NUCENTRIX BROADBAND NETWORKS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 0-23694

Nucentrix Broadband Networks, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 73-1435149
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

4120 International Parkway, 75007-1906
Suite 2000, Carrollton, Texas (Zip Code)
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code (972) 662-4000

- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.

Indicate by check [X] whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:

Shares Outstanding
Class as of November 1, 2002
Common Stock, $.001 par value 10,404,443

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to condensed consolidated financial statements.

2

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

3

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

4

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)

(1) Description of Business

Nucentrix Broadband Networks, Inc. ("Nucentrix" or the "Company")
provides broadband wireless Internet and wireless subscription
television, or "wireless cable," services using up to approximately 200
megahertz ("MHz") of radio spectrum licensed by the Federal
Communications Commission ("FCC") in the 2.1 gigahertz ("GHz") and 2.5
GHz bands, primarily in medium and small markets across Texas, Oklahoma
and the Midwestern United States. The Company owns the basic trading
area ("BTA") authorization, or otherwise licenses or leases spectrum,
in 93 markets covering an estimated 8.7 million total households. On
average, the Company owns or leases approximately 150 MHz of spectrum
per market. This spectrum commonly is referred to as Multichannel
Multipoint Distribution Service, or "MMDS," and Instructional
Television Fixed Service, or "ITFS." The Company currently provides
high-speed wireless Internet access service in two markets, primarily
to medium-sized and small businesses, small offices/home offices and
telecommuters.

In March 2002, as part of the Company's long-term plan to focus its use
of spectrum from wireless cable to broadband Internet and other
advanced wireless services, the Company announced the signing of
agreements with DIRECTV, Inc. ("DIRECTV"), Pegasus Satellite
Television, Inc. ("Pegasus") and an affiliate of Time Warner Cable
("Time Warner Cable") to convert substantially all of the Company's
wireless cable subscribers to programming provided by these entities.
In connection with the conversion program, in September and October
2002 the Company terminated wireless cable service in seven markets,
and consolidated operations in three additional markets. As of October
31, 2002, the Company provided wireless cable services in a total of 50
markets. The Company expects to close and consolidate operations in
additional wireless cable markets through 2002 and 2003 as it
implements its conversion program and clears its spectrum for advanced
broadband wireless services.

(2) Liquidity and Capital Resources

The Company's condensed consolidated financial statements have been
presented on a going concern basis which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.

The Company has incurred operating losses since its inception. The
future growth of the Company's business by using its spectrum to
provide fixed, portable or mobile broadband Internet service will
require substantial investment in capital expenditures, and additional
capital will be required to implement the Company's long term strategy
of providing advanced wireless services in medium and small markets.
The Company currently is focused on validating the most efficient
technology platform from which to deliver its services, and during the
next six months the Company likely will seek to raise capital for
spectrum maintenance, operating expenses and/or to fund deployment. The
Company also may seek additional capital if it consummates any
significant acquisitions or strategic alliances, or determines that
market conditions are appropriate for such financing. There can be no
assurance that any financing will be available on acceptable terms or
in a timely manner.

The Company is in the process of converting substantially all of its
wireless cable subscribers to programming provided by DIRECTV, Pegasus
and Time Warner Cable. In exchange for each subscriber converted, the
Company will receive a conversion payment and, in the case of
subscribers converted to DIRECTV and Pegasus, an equipment subsidy,
installation payment and residual royalty. As a result of these
transactions, revenues and cash flows from the Company's wireless cable
business will decline substantially as its wireless cable subscribers
convert or otherwise disconnect their service. Except for a nominal
residual royalty payment, the Company does not expect its existing
wireless cable subscriber base to generate material revenues or cash
flows for the

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Company after April 2003. Although the Company intends to reduce
expenditures associated with its wireless cable business, ongoing costs
of maintaining the Company's FCC spectrum licenses and leases, as well
as other corporate overhead, will exceed recurring revenues as the
Company implements this conversion program.

The Company is continuing to evaluate the technology for MMDS service,
the commitments by other MMDS operators to specific technology
platforms, the accessibility of capital markets, and the availability
of other sources of financing. The Company expects that cash on hand
and cash generated from its operations will be sufficient to fund
operations in the normal course of business at least through the second
quarter of 2003. The consolidated financial statements do not include
any adjustments that might result from the outcome of any of the
uncertainties discussed in this report.

(3) Principles of Consolidation

The condensed consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Significant
intercompany balances and transactions between the entities have been
eliminated in consolidation.

(4) Interim Financial Information

In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all
adjustments, consisting only of those of a normal recurring nature
(other than adjustments recorded to the statements of operations for
the three and nine months ended September 30, 2001, and statement of
cash flows for the nine months ended September 30, 2001, as further
discussed in note 16 of the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for 2001),
necessary to present fairly the Company's financial position as of
September 30, 2002, and the results of operations for the three and
nine months ended September 30, 2002 and 2001, and statements of cash
flows for the nine months ended September 30, 2002 and 2001. These
results are not necessarily indicative of the results to be expected
for the full fiscal year. The accompanying financial statements are for
interim periods and should be read in conjunction with the 2001 audited
consolidated financial statements of the Company included in the
Company's Annual Report on Form 10-K for 2001.

(5) Net Loss Per Common Share - Basic and Diluted

The Company has presented basic and diluted loss per share, computed on
the basis of the weighted average number of common shares outstanding
during the period. Outstanding options to purchase 548,300 and 780,900
shares of common stock at September 30, 2002 and 2001, respectively,
and outstanding warrants to purchase 1,099,635 and 825,000 shares of
common stock at September 30, 2002 and 2001, respectively, were not
included in the computation of diluted loss per share because their
effects are antidilutive.

(6) Commitments and Contingencies

Nucentrix is a party to several purported class action lawsuits
alleging that it overcharged its customers for administrative late
fees. All of these lawsuits were filed by the same plaintiff's attorney
in various state and federal courts in Texas. Management believes these
actions to be without merit and intends to vigorously defend them.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss
with respect to such matters, and while management does not expect such
an adverse outcome, management believes that an adverse outcome in one
or more of these proceedings could have a material adverse effect on
the Company's financial condition, results of operations or cash flows.

Nucentrix has a programming arrangement with World Satellite Network,
Inc. ("WSNet"), under which it pays WSNet to obtain and manage certain
of the video programming that Nucentrix delivers to its wireless cable
subscribers, including making payments for such programming directly to
programmers such as Disney, ESPN

6

and HBO. In October 2002, WSNet filed for protection under Chapter 11
of the U.S. Bankruptcy Code. The Company is in the process of making
arrangements to pay programmers directly for monthly programming,
beginning with programming for October 2002. However, for programming
delivered in September 2002, Nucentrix has paid WSNet approximately
$470,000. Nucentrix understands that WSNet has not remitted this amount
to the various programmers from whom Nucentrix received programming.
The Company is continuing to evaluate its rights and potential
obligations with respect to WSNet and the programmers. The Company
ultimately may be liable for payment of some or all of this amount to
one or more programmers. The Company also may have a claim against
WSNet for such amount. While it is not feasible to predict or determine
the final outcome of this matter or to estimate the amounts or
potential range of loss, Nucentrix does not believe that an adverse
outcome in this matter would have a material adverse effect on its
consolidated financial condition, results of operations or cash flows.

Nucentrix is involved in routine legal and regulatory proceedings
incident to its business. The Company does not believe that any other
pending legal or regulatory matter will have a material adverse effect
on its financial condition, results of operations or cash flows.

(7) Segment Reporting

The Company is considered to be comprised of two reportable segments:
(i) distribution of wireless cable services and (ii) delivery of
Internet protocol ("IP")-based services. The Company measures segment
profit as EBITDA. EBITDA is defined as earnings before interest, taxes,
depreciation, and amortization. Information regarding operating
segments as of and for the three and nine months ended September 30,
2002 and 2001, is presented in the following tables (in thousands):

A reconciliation from the segment information to the net loss for the three and
nine months ended September 30, 2002 and 2001, is as follows:

Total assets for the operating segments as of September 30, 2002, and
December 31, 2001, are as follows:

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(A) Revenues from the wireless cable services segment's agency relationship
with DIRECTV represent approximately $1.1 million and $2.7 million of
the Company's consolidated revenue for the three and nine months ended
September 30, 2002, respectively.

(B) Intersegment revenue (expense) represents a charge from the IP-based
services segment to the wireless cable services segment for the use of
shared assets. The "other" category includes corporate expenses, other
income and assets not considered part of the two reportable operating
segments.

(C) EBITDA, or earnings before interest, taxes, depreciation, and
amortization, is widely used by analysts, investors and other
interested parties in the Internet, cable television and
telecommunications industries. EBITDA is also a widely accepted
financial indicator of a company's ability to incur and service
indebtedness. EBITDA is not a financial measure determined by generally
accepted accounting principles and should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of funds available for discretionary or other
liquidity purposes. EBITDA may not be comparably calculated from one
company to another.

(8) Change in Accounting Estimate

At December 31, 2001, the Company changed its estimated useful life on
systems and equipment for its wireless cable operations (subscriber
premises equipment, installation costs, transmission equipment, and
systems construction costs) from 3-10 years to 1 year, effective as of
January 1, 2002. The change increased net loss for the nine months
ended September 30, 2002, by $3.7 million, or $0.35 per share. The
change was made to better reflect the estimated useful life of systems
and equipment and more accurately match depreciation expense with the
future estimated cash flows generated by these assets. The Company
expects decreasing future cash flows generated by its wireless cable
systems and equipment as a result of the conversion of the Company's
wireless cable subscribers discussed in note 2 above.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

In this Quarterly Report on Form 10-Q, we will refer to Nucentrix
Broadband Networks, Inc., a Delaware corporation, as "the Company," "we," "us,"
and "our."

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to
our financial condition, results of operations, business strategy, and financial
needs. The words "may," "will," "expect," "believe," "plan," "intend,"
"anticipate," "estimate," "continues," and similar expressions, as they relate
to us, as well as discussions of our strategy and pending transactions, are
intended to identify forward-looking statements. These statements reflect our
current view of future events and are based on our assessment of, and are
subject to, a variety of factors, contingencies, risks, assumptions, and
uncertainties deemed relevant by management, including:

o our ability to obtain financing necessary to implement our
business strategy in a timely manner and on acceptable terms,

o the capabilities and availability of technology platforms for
commercial deployment of broadband wireless services over
Multipoint Distribution Service ("MDS"), Multichannel
Multipoint Distribution Service ("MMDS") and Instructional
Fixed Service Television ("ITFS") spectrum,

o competitive technologies, products and services,

o regulatory and interference issues, including the ability to
obtain and maintain MDS and MMDS licenses and MDS, MMDS and
ITFS spectrum leases, further rulemakings to address technical
and interference rules for mobile use of the 2500 - 2690
megahertz ("MHz") band (or "2.5 GHz" band), and further
proceedings to address relocation of licenses in the 2150 -
2162 MHz band (or "2.1 GHz" band),

o business and economic conditions in our existing markets, and

o those matters discussed specifically under Item 1, "Business -
Risk Factors" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations
("MD&A")" in our Form 10-K for the year ended December 31,
2001, filed with the Securities and Exchange Commission
("SEC") on May 8, 2002.

We cannot assure you that any of our expectations will be realized, and
actual results and occurrences may differ materially from our expectations as
stated in this report. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

OVERVIEW

We provide broadband wireless Internet and wireless subscription
television services using up to approximately 200 MHz of radio spectrum licensed
by the Federal Communications Commission ("FCC") in the 2.1 GHz and 2.5 GHz
bands, primarily in medium and small markets across Texas, Oklahoma and the
Midwestern United States. We own the basic trading area ("BTA") authorization,
or otherwise license or lease MDS, MMDS and ITFS spectrum, in 93 markets
covering an estimated 8.7 million total households. On average, we own or lease
approximately 150 MHz of spectrum per market. We often refer to our frequencies
collectively in this document as "MMDS."

Historically, we have used our spectrum to provide wireless
subscription television services, commonly referred to as "wireless cable." In
March 2002, as part of our long-term plan to shift the focus of our use of
spectrum from wireless cable to broadband Internet and other advanced wireless
services, we announced the signing of agreements with DIRECTV, Inc. ("DIRECTV"),
Pegasus Satellite Television, Inc. ("Pegasus") and an affiliate of Time Warner
Cable ("Time Warner Cable") to convert substantially all of our wireless cable
subscribers to programming provided by these entities. In connection with the
conversion program, in September and October 2002 we terminated wireless cable
service

10

in seven markets, and consolidated operations in three additional markets. As of
October 31, 2002, we provided wireless cable services in a total of 50 markets.
We expect to close and consolidate operations in additional wireless cable
markets through 2002 and 2003 as we implement the conversion program and clear
our spectrum for advanced broadband wireless services.

In September 2001, the FCC allocated the 2.5 GHz band for flexible use,
making this band available for advanced fixed, portable and mobile services,
including mobile 3G wireless systems. In October 2002, a coalition of MMDS and
ITFS operators and licensees submitted a proposal to the FCC to replace the
existing regulations for MMDS and ITFS spectrum with new regulations, including
a nationwide bandplan and geographic service areas that would accommodate
deployment of next generation broadband services. See Part II, Item 5, "Other
Information" in this report.

Our long-term business strategy is to provide fixed, portable and,
ultimately, mobile broadband Internet access and other information services
using our high-capacity MMDS radio spectrum in medium and small markets. Our
expected range of services includes high-speed Internet connectivity that is
integrated with wireless Local Area Networks for businesses and Home Area
Networks for residential users, to distribute broadband services throughout a
customer's business and home. We currently provide high-speed wireless Internet
access service to approximately 425 accounts in Austin and Sherman-Denison,
Texas. These accounts primarily are medium-sized and small businesses, small
offices/home offices ("SOHOs") and telecommuters. Our current service offerings
include Internet access from 128 Kbps to 1.54 Mbps, or up to 50 times faster
than service provided over standard dial-up telephone lines. Through two
national independent contractors, we also provide value-added services such as
e-mail, Web hosting and design, and domain name service.

We believe we are well positioned to bring advanced wireless services
to our medium and small markets, due to the relatively large amount of spectrum
(approximately 150 MHz per market) that we hold. We currently are focused on
validating the most efficient technical platform from which to deliver our
services and, during the next six months, we likely will seek to raise capital
for spectrum maintenance, operating expenses and/or to fund deployment. We also
may seek additional capital if we consummate any significant acquisitions or
strategic alliances, or determine that market conditions are appropriate for
such financing. There can be no assurance that any financing will be available
on acceptable terms or in a timely manner.

We currently do not plan to launch additional Internet markets with
existing first generation technology. We believe that a "next generation"
technology platform that (1) addresses line-of-sight limitations that exist in
current generation equipment, (2) allows customers to install and upgrade their
customer premises equipment themselves, and (3) is cost effective to deploy,
must support the launch of broadband services in additional markets. We are
continuing to evaluate the development of next generation MMDS technology
platforms. In addition, we are continuing to monitor the commitments by other
MMDS operators to next generation technology platforms. We also are evaluating
the accessibility of capital markets, and the availability of other sources of
financing. Until we are able to deploy a next generation technology platform
that meets our cost and performance criteria, and have obtained financing on
satisfactory terms and conditions, we intend to continue to look for
efficiencies, maximize our cash resources and preserve strategic spectrum
resources. This likely will result in deployment of no new Internet markets in
2002. To the extent that financing is available on satisfactory terms and
conditions for spectrum acquisitions or strategic alliances, we may seek to
obtain such financing. See "Future Cash Requirements" in this report.

We have marketed and sold DIRECTV digital broadcast satellite
programming as a commissioned sales agent for DIRECTV since 1998. We currently
market and sell DIRECTV programming under an agreement with DIRECTV entered into
in February 2001. DIRECTV pays us an up-front and a residual commission for each
subscriber to whom we sell a DIRECTV programming package. We also receive
certain equipment subsidies from DIRECTV - approved equipment providers. Our
agreement with DIRECTV expires in February 2006. The up-front commissions we
receive from DIRECTV are subject to a chargeback that we pay DIRECTV if the
subscriber terminates, cancels or disconnects service before the end of one
year. The amount of the chargeback is prorated based on the length of time
remaining in the one-year chargeback period. Residual commissions are payable to
us until the earlier of (1) disconnection or termination of the subscriber, (2)
termination or expiration of our agreement with DIRECTV, or (3) five years after
activation of the subscriber. Our failure to achieve certain subscriber
benchmarks during any calendar year of our

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agreement with DIRECTV would result in a reduction of the residual commission
for the next calendar year. This sales agency agreement applies only to new
DIRECTV subscribers procured by the Company.

Our business strategy contemplates a decline in wireless cable
subscribers, DIRECTV subscribers, revenues, and cash flows in 2002 and beyond,
as we allocate most of our resources to maintain our spectrum assets and develop
our broadband wireless Internet access and other advanced wireless services. We
are in the process of converting substantially all of our wireless cable
subscribers to programming provided by DIRECTV, Pegasus and Time Warner Cable.
In exchange for each subscriber converted, we will receive a conversion payment
and, in the case of subscribers converted to DIRECTV and Pegasus, an equipment
subsidy, installation payment and residual royalty. As a result of these
transactions, revenues and cash flows from our wireless cable business will
decline substantially as our wireless cable subscribers convert or otherwise
disconnect their service. Except for a nominal residual royalty payment, we do
not expect our existing wireless cable subscriber base to generate material
revenues or cash flows for the Company after April 2003. Although we intend to
continue to reduce expenditures associated with our wireless cable business,
ongoing costs of maintaining our FCC spectrum licenses and leases, as well as
other corporate overhead, will exceed recurring revenues as we implement this
conversion program. At October 31, 2002, we had converted a total of
approximately 13,300 wireless cable customers to programming provided by
DIRECTV, Pegasus and Time Warner Cable.

At October 31, 2002, we had approximately 40,700 wireless cable
customers, including approximately 39,500 customers who subscribed only to
programming service provided over our MMDS spectrum, and 1,200 "combo"
subscribers who subscribed to both our MMDS programming service and to DIRECTV
programming service sold by us. In addition, at October 31, 2002, there were
approximately 20,100 customers who received only DIRECTV programming sold by us.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001.

Revenues; Subscribers. Our revenues consist primarily of monthly fees
paid by wireless cable subscribers for basic programming, premium programming,
equipment rental, and other miscellaneous fees, revenue from our agency
relationship with DIRECTV, and revenues from the conversion program discussed
above under "Overview." Revenues also include fees generated from Internet
operations in Austin and Sherman/Denison, Texas. Unless the context requires
otherwise, all references to "subscribers" or "systems" are to our wireless
cable subscribers and systems because revenues and subscribers from our Internet
business were immaterial for the three months and nine months ended September
30, 2002 and 2001.

Subscription revenues from wireless cable subscribers and continuing
monthly service fees from DIRECTV for each DIRECTV customer generated are
recognized as service is provided. If the Company does not meet minimum
subscriber benchmarks each year, the DIRECTV continuing monthly service fee will
be reduced. Management currently does not expect that any such reduction would
have a material effect on the Company's financial condition, results of
operations or cash flows.

Wireless cable and DIRECTV installation revenue, and revenue received
from our agency relationship with DIRECTV (except for continuing monthly service
fees, which are recognized as received), is recognized to the extent of direct
selling costs incurred, and the remainder is deferred and amortized to income
over the expected subscriber relationship period of one year for wireless cable
installation revenue and three years for DIRECTV installation and agency
revenue. A chargeback reserve is recorded for DIRECTV contingencies in the event
that a subscriber terminates, cancels or disconnects his or her DIRECTV
subscription within 12 months.

Our revenues for the third quarter of 2002 were $8.4 million, compared
to $11.9 million for the third quarter of 2001. Revenues for the nine months
ended September 30, 2002, were $29.0 million, compared to $38.4 million for the
same period last year. The average number of wireless cable subscribers for the
three months ended September 30, 2002, was 57,936 compared to 89,910 for the
same period of 2001. For the nine months ended September 30, 2002, the average
number of wireless cable subscribers was 68,707 compared to 97,390 for the nine
months ended September 30, 2001. In addition, during the three and nine months
ended September 30, 2002, we had 23,163 and 25,335 average subscribers who

12

received only DIRECTV programming sold by us. As of January 1, 2000, we do not
include these customers in our reported wireless cable television subscriber
base but we do receive certain agency revenue from DIRECTV related to these
accounts, as well as equipment lease payments from a portion of these customers.
We also do not include these customers or their related revenues in our
calculation of recurring average revenue per subscriber.

The decrease in revenues for the three and nine months ended September
30, 2002, resulted primarily from fewer total wireless cable subscribers as we
reduced sales and marketing relating to our wireless cable services, converted
wireless cable subscribers to programming provided by DIRECTV, Pegasus and Time
Warner Cable and terminated wireless cable service in two markets. Recurring
average revenue per subscriber was $38.41 and $38.33 for the three and nine
months ended September 30, 2002, compared to $37.83 and $36.78 for the same
periods last year. Internet service revenues for the three and nine months ended
September 30, 2002 and 2001, were not material.

System Operations Expense. Systems operations expense includes spectrum
lease payments, programming costs, labor and overhead relating to service calls
and disconnects, transmitter site and tower rentals, certain repairs and
maintenance expenditures, and Internet service costs. Programming costs (with
the exception of minimum payments), spectrum lease payments (with the exception
of certain fixed payments), and repairs and maintenance are variable expenses
based on the number of subscribers. Systems operations expense was $5.1 million,
or 60.8% of revenues, for the third quarter of 2002, compared to $6.2 million,
or 51.7% of revenues, for the same period in 2001. For the nine months ended
September 30, 2002, systems operations expense was $16.6 million, or 57.3% of
revenues, compared to $20.1 million, or 52.2% of revenues, for the comparable
prior year period. System operations expense decreased over both periods
primarily due to lower programming expense as a result of fewer subscribers.
System operations expense as a percent of revenue increased over both periods
due to the fixed portion of certain spectrum lease payments and technical labor
in our wireless cable markets.

Selling, General and Administrative (SG&A) Expense. SG&A expenses
include office and administrative costs of operating our wireless cable and
Internet markets, as well as sales and marketing and bad debt expenses related
to these operations and corporate costs directly and indirectly allocated to
these operations. SG&A also includes corporate costs allocated to spectrum
maintenance. In addition, the direct incremental costs incurred in generating a
customer relationship with DIRECTV, comprised of material, equipment and labor,
are recorded as an asset. This asset, referred to as "subscriber acquisition
costs," is amortized as a component of SG&A expense over the estimated
subscriber relationship period of three years.

SG&A expense for the third quarter of 2002 was $5.1 million, or 60.7%
of revenues, compared to $6.0 million, or 50.2% of revenues, for the same period
last year. For the nine months ended September 30, 2002, SG&A expense was $16.1
million, or 55.6% of revenues, compared to $20.2 million, or 52.6% of revenues,
for the same period last year. SG&A expense for the three and nine months ending
September 30, 2002, included $656,000 and $2.8 million in costs associated with
our Internet operations. SG&A expense for the three and nine months ending
September 30, 2001 included $1.1 million and $4.4 million in costs associated
with our Internet operations. These costs primarily consist of (i) costs related
to our two operating Internet markets in Austin and Sherman-Denison, Texas and
(ii) allocable corporate overhead.

SG&A expense decreased over the periods presented due to lower
advertising and field administrative costs in our wireless cable markets
resulting from lower subscriber counts as we converted wireless cable
subscribers to programming provided by DIRECTV, Pegasus and Time Warner Cable.
In addition, start-up and general and administrative costs related to our
broadband wireless Internet business, which were principally incurred in the
first quarter of 2001, decreased in the current year following a reduction in
force and a delay in availability of a next generation technology platform. SG&A
expense as a percent of revenue increased over both periods due to the fixed
portion of SG&A expenses relating to conversion of our wireless cable
subscribers.

Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and capitalized installation
costs, and amortization of license and leased license investment. Our policy is
to capitalize the direct costs of wireless cable installations. These direct
costs include reception materials and equipment on subscriber premises and
installation labor. These direct costs are capitalized as systems and equipment
and amortized over the estimated remaining life of 12 months. The
non-recoverable portion of the cost of a wireless cable installation

13

becomes fully depreciated upon disconnection of the subscriber. License and
leased license investment includes costs incurred to acquire and/or develop MMDS
and ITFS spectrum rights. These costs are capitalized and amortized over the
estimated remaining life of 10 years.

Depreciation and amortization expense was $3.9 million and $17.0
million for the three and nine months ended September 30, 2002, compared to $6.5
million and $20.0 million for the same periods last year. Depreciation and
amortization expense decreased during the current year due to fewer disconnects
in 2002 compared to 2001. When subscribers are disconnected, the remaining
balance of non-recoverable equipment related to that installation is written off
to depreciation expense. Depreciation and amortization also decreased due to a
$14.1 million impairment charge in the fourth quarter of 2001 to write down
systems and equipment and license and leased license investment to estimated
fair value. This decrease was partially offset by increased depreciation as a
result of the Company changing its estimated useful life for systems and
equipment relating to its wireless cable operations from 3-10 years to one year.
See note 8 of the financial statement footnotes in this report.

Operating Loss. We generated operating losses of $5.7 million and $20.8
million for the three and nine months ended September 30, 2002, compared to
operating losses of $6.7 million and $21.8 million for the three and nine months
ended September 30, 2001. Operating losses for the three and nine months ended
September 30, 2002, decreased due to lower programming costs, lower advertising
and field administrative costs in our wireless cable markets, and lower start-up
and general and administrative costs related to our Internet business, as well
as lower depreciation and amortization expense discussed above.

EBITDA. "EBITDA," or earnings before interest, taxes, depreciation, and
amortization, is widely used by analysts, investors and other interested parties
in the Internet, cable television and telecommunications industries. EBITDA is
also a widely accepted financial indicator of a company's ability to incur and
service indebtedness. EBITDA is not a financial measure determined by generally
accepted accounting principles and should not be considered as an alternative to
net income as a measure of operating results or to cash flows as a measure of
funds available for discretionary or other liquidity purposes. EBITDA may not be
comparably calculated from one company to another. EBITDA was a negative $1.8
million and a negative $3.7 million for the three and nine months ended
September 30, 2002, compared to a negative $225,000 and a negative $1.9 million
for the same periods in 2001. The decrease in EBITDA over the periods presented
was attributable primarily to decreased revenues from our wireless cable
business, partially offset by lower SG&A expense and systems operations expense
discussed above.

Interest Income. Interest income was $59,000 and $248,000 for the three
and nine months ended September 30, 2002, compared to $217,000 and $858,000 for
the same periods last year. The decrease in interest income was due to higher
earnings during the prior year on larger unrestricted cash balances.

Interest Expense. We incurred interest expense of $256,000 and $807,000
for the three and nine months ended September 30, 2002, compared to $308,000 and
$939,000 for the same periods last year. Interest expense decreased in 2002 due
to lower principal balances on our BTA debt and capital leases.

Other Income (Expense). Other income was $499,000 and $823,000 for the
three and nine months ended September 30, 2002, compared to $107,000 and
$483,000 for the same periods of 2001. Other income in the current year
primarily includes recognition of a deferred gain related to the sale-leaseback
of our communications towers during 1999 and 2000, and $510,000 in gain
recognized on the conversion of our wireless cable subscribers to programming
provided by Time Warner Cable. Other income in the prior year includes
recognition of a deferred gain related to the sale-leaseback of our
communications towers, as well as a $100,000 gain from the sale of our equity
interest in a Mexican MMDS company.

Net Loss. We have recorded net losses since our inception. Net loss for
the three and nine months ended September 30, 2002, was $5.4 million ($0.52 per
share) and $20.5 million ($1.97 per share), compared to $6.7 million ($0.64 per
share) and $21.4 million ($2.08 per share) for the same periods last year. The
decrease in net loss over the periods presented resulted primarily from the
decreased operating loss discussed above.

14

LIQUIDITY AND CAPITAL RESOURCES

The broadband wireless business is capital-intensive. Since inception,
we have spent funds to lease or otherwise acquire MMDS channel rights in various
markets and operating systems, to construct video operating systems and two
Internet systems, and to finance initial system operating losses. Our primary
sources of capital have been subscription fees, debt financing, the sale of
common stock, and the sale of MMDS spectrum rights that were not essential to
our business strategy. The approval by the FCC of the use of MMDS spectrum for
digital two-way communications services and the FCC's flexible use authorization
will allow us to use our spectrum to provide fixed, portable and, ultimately,
mobile broadband wireless services such as high-speed Internet access services,
voice over IP and other advanced wireless telecommunications services. The
growth of our business by using our spectrum to provide broadband data and voice
communications services will require substantial investment in capital
expenditures.

Cash used in operations was $4.2 million during the nine months ended
September 30, 2002, compared to $2.6 million during the same period in 2001.
Cash used in operations during the nine months ended September 30, 2002, was
primarily from our net loss of $20.5 million, partially offset by depreciation
and amortization of $17.0 million, and other non-cash charges and changes in
operating assets and liabilities. Cash used in operations for the first nine
months of 2001was primarily from our net loss of $21.4 million, partially offset
by depreciation and amortization of $20.0 million, and from increased subscriber
acquisition costs related to our DIRECTV agency relationship, severance payments
related to a reduction in force and payments of accrued property taxes and other
liabilities.

Cash provided by investing activities was $39,000 during the nine
months ended September 30, 2002, compared to cash used in investing activities
of $1.6 million during the same period in 2001. The improvement in cash provided
by investing activities is due to substantially lower spending for the
acquisition and installation of subscriber equipment in the current year as we
began converting our wireless cable subscribers to programming provided by
DIRECTV, Pegasus and Time Warner Cable.

Cash used in financing activities was $1.4 million during the nine
months ended September 30, 2002, compared to $1.5 million for the same period in
2001. Cash used in financing activities during both periods was for payments on
our BTA debt and capital lease obligations.

At October 31, 2002, we had approximately $9.0 million of unrestricted
cash and cash equivalents and $23,000 in restricted cash representing collateral
securing various outstanding letters of credit to certain of our vendors.

FUTURE CASH REQUIREMENTS

Our goal is to become a leading provider of advanced wireless services
in our markets. To implement our long-term business strategy we intend to first
offer high-speed fixed and portable broadband Internet access to medium-sized
and small businesses, SOHOs, telecommuters, and residential consumers in our
markets. Subject to market demand, technological developments and interference
regulations, a flexible use allocation in the 2.5 GHz band could allow us
ultimately to offer mobile 3G and voice services.

The growth of our business by using our spectrum to provide fixed,
portable or mobile broadband Internet service will require substantial
investment in capital expenditures. We expect that next generation MMDS
technology will provide greater coverage capabilities by addressing
line-of-sight limitations that exist in current equipment, and will allow
customers to install and upgrade customer premises equipment themselves. These
improvements should allow us to reduce subscriber-related costs and operating
expenses; however, the development and launch of broadband wireless MMDS
networks will be capital intensive, and additional capital will be required to
implement our long-term strategy of providing advanced wireless services in
medium and small markets.

We estimate that a launch of a next generation broadband wireless
system providing high-speed Internet access in a typical market will involve an
initial expenditure of approximately $500,000 to $1.5 million for network
equipment, depending upon the system design and type and sophistication of the
equipment. In addition, we estimate that the acquisition and installation of
each new Internet subscriber will cost between $500 and $800 depending upon the
type of

15

customer. This includes charges for equipment, labor and direct commissions.
This may be offset partially by installation and other up-front fees. Other
launch costs include the cost of securing adequate space for marketing and
operational facilities, as well as costs related to employees. As a result of
these costs, operating losses are likely to be incurred by a system during the
start-up period.

As part of our long-term plan to focus on the use of our spectrum for
broadband Internet and other advanced wireless services, in March 2002 we
announced agreements to convert substantially all of our wireless cable
subscribers to DIRECTV, Pegasus and Time Warner Cable. As a result of this
strategic shift in the focus of our business, revenues and cash flows from our
wireless cable business will decline substantially as our wireless cable
subscribers convert to DIRECTV, Pegasus or Time Warner Cable or otherwise
disconnect their service with us. Except for a nominal residual royalty payment
and recognition of deferred revenue related to cash received at the time of
conversion, we do not expect our existing wireless cable subscriber base to
continue to generate material revenues or cash flows for the Company after April
2003. In connection with the conversion program and to reduce corporate
overhead, in September and October 2002 we terminated wireless cable service in
seven markets, and consolidated operations in three additional markets. Although
we intend to reduce expenditures associated with our wireless cable business,
ongoing costs of maintaining our FCC spectrum licenses and leases, as well as
other corporate overhead, will exceed revenues as we implement the conversion
program.

We are continuing to evaluate the development of technology for MMDS
service, the commitments by other MMDS operators to specific technology
platforms, the accessibility of capital markets, and the availability of other
sources of financing. However, until we are able to deploy a technology platform
that meets our cost and performance criteria, and have obtained financing on
satisfactory terms and conditions, we intend to continue to look for
efficiencies, maximize our cash resources and preserve strategic spectrum
resources. This likely will result in deployment of no new Internet markets in
2002.

We also are continuing to evaluate our near- and long-term capital
needs, and likely will seek capital during the next six months for spectrum
maintenance, operating expenses and/or to fund deployment. We also may seek
additional capital if we consummate any significant acquisitions or strategic
alliances, or determine that market conditions are appropriate for such
financing. Options for raising additional capital include the sale of debt or
equity securities, borrowings under secured or unsecured loan arrangements,
including vendor equipment financing, and sales of assets. We can provide no
assurance that such capital or financing will be available in a timely manner or
on satisfactory terms. We expect that cash on hand of $9.0 million at October
31, 2002, and cash generated from our operations, with no additional financing,
will be sufficient to fund operations in the normal course of business at least
through the second quarter of 2003. The consolidated financial statements do not
reflect any adjustments that might result from the outcome of any uncertainty
discussed in this report.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions. The Company's significant accounting
policies and methods used in the preparation of the consolidated financial
statements are discussed in note 1 of the notes to consolidated financial
statements of the Company's Annual Report on Form 10-K for 2001. The Company
believes that of its significant accounting policies, the following may involve
a higher degree of judgment and complexity.

Revenues consist primarily of monthly fees paid by wireless cable
subscribers for basic programming, premium programming, equipment rental, and
other miscellaneous fees, and revenues from our agency relationship with DIRECTV
(which include revenues from DIRECTV from the conversion program discussed above
in "Overview"). Revenues also include fees generated from Internet operations in
Austin and Sherman-Denison, Texas.

Subscription revenues from wireless cable subscribers and continuing
monthly service fees from DIRECTV for each DIRECTV customer generated are
recognized as service is provided. If the Company does not meet minimum
subscriber benchmarks each year, the DIRECTV continuing monthly service fee will
be reduced.

16

Wireless cable and DIRECTV installation revenue, and revenue received
from our agency relationship with DIRECTV (except for continuing monthly service
fees, which are recognized as received), is recognized to the extent of direct
selling costs incurred, and the remainder is deferred and amortized to income
over the expected subscriber relationship period of one year for wireless cable
revenue and three years for DIRECTV installation and agency revenue. A
chargeback reserve is recorded for all DIRECTV contingencies.

The direct costs of wireless cable installations include reception
materials and equipment on subscriber premises and installation labor, which are
capitalized as systems and equipment and amortized over the estimated remaining
life of 12 months. The non-recoverable portion of the cost of a wireless cable
installation becomes fully depreciated upon disconnection of the subscriber.
License and leased license investment includes costs incurred to acquire and/or
develop MMDS and ITFS spectrum rights. These costs are capitalized and amortized
over the estimated remaining life of 10 years.

The direct incremental costs incurred in generating a customer
relationship with DIRECTV, comprised of material, equipment and labor, are
recorded as an asset. This asset, referred to as "subscriber acquisition costs,"
is amortized as a component of SG&A expense over the expected subscriber
relationship period of three years.

Our revenue recognition for wireless cable and DIRECTV installation
revenue, amortization of the recoverable portion of direct costs of wireless
cable installations, and subscriber acquisition costs for DIRECTV subscribers is
based on assumptions regarding our estimated subscriber term. The estimated
subscriber term of one year for wireless cable installations is based on the
Company's expected conversion of wireless cable subscribers to programming
provided by DIRECTV, Pegasus and Time Warner Cable. The estimated subscriber
term of three years for DIRECTV subscribers is based on historic subscriber
churn rates. If different estimated subscriber terms were used, the revenue
amounts reported could be materially different than amounts reported in this
report, and if the estimated subscriber terms change in future years, the
amounts reported in future years would not be comparable to the years reported
in this report.

Our long-term operating assets, which include headend and base station
equipment, are recorded at cost and amortized on a straight-line basis over the
estimated remaining life of 12 months. Our licenses and leased license
investments, which include costs incurred to acquire and/or develop MMDS and
ITFS spectrum rights, are amortized from the inception of service in each market
over the estimated remaining life of 10 years. In August 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to be Disposed Of," it retains many of the fundamental provisions of that
statement. SFAS 144 became effective for fiscal years beginning after December
15, 2001, and was adopted by the Company effective January 1, 2002. The adoption
of SFAS 144 did not have a material impact on the Company's consolidated
financial condition, results of operations or cash flows.

COMMITMENTS AND CONTINGENCIES

We are a party to several purported class action lawsuits alleging that
we overcharged our customers for administrative late fees. We believe the
lawsuits are without merit and intend to vigorously defend them. While it is not
feasible to predict or determine the final outcome of these proceedings or to
estimate the amounts or potential range of loss with respect to these matters,
and while we do not expect such an adverse outcome, we believe that an adverse
outcome in one or more of these proceedings could have a material adverse effect
on our consolidated financial condition, results of operations or cash flows.
For a more detailed discussion of legal matters, see Part II, Item 1, "Legal
Proceedings."

We have a programming arrangement with World Satellite Network, Inc.
("WSNet"), under which we pay WSNet to obtain and manage certain of the video
programming that we deliver to our wireless cable subscribers, including making
payments for such programming directly to programming providers such as Disney,
ESPN and HBO. In October 2002, WSNet filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. We are in the process of making arrangements to pay
programmers directly for the monthly programming that we continue to deliver to
our remaining wireless cable subscribers, beginning with programming for October
2002. However, for programming delivered in

17

September 2002, we have paid WSNet approximately $470,000. We understand that
WSNet has not remitted this amount to the various programmers from whom we
received programming. We are continuing to evaluate our rights and potential
obligations with respect to WSNet and the programmers. We ultimately may be
liable for payment of some or all of this amount to one or more programmers. We
also may have a claim against WSNet for such amount. While it is not feasible to
predict or determine the final outcome of this matter or to estimate the amounts
or potential range of loss, we do not believe that an adverse outcome in this
matter would have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.

CONTRACTUAL OBLIGATIONS

The Company's contractual obligations include long-term debt (primarily
related to BTA installment notes), capital lease obligations (primarily related
to tower leases), operating leases (primarily related to spectrum leases), and
other long-term obligations (settlement payments), as summarized below.

Payments Due by Year
(in thousands)

In August 2002, we resumed partial payment to the FCC on installment
notes covering 25 non-strategic BTAs, and full payment for two non-strategic
BTAs, for which we previously had suspended payment. The total outstanding
principal balance on these notes is approximately $1.9 million. Quarterly
payments of principal and interest due under these notes are approximately
$140,000. We currently are in the process of attempting to sell or assign these
BTAs, and have entered into a definitive agreement to assign two BTAs. We also
have discussed the disposition of these BTAs with the FCC, and intend to request
the FCC to waive its right to collect the outstanding principal and interest due
under these notes in exchange for returning the FCC authorizations for BTAs we
are unable to sell or assign. The outstanding principal balance continues to be
reflected in the long-term debt portion of the above table, pending the sale or
assignment of these BTAs and the results of our discussions with the FCC.

In July 2002 we began negotiations with spectrum lessors to defer a
portion of our monthly spectrum lease payments until we launched commercial
two-way Internet services in the applicable market. As of October 31, 2002, we
had renegotiated over 120 spectrum leases. All deferred spectrum lease
obligations are included in the Contractual Obligations table above. We are
continuing to expense all spectrum lease payments on a straight-line basis in
our condensed consolidated statements of operations. In addition, the condensed
consolidated balance sheets in this report include a current liability of
approximately $330,000 for deferred spectrum lease payments as of September 30,
2002.

INFLATION

We do not believe that inflation has had or is likely to have any
significant impact on our operations. We believe that we will be able to
increase subscriber rates, if necessary, to keep pace with inflationary
increases in costs.

TRANSACTIONS

In May 2000, we entered into a definitive agreement to acquire all of
the MDS, MMDS and ITFS spectrum licenses, lease rights and other assets of
Wireless Cable of Rockford, LLC and Allen Leeds in Rockford, Illinois for $6.0
million in common stock and assumption of BTA debt. In October 2001, the FCC
dismissed the BTA owner's

18

application for consent to assign the Rockford BTA to the Company. In November
2001, the BTA owner filed a Petition for Reconsideration of the FCC's decision,
which remains pending. In November 2002, we notified the BTA owner of the
termination of the agreement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in marketable securities
(which consist of certificates of deposit). At September 30, 2002, our
marketable securities were recorded at a fair value of approximately $23,000,
with an overall weighted average return of approximately 2% and an overall
weighted average life of less than one year. The marketable securities held by
us have exposure to price risk, which is estimated as the potential loss in fair
value due to a hypothetical change of 20 basis points (10% of our overall
average return on marketable securities) in quoted market prices. This
hypothetical change would have an immaterial effect on the recorded value of the
marketable securities.

We are not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of our
long-term debt is at a fixed rate as of September 30, 2002. The fair value of
our long-term debt at September 30, 2002, is estimated to be $9.4 million based
on the overall rate of the long-term debt of 9.5% and an overall maturity of
four years compared to terms and rates currently available in long-term
financing markets. To date we have not entered into any derivative financial
instruments to manage interest rate risk and currently are not evaluating the
future use of any such financial instruments.

We do not currently have any exposure to foreign currency transaction
gains or losses. All other business transactions are in U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of our principal
executive officer/principal financial officer and other senior management, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our principal executive officer/principal
financial officer concluded that our disclosure controls and procedures are
effective in ensuring that material information is timely communicated to
appropriate management personnel, including the principal executive
officer/principal financial officer, to enable such personnel to evaluate
information and determine the information required to be included in our
periodic SEC reports. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in certain legal proceedings as described in note (6)
of the notes to condensed consolidated financial statements included in Part I,
Item 1 of this report, which is incorporated herein by reference, in Item 3
"Legal Proceedings" in our Annual Report on Form 10-K for 2001 and in Part II,
Item 1, "Legal Proceedings," in our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002, and June 30, 2002.

Nucentrix is a party to several purported class action lawsuits
alleging that we overcharged our customers for administrative late fees. These
lawsuits were filed by the same plaintiff's attorney in various state and
federal courts in

19

Texas. Management believes these actions to be without merit and intends to
vigorously defend them. Developments in these and other lawsuits during the
third quarter 2002 (and, with respect to the Garcia case, during the second
quarter of 2002) are discussed below.

o In September 2002, the U.S. District Court for the District of Delaware
affirmed the U.S. Bankruptcy Court's dismissal of the plaintiffs'
claims that we had undervalued our enterprise value in the chapter 11
proceeding of our predecessor, Heartland Wireless Communications, Inc.,
in Hunt Capital Group, L.L.C., et al., v. Carroll D. McHenry, et al.,
Case No. OJ-2000-534. Plaintiffs did not appeal the District Court's
decision.

o In June 2002, the U.S. Circuit Court of Appeals for the Fifth Circuit
affirmed the U.S. District Court's dismissal of the plaintiff's claims
that the collection of late fees violated the federal Racketeering
Influenced and Corrupt Organizations Act, or RICO, in Nolen, et al. v.
Nucentrix Broadband Networks, Inc., et al. (L-00CV134). In July 2002,
the plaintiff filed an application for appeal to the U.S. Supreme
Court.

o In June 2002, the Court of Appeals for the Fourth District of Texas in
Garcia v. Heartland Wireless Communications, Inc. (01-04-10449CV),
dismissed the plaintiff's appeal of the state court's Order granting
the Company's Motion to Compel Arbitration and dismissal of this
lawsuit without prejudice.

While it is not feasible to predict or determine the final outcome of
the remaining proceedings or to estimate the amounts or potential range of loss
with respect to such matters, and while management does not expect such an
adverse outcome, management believes that an adverse outcome in one or more of
these proceedings could have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

We also are a party, from time to time, to routine litigation incident
to our business. We do not believe that any other pending litigation matter will
have a material adverse effect on our financial condition, results of operations
or cash flows.

ITEM 5. OTHER INFORMATION

MMDS/ITFS RULES PROPOSAL

In October 2002, a coalition of MMDS and ITFS operators and licensees
submitted a proposal to the FCC to replace the existing regulations for MMDS and
ITFS spectrum with new regulations that would accommodate deployment of next
generation fixed, portable and mobile broadband services. Among other things,
the proposal requests the FCC to:

o Modify the MMDS/ITFS rules to allow deployment of cellular systems that
can operate on fixed, portable and mobile bases.

o Establish a new, nationwide bandplan for the 2.5 GHz band that
separates high-power operations from two-way cellular operations and
eliminates the need for consent from adjacent channel licensees in most
instances.

o Replace the existing system of multiple, interleaved 6-MHz channels in
MMDS/ITFS with substantially contiguous spectrum blocks in a lower,
middle and upper portion of the 2.5 GHz band.

o Replace the site-by-site licensing system for MMDS/ITFS cellular
systems with rules modeled on more flexible wireless regulations,
allowing licensees to construct and operate facilities within defined
geographic service areas.

o Establish a market-by-market mechanism for transitioning from the old
bandplan to the new one.

20

o Eliminate certain outdated regulations and conform the MMDS/ITFS rules
to current FCC standards for geographically-licensed flexible use
services.

The foundation of the coalition's proposal is the FCC's order in
September 2001, which ruled that MMDS/ITFS licensees would not be relocated from
the 2.5 GHz band to other frequency bands, and added a mobile allocation to the
band, making it available for advanced mobile services, including 3G and future
generations of mobile wireless services. In October 2002, the FCC issued a
public notice seeking comment on the proposal. A notice of proposed rulemaking
and final report and order will be required from the FCC in order for any new
rules and regulations to be adopted.

SPECTRUM ALLOCATION PROCEEDINGS FOR ADVANCED WIRELESS SERVICES

The 2.1 GHz band remains under consideration for relocation for 3G
services. We currently use spectrum at 2150-2160 MHz for upstream transmissions
in our existing wireless networks. In November 2002, the FCC issued a Second
Report and Order (the "Order") that allocated one 45-MHz frequency band at each
of 1710-1755 MHz and 2110-2155 MHz for fixed and mobile advanced wireless
services, including 3G services. Accordingly, we expect that our licenses and
operations in the 2.1 GHz band will be relocated. The Order provides that the
FCC will consider relocation spectrum and propose relocation procedures for MDS
operations in the 2.1 GHz band in a future proceeding.

In July 2002, prior to the issuance of the Order, the Company and the
other major holders of MDS spectrum in the United States (BellSouth Corporation,
Sprint Corporation and WorldCom, Inc.), along with the Wireless Communications
Association International, filed a proposal for a compromise solution with the
FCC. The proposal provides that the holders of MDS spectrum at 2.1 GHz would
agree to relocate to spectrum at 1910-1916 MHz and 1990-1996 MHz, with the costs
of relocation to be borne by the winners of the 1.7/2.1 GHz band auction. Among
other parties, Nextel Communications, Inc. ("Nextel") has opposed this proposal,
and has requested that the FCC provide Nextel with replacement spectrum at 1.9
GHz in connection with the possible realignment of public safety operations in
the 800 MHz band. We are not able to predict whether the FCC will accept our
proposal, or determine at this time the impact that relocation to another band
would have on our operations. Relocation of our operations to another frequency
band could require new or additional equipment, raise operating costs, delay the
provision of service, or render service uneconomic in certain areas.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (the "March
1999 Form 10-Q")).

3.2 Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the March 1999 Form 10-Q).

99.1* Certification pursuant to 18 U.S.C. Section 1350 (Chief Executive
Officer and Acting Chief Financial Officer).

- --------------------------------
* Filed herewith

(b) REPORTS ON FORM 8-K

None.
.

21

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 13, 2002 NUCENTRIX BROADBAND NETWORKS, INC.

By: /s/ Carroll D. McHenry
------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer, Acting
Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)

CERTIFICATIONS

I, Carroll D. McHenry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nucentrix
Broadband Networks, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;

4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Securities Exchange Act Rules 13a-14 and
15d-14) for the registrant and I 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 me
by others within those entities, particularly during the
period in which this quarterly 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 quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;

5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

22

(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. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ Carroll D. McHenry
------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer,
Acting Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)

23

Index to Exhibits

- --------------------------------
*Filed herewith