      |          |         |         |   |          |        |        
|                        | Writeoff of long-term assets                  |                                                      |          | 12,611  |         |      |          | 12,275  |         |   |          |        |        
|                        | Interest expense related to Motorola warrants |                                                      |          |         |         |      |          | 4,154   |         |   |          |        |        
|                        | Basis difference in fixed assets              |                                                      |          | 175     |         |      |          | 407     |         |   |          | 4,100  |        
|                        | Basis
difference in Inventory                 |                                                      |          | 24,925  |         |      |          | 28,276  |         |   |          | 5,500  |        
|                        | Other                                         |                                                      |          | 5,725   |         |      |          | 6,530   |         |   |          | 10,100 |        
|                        |                                               |                                                      |          |         |         |      |          |         |         |   |          |       
|                        |                                               | Total deferred tax assets before valuation allowance |          |         | 218,773 |      |          |         | 185,457 |   |          |        | 122,200 | 
|Valuation allowance     |                                               |                                                      | (218,773 | )       |         |      | (185,457 | )       |         |   | (122,200 | )     
|                        |                                               |                                                      |          |         |         |      |          |         |         |   |          |       
|Net deferred tax assets |                                               | $                                                    |         |         |         | $    |         |         |         | $ |         |       
|                        |                                               |                                                      |          |         |         |      |          |         |         |   |          |       

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company
established a 100% valuation allowance at December 31, 2002 and 2001 due to
the uncertainty of realizing future tax benefits from its net operating loss
carryforwards and other deferred tax assets.

At December 31, 2002, for tax purposes, the Company had approximately
$437,000,000 in federal net operating loss carryforwards, approximately
$171,000,000 in state net operating loss carryforwards, and approximately
$7,709,000 in research and development credit carryforwards. The Companys
federal net operating loss and research and development credit carryforwards begin to expire in 2020. The
Companys state net operating loss and foreign tax credit carryforwards have
various expiration dates beginning in 2004.

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|15. |  | SUBSEQUENT EVENTS
|--- |  | -----------------

In January 2003, Motorola initiated an unsolicited tender offer for all of
the shares of the Companys common stock not owned by Motorola. On April 14, 2003 Motorola announced that it had completed its
cash tender offer and that as a result Motorola would own
approximately 88.7 percent of the Companys outstanding common stock.
Motorola also stated that it intended to convert certain of its
shares of the Companys preferred stock into shares of the
Companys common stock to achieve a 90 percent ownership
level and that it will then effect a short-form merger pursuant to
which all of our remaining outstanding shares (other than dissenting shares) will
be converted into the right to receive $1.18 per share. Once
Motorola completes the short-form merger, the Company will no longer
be a publicly traded company on the Nasdaq National Market or
otherwise.




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

None.




PART III




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

Information concerning this item will be in our definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 for our 2003 annual meeting of stockholders and is incorporated herein by
reference.




ITEM 11.EXECUTIVE COMPENSATION

Information concerning this item will be in our definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 for our 2003 annual meeting of stockholders and is incorporated herein by
reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning this item will be in our definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 for our 2003 annual meeting of stockholders and is incorporated herein by
reference.




ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning this item will be in our definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 for our 2003 annual meeting of stockholders and is incorporated herein by
reference.




ITEM 14.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is

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accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and in
reaching a reasonable level of assurance, management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.

There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date we completed our evaluation.

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PART IV




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

FINANCIAL STATEMENTS AND SCHEDULES

The
Financial Statements which are filed with this Form 10-K are set forth
in the Index to Financial Statements at page 43, which immediately precedes
such financial statements. No schedules are presented as they are
included in the footnotes to the financial statements.

We filed
a current report on Form 8-K, on December 20, 2002 relating
to our issuance of Series A-2 Preferred to Motorola, Inc.




EXHIBITS

The following exhibits are, as indicated below, either filed herewith or
have previously been filed with the SEC and are referred to and incorporated
herein by reference to such filings.

|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                     
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|2.1     |  | Form of Merger Agreement among General Instrument Corporation,
Spencer Trask Investors LLC, Next Level Communications, Next Level
Communications L.P. and us, which was filed as exhibit 2.1 to our
registration statement on Form S-1 (file no. 333-85999) and is
incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                     
|3.1     |  | Restated Certificate of Incorporation, which was filed as
exhibit 3.1 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                     
|3.2     |  | Bylaws, which were filed as exhibit 3.2 to our registration
statement on Form S-1 (file No. 333-85999) and are incorporated by
reference herein.                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                     
|4.1     |  | Form of Registration Rights Agreement among General Instrument
Corporation, Spencer Trask Investors LLC and us, which was filed as
exhibit 4.2 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                              
|        |  |                                                                                                                                                                                                                                                                                                     
|9.1     |  | Form of Voting Trust Agreement among General Instrument
Corporation, Chasemellon Shareholder Services and us, which was filed
as exhibit 9.1 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                                
|        |  |                                                                                                                                                                                                                                                                                                     
|10.1    |  | Form of Indemnification Agreement for our directors and
officers, which was filed as exhibit 10.1 to our registration
statement on Form S-1 (file No. 333-85999) and is incorporated by
reference herein.                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                     
|10.2    |  | Form of Corporate and Intercompany Agreement for our directors
and officers, which was filed as exhibit 10. to our registration
statement on Form S-1 (file No. 333-85999) and is incorporated by
reference herein.                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                     
|10.3*   |  | 1999 Equity Incentive Plan, which was filed as exhibit 10.3 to
our registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                 

67



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                 
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                 
|10.4*   |  | 1999 Employee Stock Purchase Plan, which was filed as exhibit
10.4 to our registration statement on Form S-1 (file No. 333-85999)
and is incorporated by reference herein.                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                 
|10.5    |  | Patent and Technical Information Cross-License Agreement, which
was filed as exhibit 10.5 to our registration statement on Form S-1
(file No. 333-85999) and is incorporated by reference herein.                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                 
|10.6**  |  | Agreement between U S WEST Communications, Inc.
and us, which was
filed as exhibit 10.8 to our registration statement on Form S-1 (file
No. 333-85999) and is incorporated by reference herein.                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                 
|10.7**  |  | Agreement among Telesector Resources group, Inc., General
Instrument Corporation and us, which was filed as exhibit 10.8 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                
|        |  |                                                                                                                                                                                                                                                                                                 
|10.8**  |  | Agreement between Sanmina-SCI Technology, Inc. and us,
which was filed as exhibit 10.10 to our registration statement on Form S-1
(file No. 333-85999) and is incorporated by reference herein.                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                 
|10.9**  |  | Agreement between CMC Mississippi, Inc. and us,
which was filed as
exhibit 10.11 to our registration statement on Form S-1
(file No. 333-85999) and is incorporated by reference herein.                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                 
|10.10*  |  | 1999 Stock Plan, which was filed as exhibit 10.12 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.11   |  | Form of Warrant, which was filed as exhibit 10.13 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.12   |  | Business Loan Agreement between Bank of America, N.A. and us,
which was filed as exhibit 10.14 to our registration statement on
Form S-1 (file No. 33-38618) and is incorporated by reference herein.                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                 
|10.13   |  | Form of Change of Control Agreement which was filed as exhibit
10.1 to our 2000 third quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                 
|10.14   |  | Severance agreement between Mr. Keeler and us effective
December 4, 2000 which was filed as exhibit 10.1 to our 2001 first
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.                                                                          
|        |  |                                                                                                                                                                                                                                                                                                 
|10.15   |  | Tax allocation and sharing agreement between Motorola Inc.,
and us effective February, 2001 which was filed as exhibit 10.2 to
our 2001 first quarterly report on Form 10-Q (file No. 000-27877) and
is incorporated by reference herein.                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.16   |  | Amendment No. 1 (dated July 25, 2001) to Credit Agreement,
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2001 second
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.   
|        |  |                                                                                                                                                                                                                                                                                                 
|10.17   |  | Amendment No. 2 (dated September 28, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2001 third
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.

68



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.18   |  | Amendment No. 3 (dated October 15, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.2 to our 2001 third
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.             
|        |  |                                                                                                                                                                                                                                                                                                            
|10.19   |  | Amendment No. 1 (dated October 24, 2001) to Registration
Rights Agreement dated as of May 16, 2001 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
10.3 to our 2001 third quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                            
|10.20   |  | Amendment No. 4 (dated December 11, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.20 to our 2001 annual
report on Form 10-K (file No. 000-27877) and is incorporated by
reference herein.                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.21   |  | Promissory Note dated as of December 11, 2001 between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 10.21 to our 2001 annual report on Form 10-K (file No.
000-27877) and is incorporated by reference herein.                                                             
|        |  |                                                                                                                                                                                                                                                                                                            
|10.22   |  | Amendment No. 2 (dated December 11, 2001) to the Registration
Rights Agreement dated as of May 16, 2001 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
10.22 to our 2001 annual report on Form 10-K (file No. 000-27877) and
is incorporated by reference herein.   
|        |  |                                                                                                                                                                                                                                                                                                            
|10.23   |  | Form of Warrant No. 011 which was filed as exhibit 10.23 to
our 2001 annual report on Form 10-K (file No. 000-27877) and is
incorporated by reference herein.                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                            
|10.24   |  | Employment Agreement dated as of August 6, 2001 between Next
Level Communications, Inc. and J. Michael Norris which was filed as
exhibit 10.20 to our 2001 annual report on Form 10-K (file No.
000-27877) and is incorporated by reference herein.                                                        
|        |  |                                                                                                                                                                                                                                                                                                            
|10.25   |  | Credit Agreement, dated as of May 16, 2001, between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
99.1 to our current report filed on Form 8-K (file No. 0-27877) and
is incorporated by reference herein.                                                                 
|        |  |                                                                                                                                                                                                                                                                                                            
|10.26   |  | Security Agreement, dated as of May 16, 2001, between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 99.2 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                               
|        |  |                                                                                                                                                                                                                                                                                                            
|10.27   |  | Form of Warrant which was filed as exhibit 99.3 to our current
report filed on Form 8-K (file No. 0-27877) and is incorporated by
reference herein.                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                            
|10.29   |  | Registration Rights Agreement, dated as of May 16, 2001,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.30   |  | Certificate of Designation, dated as of February 20, 2002
which was filed as exhibit 4.1 to our 2002 first quarterly report on
Form 10-Q (file No. 000-27877) and is incorporated by reference
herein.                                                                                                     

69



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|        |  |                                                                                                                                                                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                             
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                             
|10.31   |  | Securities Purchase Agreement, dated as of February 20, 2002
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 10.1 to our 2002 first quarterly report on Form 10-Q
(file No. 000-27877) and is incorporated by reference herein.                       
|        |  |                                                                                                                                                                                                                                                                                             
|10.32   |  | Registration Rights Agreement, dated as of February 20, 2002
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 10.2 to our 2002 first quarterly report on Form 10-Q
(file No. 000-27877) and is incorporated by reference herein.                       
|        |  |                                                                                                                                                                                                                                                                                             
|10.33   |  | Form of Warrant No. Series A 001 which was filed as exhibit
10.3 to our 2002 first quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                             
|10.34   |  | Form of Warrant No. Series A 002 which was filed as exhibit
10.4 to our 2002 first quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                             
|10.35   |  | Commitment Letter, dated as of March 29, 2002 between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 10.5 to our 2002 first quarterly report on Form 10-Q (file
No. 000-27877) and is incorporated by reference herein.                                      
|        |  |                                                                                                                                                                                                                                                                                             
|10.36   |  | Certificate of Designation, dated as of June 25, 2002 which
was filed as exhibit 99.1 to our current report filed on Form 8-K
(file No. 0-27877) and is incorporated by reference herein.                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                             
|10.37   |  | Securities Purchase Agreement, dated as of June 25, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.2 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                    
|        |  |                                                                                                                                                                                                                                                                                             
|10.38   |  | Registration Rights Agreement, dated as of June 25, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.3 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                    
|        |  |                                                                                                                                                                                                                                                                                             
|10.39   |  | Form of Common Stock Purchase Warrant, which was filed as
exhibit 99.4 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                             
|10.40   |  | Amendment No. 5 (dated May 30, 2002) to Credit Agreement,
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2002 second
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                             
|10.41   |  | Securities Purchase Agreement, dated as of September 26, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                               
|        |  |                                                                                                                                                                                                                                                                                             
|10.42   |  | Amendment No. 1, dated as of September 26, 2002 to
Registration Rights Agreement, dated as of June 25, 2002, between
Next Level Communications,                                                                                                                                             

70



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|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                        
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|        |  | Inc. and Motorola, Inc. which was filed as exhibit 99.2 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.43   |  | Form of Warrant A-1 003 which was filed as exhibit 99.3 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.44   |  | Form of Warrant A-1 004 which was filed as exhibit 99.4 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.45   |  | Certificate of Increase of Shares Designated as Series A-1
Convertible Preferred Stock, dated as of September 26, 2002 which was
filed as exhibit 99.5 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.46   |  | Securities Purchase Agreement, dated as of December 18, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.47   |  | Amendment No. 2, dated as of December 18, 2002 to Registration
Rights Agreement, dated as of June 25, 2002, as amended by Amendment
No. 1 dated as of September 26, 2002 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
99.2 to our current report filed on Form 8-K (file No. 0-27877) and
is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.48   |  | Form of Warrant A-2 001 which was filed as exhibit 99.3 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.49   |  | Form of Warrant A-2 002 which was filed as exhibit 99.4 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.50   |  | Amended Certificate of Designation for Series A Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.5 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.51   |  | Amended Certificate of Designation for Series A-1 Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.6 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.52   |  | Certificate of Designation for Series A-2 Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.7 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.53   |  | Form of Indemnification Agreement entered into between Next
Level and Messrs. Clay, Good, Kornblau and Latchford on March 7, 2003
which was filed as exhibit (e)(64) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.54   |  | Retention Agreement between Next Level and Mr. Ide dated March
7, 2003 which was filed as exhibit (e)(65) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                           

71



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|        |  |                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.55   |  | Retention Agreement between Next Level and Mr. St. Cyr dated
March 7, 2003 which was filed as exhibit (e)(66) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.56   |  | Retention Agreement between Next Level and Mr. Sheppard dated
March 7, 2003 which was filed as exhibit (e)(67) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.57   |  | Retention Agreement between Next Level and Mr. Weeks dated
March 7, 2003 which was filed as exhibit (e)(68) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.58   |  | Retention Agreement between Next Level and Mr. Wiley dated
March 7, 2003 which was filed as exhibit (e)(69) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.59   |  | Retention Agreement between Next Level and Mr. Zar dated March
7, 2003 which was filed as exhibit (e)(70) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.60   |  | Letter to Stockholders of Next Level dated February 26, 2003
which was filed as exhibit (a)(1)(viii) to Amendment No. 7 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.61   |  | Letter to Stockholders of Next Level dated February 19, 2003
which was filed as exhibit (a)(1)(v) to Amendment No. 5 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.62   |  | Letter to Stockholders of Next Level dated February 12, 2003
which was filed as exhibit (a)(1)(iii) to Amendment No. 4 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.63   |  | Questions and Answers about the Motorola Tender Offer, issued
by Next Level on February 7, 2003 which was filed as exhibit (a)(63)
to Amendment No. 3 of our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.64   |  | Amended Complaint of Barry Feldman, individually and on behalf
of all others similarly situated, against J. Michael Norris, et al.,
Civil Action No. 20114 filed in the Court of Chancery of the State of
Delaware on February 4, 2003 which was filed as exhibit (a)(62) to
Amendment No. 2 of our Schedule 14D-9 and is incorporated by
reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.65   |  | Complaint filed in the Chancery Court, New Castle County,
Delaware on February 4, 2003 which was filed as exhibit (a)(6) to
Amendment No. 1 of our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.66   |  | Credit Agreement, Amendment No. 5, dated as of March 22, 2002,
between Next Level and Motorola which was filed as exhibit (e)(21) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.67   |  | Credit Agreement, Amendment No. 6, dated as of May 30, 2002,
between Next Level and Motorola which was filed as exhibit (e)(22) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             

72



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.68   |  | Credit Agreement, Amendment No. 7, dated as of October 22,
2002, between Next Level and Motorola which was filed as exhibit
(e)(23) to our Schedule 14D-9 and is incorporated by reference
herein.                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.69   |  | Registration Rights Agreement, dated as of May 16, 2001,
between Next Level and Motorola which was filed as exhibit (e)(26) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.70   |  | Registration Rights Agreement, Amendment No. 3, dated as of
October 22, 2002, between Next Level and Motorola which was filed as
exhibit (e)(29) to our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.71   |  | Common Stock Purchase Warrant No. 12, granted to Motorola by
Next Level which was filed as exhibit (a)(1)(xi) to Amendment No. 9
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.72   |  | Complaint of Barry Feldman, individually and on behalf of all others
similarly situated, against Walter C. Clay, Alex Good, Craig
Kornblau, John McCartney, Richard D. Severns and Paul Latchford,
Civil Action No. 20195 filed in the Court of Chancery of the
State of Delaware on March 14, 2003 which was filed as
exhibit (a)(5)(i) to Amendment No. 11 of our
Schedule 14D-9 and is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.73   |  | Settlement Agreement, dated March 23, 2003 by and between Next
Level, Next Level Partners LLC and Motorola which was filed as
exhibit (a)(5)(ii) to Amendment No. 11 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|23.1*** |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|24.1*** |  | Power of Attorney (see page 74).                                                                                                                                                                                                                                                                                                                                                                                           



---

|*   |  | Management contract or compensatory plan or arrangement.                         
|--- |  | ---------------------------------------------------------------------------------
|   
|**  |  | Confidential Treatment has been granted as to certain portions of
these exhibits.
|   
|*** |  | Filed herewith.                                                                  

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SIGNATURES

Pursuant to the requirements of Section 13 or 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.

|                     |  |                                 |  |                                                                 
|-------------------- |  | ------------------------------- |  | ----------------------------------------------------------------
|Date: April 15, 2003 |  | NEXT LEVEL COMMUNICATIONS, INC.
|                     |  |                                 |  |                                                                 
|                     |  |                                 |  | By: /s/ J. Michael Norris,
Chief Executive Officer and
President

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint J. Michael Norris and Keith A.
Zar, with full power of substitution and resubstitutions and full power to act
without the other, his or her true and lawful attorneys-in-fact and agents to
act for him or her in his or her name, place or stead, in any and all
capacities, to sign any amendments to this report and to file such amendments,
together with exhibits and other documents in connection therewith, with the
Securities and Exchange Commission, granting to each attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as he or
she might or could do in person, and ratifying and confirming all that the
attorneys-in-fact and agents, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

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.

|                                         |  |                                                                                                            |      |               
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- | ---- | --------------
|Signature                                |  | Title                                                                                                      | Date |               
|                                         |  |                                                                                                            |      |               
|/s/ J. Michael Norris

J. Michael Norris |  | Chairman of the
Board, Chief
Executive Officer
and President
(Principal Executive Officer)                 |      | April 15, 2003
|                                         |  |                                                                                                            |      |               
|/s/ James F. Ide

James F. Ide           |  | Senior Vice
President, Chief
Financial Officer,
and Treasurer
(Principal
Financial and Accounting Officer) |      | April 15, 2003
|                                         |  |                                                                                                            |      |               
|/s/ Gray Benoist

Gray Benoist           |  | Director                                                                                                   |      | April 15, 2003
|                                         |  |                                                                                                            |      |               
|/s/ Walter S. Clay

Walter S. Clay       |  | Director                                                                                                   |      | April 15, 2003
|                                         |  |                                                                                                            |      |               
|/s/ Eugene Delaney

Eugene Delaney       |  | Director                                                                                                   |      | April 15, 2003
|                                         |  |                                                                                                            |      |               
|/s/ Alex Good

Alex Good                 |  | Director                                                                                                   |      | April 15, 2003

74



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##### Table of Contents



|                                         |  |          |      |               
|---------------------------------------- |  | -------- | ---- | --------------
|Signature                                |  | Title    | Date |               
|                                         |  |          |      |               
|/s/ Craig Kornblau

Craig Kornblau       |  | Director |      | April 15, 2003
|                                         |  |          |      |               
|/s/ Paul S. Latchford

Paul S. Latchford |  | Director |      | April 15, 2003

75



---



##### Table of Contents



CERTIFICATIONS

I, J. Michael Norris, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Next Level
Communications, Inc.;                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                       
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                   



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



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



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated
in this annual report whether or not there have been significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |                                       |  | 
|--------------------- |  | ------------------------------------- |  | 
|Date:  April 15, 2003 |  | /s/ J. Michael Norris                 |  | 
|                      |  |                                       |  | 
|                      |  | Chief Executive Officer and President |  | 

76



---



##### Table of Contents



I, James F. Ide, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Next Level
Communications, Inc.;                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                       
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                   



| | (a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | (c) |  | presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



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



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated
in this annual report whether or not there have been significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |                         |  | 
|--------------------- |  | ----------------------- |  | 
|Date:  April 15, 2003 |  | /s/ James F. Ide        |  | 
|                      |  |                         |  | 
|                      |  | Chief Financial Officer |  | 

77



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##### Table of Contents



CERTIFICATION
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant
to 18 U.S.C. § 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of Next Level
Communications, Inc. (the Company) hereby certifies, to
such officers knowledge, that:

|     |  |                                                                                                                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  |  | the
Annual Report on Form 10-K of the Company for the annual period
ended December 31, 2002 (the Report) fully complies
with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
|     |  |                                                                                                                                                                                                                                                          
|(ii) |  | the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.                                                                                                     

A
signed original of this written statement required by
Section 906 has been provided to Next Level Communications, Inc.
and will be retained by Next Level Communications, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.

|                      |  |                                       |  | 
|--------------------- |  | ------------------------------------- |  | 
|Date:  April 15, 2003 |  | /s/ J. Michael Norris                 |  | 
|                      |  |                                       |  | 
|                      |  | Chief
Executive Officer and President |  | 
|                      |  |                                       |  | 
|                      |  |                                       |  | 
|                      |  | /s/ James F. Ide                      |  | 
|                      |  |                                       |  | 
|                      |  | Chief
Financial Officer               |  | 



---



##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                     
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|2.1     |  | Form of Merger Agreement among General Instrument Corporation,
Spencer Trask Investors LLC, Next Level Communications, Next Level
Communications L.P. and us, which was filed as exhibit 2.1 to our
registration statement on Form S-1 (file no. 333-85999) and is
incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                     
|3.1     |  | Restated Certificate of Incorporation, which was filed as
exhibit 3.1 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                     
|3.2     |  | Bylaws, which were filed as exhibit 3.2 to our registration
statement on Form S-1 (file No. 333-85999) and are incorporated by
reference herein.                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                     
|4.1     |  | Form of Registration Rights Agreement among General Instrument
Corporation, Spencer Trask Investors LLC and us, which was filed as
exhibit 4.2 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                              
|        |  |                                                                                                                                                                                                                                                                                                     
|9.1     |  | Form of Voting Trust Agreement among General Instrument
Corporation, Chasemellon Shareholder Services and us, which was filed
as exhibit 9.1 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                                
|        |  |                                                                                                                                                                                                                                                                                                     
|10.1    |  | Form of Indemnification Agreement for our directors and
officers, which was filed as exhibit 10.1 to our registration
statement on Form S-1 (file No. 333-85999) and is incorporated by
reference herein.                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                     
|10.2    |  | Form of Corporate and Intercompany Agreement for our directors
and officers, which was filed as exhibit 10. to our registration
statement on Form S-1 (file No. 333-85999) and is incorporated by
reference herein.                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                     
|10.3*   |  | 1999 Equity Incentive Plan, which was filed as exhibit 10.3 to
our registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                 





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                 
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                 
|10.4*   |  | 1999 Employee Stock Purchase Plan, which was filed as exhibit
10.4 to our registration statement on Form S-1 (file No. 333-85999)
and is incorporated by reference herein.                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                 
|10.5    |  | Patent and Technical Information Cross-License Agreement, which
was filed as exhibit 10.5 to our registration statement on Form S-1
(file No. 333-85999) and is incorporated by reference herein.                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                 
|10.6**  |  | Agreement between U S WEST Communications, Inc. and us, which was
filed as exhibit 10.8 to our registration statement on Form S-1 (file
No. 333-85999) and is incorporated by reference herein.                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                 
|10.7**  |  | Agreement among Telesector Resources group, Inc., General
Instrument Corporation and us, which was filed as exhibit 10.8 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                
|        |  |                                                                                                                                                                                                                                                                                                 
|10.8**  |  | Agreement between Sanmina-SCI Technology, Inc. and us, which was
filed as exhibit 10.10 to our registration statement on Form S-1
(file No. 333-85999) and is incorporated by reference herein.                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                 
|10.9**  |  | Agreement between CMC Mississippi, Inc. and us, which was filed as
exhibit 10.11 to our registration statement on Form S-1 (file No.
333-85999) and is incorporated by reference herein.                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                 
|10.10*  |  | 1999 Stock Plan, which was filed as exhibit 10.12 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.11   |  | Form of Warrant, which was filed as exhibit 10.13 to our
registration statement on Form S-1 (file No. 333-85999) and is
incorporated by reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.12   |  | Business Loan Agreement between Bank of America, N.A. and us,
which was filed as exhibit 10.14 to our registration statement on
Form S-1 (file No. 33-38618) and is incorporated by reference herein.                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                 
|10.13   |  | Form of Change of Control Agreement which was filed as exhibit
10.1 to our 2000 third quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                 
|10.14   |  | Severance agreement between Mr. Keeler and us effective
December 4, 2000 which was filed as exhibit 10.1 to our 2001 first
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.                                                                          
|        |  |                                                                                                                                                                                                                                                                                                 
|10.15   |  | Tax allocation and sharing agreement between Motorola Inc.,
and us effective February, 2001 which was filed as exhibit 10.2 to
our 2001 first quarterly report on Form 10-Q (file No. 000-27877) and
is incorporated by reference herein.                                                       
|        |  |                                                                                                                                                                                                                                                                                                 
|10.16   |  | Amendment No. 1 (dated July 25, 2001) to Credit Agreement,
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2001 second
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.   
|        |  |                                                                                                                                                                                                                                                                                                 
|10.17   |  | Amendment No. 2 (dated September 28, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2001 third
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.18   |  | Amendment No. 3 (dated October 15, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.2 to our 2001 third
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.             
|        |  |                                                                                                                                                                                                                                                                                                            
|10.19   |  | Amendment No. 1 (dated October 24, 2001) to Registration
Rights Agreement dated as of May 16, 2001 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
10.3 to our 2001 third quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                            
|10.20   |  | Amendment No. 4 (dated December 11, 2001) to Credit Agreement
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.20 to our 2001 annual
report on Form 10-K (file No. 000-27877) and is incorporated by
reference herein.                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.21   |  | Promissory Note dated as of December 11, 2001 between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 10.21 to our 2001 annual report on Form 10-K (file No.
000-27877) and is incorporated by reference herein.                                                             
|        |  |                                                                                                                                                                                                                                                                                                            
|10.22   |  | Amendment No. 2 (dated December 11, 2001) to the Registration
Rights Agreement dated as of May 16, 2001 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
10.22 to our 2001 annual report on Form 10-K (file No. 000-27877) and
is incorporated by reference herein.   
|        |  |                                                                                                                                                                                                                                                                                                            
|10.23   |  | Form of Warrant No. 011 which was filed as exhibit 10.23 to
our 2001 annual report on Form 10-K (file No. 000-27877) and is
incorporated by reference herein.                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                            
|10.24   |  | Employment Agreement dated as of August 6, 2001 between Next
Level Communications, Inc. and J. Michael Norris which was filed as
exhibit 10.20 to our 2001 annual report on Form 10-K (file No.
000-27877) and is incorporated by reference herein.                                                        
|        |  |                                                                                                                                                                                                                                                                                                            
|10.25   |  | Credit Agreement, dated as of May 16, 2001, between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
99.1 to our current report filed on Form 8-K (file No. 0-27877) and
is incorporated by reference herein.                                                                 
|        |  |                                                                                                                                                                                                                                                                                                            
|10.26   |  | Security Agreement, dated as of May 16, 2001, between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 99.2 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                               
|        |  |                                                                                                                                                                                                                                                                                                            
|10.27   |  | Form of Warrant which was filed as exhibit 99.3 to our current
report filed on Form 8-K (file No. 0-27877) and is incorporated by
reference herein.                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                            
|10.29   |  | Registration Rights Agreement, dated as of May 16, 2001,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                    
|        |  |                                                                                                                                                                                                                                                                                                            
|10.30   |  | Certificate of Designation, dated as of February 20, 2002
which was filed as exhibit 4.1 to our 2002 first quarterly report on
Form 10-Q (file No. 000-27877) and is incorporated by reference
herein.                                                                                                     





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                             
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                             
|10.31   |  | Securities Purchase Agreement, dated as of February 20, 2002
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 10.1 to our 2002 first quarterly report on Form 10-Q
(file No. 000-27877) and is incorporated by reference herein.                       
|        |  |                                                                                                                                                                                                                                                                                             
|10.32   |  | Registration Rights Agreement, dated as of February 20, 2002
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 10.2 to our 2002 first quarterly report on Form 10-Q
(file No. 000-27877) and is incorporated by reference herein.                       
|        |  |                                                                                                                                                                                                                                                                                             
|10.33   |  | Form of Warrant No. Series A 001 which was filed as exhibit
10.3 to our 2002 first quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                             
|10.34   |  | Form of Warrant No. Series A 002 which was filed as exhibit
10.4 to our 2002 first quarterly report on Form 10-Q (file No.
000-27877) and is incorporated by reference herein.                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                             
|10.35   |  | Commitment Letter, dated as of March 29, 2002 between Next
Level Communications, Inc. and Motorola, Inc. which was filed as
exhibit 10.5 to our 2002 first quarterly report on Form 10-Q (file
No. 000-27877) and is incorporated by reference herein.                                      
|        |  |                                                                                                                                                                                                                                                                                             
|10.36   |  | Certificate of Designation, dated as of June 25, 2002 which
was filed as exhibit 99.1 to our current report filed on Form 8-K
(file No. 0-27877) and is incorporated by reference herein.                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                             
|10.37   |  | Securities Purchase Agreement, dated as of June 25, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.2 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                    
|        |  |                                                                                                                                                                                                                                                                                             
|10.38   |  | Registration Rights Agreement, dated as of June 25, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.3 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                    
|        |  |                                                                                                                                                                                                                                                                                             
|10.39   |  | Form of Common Stock Purchase Warrant, which was filed as
exhibit 99.4 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                             
|10.40   |  | Amendment No. 5 (dated May 30, 2002) to Credit Agreement,
dated as of May 16, 2001 between Next Level Communications, Inc. and
Motorola, Inc. which was filed as exhibit 10.1 to our 2002 second
quarterly report on Form 10-Q (file No. 000-27877) and is
incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                             
|10.41   |  | Securities Purchase Agreement, dated as of September 26, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                               
|        |  |                                                                                                                                                                                                                                                                                             
|10.42   |  | Amendment No. 1, dated as of September 26, 2002 to
Registration Rights Agreement, dated as of June 25, 2002, between
Next Level Communications,                                                                                                                                             





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                        
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|        |  | Inc. and Motorola, Inc. which was filed as exhibit 99.2 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.43   |  | Form of Warrant A-1 003 which was filed as exhibit 99.3 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.44   |  | Form of Warrant A-1 004 which was filed as exhibit 99.4 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.45   |  | Certificate of Increase of Shares Designated as Series A-1
Convertible Preferred Stock, dated as of September 26, 2002 which was
filed as exhibit 99.5 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.46   |  | Securities Purchase Agreement, dated as of December 18, 2002,
between Next Level Communications, Inc. and Motorola, Inc. which was
filed as exhibit 99.1 to our current report filed on Form 8-K (file
No. 0-27877) and is incorporated by reference herein.                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.47   |  | Amendment No. 2, dated as of December 18, 2002 to Registration
Rights Agreement, dated as of June 25, 2002, as amended by Amendment
No. 1 dated as of September 26, 2002 between Next Level
Communications, Inc. and Motorola, Inc. which was filed as exhibit
99.2 to our current report filed on Form 8-K (file No. 0-27877) and
is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.48   |  | Form of Warrant A-2 001 which was filed as exhibit 99.3 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.49   |  | Form of Warrant A-2 002 which was filed as exhibit 99.4 to our
current report filed on Form 8-K (file No. 0-27877) and is
incorporated by reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.50   |  | Amended Certificate of Designation for Series A Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.5 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.51   |  | Amended Certificate of Designation for Series A-1 Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.6 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.52   |  | Certificate of Designation for Series A-2 Convertible
Preferred Stock dated as of December 17, 2002 which was filed as
exhibit 99.7 to our current report filed on Form 8-K (file No.
0-27877) and is incorporated by reference herein.                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.53   |  | Form of Indemnification Agreement entered into between Next
Level and Messrs. Clay, Good, Kornblau and Latchford on March 7, 2003
which was filed as exhibit (e)(64) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.54   |  | Retention Agreement between Next Level and Mr. Ide dated March
7, 2003 which was filed as exhibit (e)(65) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                           





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.55   |  | Retention Agreement between Next Level and Mr. St. Cyr dated
March 7, 2003 which was filed as exhibit (e)(66) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.56   |  | Retention Agreement between Next Level and Mr. Sheppard dated
March 7, 2003 which was filed as exhibit (e)(67) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.57   |  | Retention Agreement between Next Level and Mr. Weeks dated
March 7, 2003 which was filed as exhibit (e)(68) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.58   |  | Retention Agreement between Next Level and Mr. Wiley dated
March 7, 2003 which was filed as exhibit (e)(69) to Amendment No. 10
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.59   |  | Retention Agreement between Next Level and Mr. Zar dated March
7, 2003 which was filed as exhibit (e)(70) to Amendment No. 10 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.60   |  | Letter to Stockholders of Next Level dated February 26, 2003
which was filed as exhibit (a)(1)(viii) to Amendment No. 7 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.61   |  | Letter to Stockholders of Next Level dated February 19, 2003
which was filed as exhibit (a)(1)(v) to Amendment No. 5 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.62   |  | Letter to Stockholders of Next Level dated February 12, 2003
which was filed as exhibit (a)(1)(iii) to Amendment No. 4 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.63   |  | Questions and Answers about the Motorola Tender Offer, issued
by Next Level on February 7, 2003 which was filed as exhibit (a)(63)
to Amendment No. 3 of our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.64   |  | Amended Complaint of Barry Feldman, individually and on behalf
of all others similarly situated, against J. Michael Norris, et al.,
Civil Action No. 20114 filed in the Court of Chancery of the State of
Delaware on February 4, 2003 which was filed as exhibit (a)(62) to
Amendment No. 2 of our Schedule 14D-9 and is incorporated by
reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.65   |  | Complaint filed in the Chancery Court, New Castle County,
Delaware on February 4, 2003 which was filed as exhibit (a)(6) to
Amendment No. 1 of our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.66   |  | Credit Agreement, Amendment No. 5, dated as of March 22, 2002,
between Next Level and Motorola which was filed as exhibit (e)(21) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.67   |  | Credit Agreement, Amendment No. 6, dated as of May 30, 2002,
between Next Level and Motorola which was filed as exhibit (e)(22) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                             





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.68   |  | Credit Agreement, Amendment No. 7, dated as of October 22,
2002, between Next Level and Motorola which was filed as exhibit
(e)(23) to our Schedule 14D-9 and is incorporated by reference
herein.                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.69   |  | Registration Rights Agreement, dated as of May 16, 2001,
between Next Level and Motorola which was filed as exhibit (e)(26) to
our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.70   |  | Registration Rights Agreement, Amendment No. 3, dated as of
October 22, 2002, between Next Level and Motorola which was filed as
exhibit (e)(29) to our Schedule 14D-9 and is incorporated by
reference herein.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.71   |  | Common Stock Purchase Warrant No. 12, granted to Motorola by
Next Level which was filed as exhibit (a)(1)(xi) to Amendment No. 9
of our Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.72   |  | Complaint of Barry Feldman, individually and on behalf of all others
similarly situated, against Walter C. Clay, Alex Good, Craig
Kornblau, John McCartney, Richard D. Severns and Paul Latchford,
Civil Action No. 20195 filed in the Court of Chancery of the
State of Delaware on March 14, 2003 which was filed as
exhibit (a)(5)(i) to Amendment No. 11 of our
Schedule 14D-9 and is incorporated by reference herein.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.73   |  | Settlement Agreement, dated March 23, 2003 by and between Next
Level, Next Level Partners LLC and Motorola which was filed as
exhibit (a)(5)(ii) to Amendment No. 11 of our
Schedule 14D-9 and is incorporated by reference herein.                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|23.1*** |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|24.1*** |  | Power of Attorney (see page 74).                                                                                                                                                                                                                                                                                                                                                                                           



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|*   |  | Management contract or compensatory plan or arrangement.                         
|--- |  | ---------------------------------------------------------------------------------
|   
|**  |  | Confidential Treatment has been granted as to certain portions of
these exhibits.
|   
|*** |  | Filed herewith.