NUCENTRIX BROADBAND NETWORKS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[ ] 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. 0-23694
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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, SUITE 2000 75007
CARROLLTON, TEXAS (Zip Code)
(Address of principal executive offices)

(972)-662-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE

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

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

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

The aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates on June 30, 2002, was $7,616,800, based on the
closing price of the registrant's common stock reported on The Nasdaq Stock
Market on the last trading day prior to such date of $2.30 per share.

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

Number of shares of common stock outstanding as of March 14,
2003 10,404,443

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed pursuant
to Regulation 14A for its annual meeting of stockholders to be held May 13,
2003, have been incorporated into Part III of this report.
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NUCENTRIX BROADBAND NETWORKS, INC.

2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

STOCKHOLDER PROPOSALS FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13,
2003

The annual meeting of stockholders of Nucentrix for 2003 is scheduled for
May 13, 2003. This date has changed by more than 30 days from the June 28 date
of Nucentrix's 2002 annual meeting of stockholders. Therefore, in accordance
with the Securities Exchange Act of 1934 (the "Exchange Act"), the dates
originally disclosed in Nucentrix's proxy statement for the 2002 annual meeting
by which stockholder proposals for the 2003 annual meeting must be delivered to
Nucentrix for purposes of Rule 14a-8 and Rule 14a-4(c) of the Exchange Act have
been changed to April 2, 2003. Additional information regarding this matter is
included in Item 4 of this report.

1

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:

- our ability to obtain financing necessary to implement our business
strategy,

- the capabilities of second generation 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") radio spectrum,

- competitive technologies, products and services,

- 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 rulemakings to address relocation of licenses in the
2150 -- 2162 MHz band (or "2.1 GHz" band),

- business and economic conditions in our existing markets,

- with respect to pending transactions, satisfying our due diligence
efforts and obtaining required third party consents, including consent of
the Federal Communications Commission ("FCC"), and

- 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 this report.

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.

2

PART I

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

ITEM 1. BUSINESS

OVERVIEW

We provide broadband wireless Internet and wireless subscription television
services using radio spectrum licensed by the 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 8.4 million total households. On average, we own or lease
approximately 130 MHz of spectrum per market. We often refer to our frequencies
collectively in this report as "MMDS."

CONVERSION OF WIRELESS CABLE BUSINESS

Historically, we have used our spectrum to provide wireless subscription
television services, commonly referred to as "wireless cable." However, as part
of our long-term plan to shift the use of our spectrum from wireless cable to
broadband Internet and other advanced wireless services, we are in the process
of converting substantially all of our wireless cable subscribers to programming
provided by DIRECTV, Inc. ("DIRECTV"), Pegasus Satellite Television, Inc.
("Pegasus") and an affiliate of Time Warner Cable ("Time Warner Cable").

In exchange for each wireless cable subscriber converted, we 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 the conversion of our wireless cable subscribers, revenues and cash
generated from our wireless cable business will decline substantially in 2003 as
our wireless cable subscribers convert or otherwise disconnect their service.
Except for a nominal residual royalty payment and recognition of deferred
revenues related to cash received at the time of conversion, we do not expect
our existing wireless cable subscriber base to generate material revenues or
cash flows for the Company after 2003. Although we intend to continue to reduce
expenditures associated with our wireless cable business, the 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 February 28, 2003, we had converted a total of approximately 19,800
wireless cable customers to programming provided by DIRECTV, Pegasus and Time
Warner Cable. Since August 2002, as part of our conversion plan we have
terminated wireless cable service in 14 markets, and consolidated operations in
14 additional markets. We continue to provide wireless cable services in a total
of 43 markets. We expect to close and consolidate operations in additional
wireless cable markets through 2003 as we implement the conversion program and
clear our spectrum for advanced broadband wireless services.

In addition to the conversion of our wireless cable subscribers discussed
above, we have marketed and sold DIRECTV digital broadcast satellite programming
as a commissioned sales agent for DIRECTV since 1998. Under an agreement with
DIRECTV entered into in February 2001, we receive up front and residual
commissions for DIRECTV subscriptions that we sell. We also receive certain
equipment subsidies from DIRECTV-approved equipment providers. If we do not meet
certain subscriber benchmarks during any calendar year of our agreement with
DIRECTV, residual commissions will be reduced for future years. As part of the
downsizing of our wireless cable sales, marketing and technical resources, we
expect the residual commissions to be reduced, and we do not expect to generate
material revenues or cash flows from this DIRECTV resale business beyond 2003.

At February 28, 2003, we had approximately 13,600 wireless cable customers,
including approximately 13,200 customers who subscribed only to programming
service provided over our MMDS spectrum, and 400 "combo" subscribers who
subscribed to both our MMDS programming service and to DIRECTV programming
service sold by us. In addition, at February 28, 2003, there were approximately
18,000 customers

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who received only DIRECTV programming sold by us. We already have received up
front commissions for the "DIRECTV only" and "combo" subscribers; therefore, we
are not eligible for additional conversion payments under our agreements with
DIRECTV and Pegasus for these subscribers. Our business strategy contemplates a
decline in wireless cable subscribers, DIRECTV subscribers, revenues and cash
flows in 2003 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.

BUSINESS STRATEGY

Our long-term business strategy is to provide fixed, portable and,
ultimately, mobile broadband wireless Internet access and other information
services using our high-capacity MMDS radio spectrum in medium and small
markets. We often refer to these services throughout this report as "broadband
wireless" services. 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 420 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 130 MHz per market) that we hold, and the lack of affordable
broadband alternatives in many of our markets. We currently are focused on
validating the most efficient technical platform from which to deliver our
wireless services. Commercial deployment of second generation ("2G") MMDS
technology has increased substantially over the last six months. MMDS equipment
providers have announced deployments of 2G systems in both the U.S. and
internationally. We expect 2G technology to allow us to deliver broadband
wireless service that (1) does not require a direct line-of-sight from our base
stations to many customers' premises, (2) is suited for portable and nomadic
devices such as lap-top computers and personal digital assistants, or PDAs, and
(3) allows customers to "plug and play," or install and upgrade their customer
premises equipment themselves.

During the first half of this year, we expect to complete our evaluation of
2G technical platforms, and will seek to raise $15 million -- $20 million in new
capital. We expect to use this capital for maintenance of existing strategic
spectrum resources, operating expenses and to fund deployment of a 2G MMDS
Internet system in up to two markets. We have retained Houlihan Lokey Howard &
Zukin ("Houlihan Lokey") as our financial advisor in connection with this
potential financing. 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
financing will be available on acceptable terms or in a timely manner, if at
all. See Item 7, "MD&A -- Liquidity and Capital Resources" in this report.

At February 28, 2003, we had approximately $4.7 million of unrestricted
cash and cash equivalents. As set forth in note 1(b) to the consolidated
financial statements, the consolidated financial statements contained in this
report have been prepared on a "going concern" basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. In conjunction with their 2002 year end audit, our independent
accountants have issued an audit opinion with respect to our 2002 consolidated
financial statements which includes an explanatory paragraph describing
conditions that raise substantial doubt about our ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. We expect that cash on
hand of $4.7 million at February 28, 2003, 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.
See Item 7, "MD&A -- Liquidity and Capital Resources" in this report.

4

CORPORATE INFORMATION

Nucentrix was incorporated under the laws of the State of Delaware in
October 1993. Our executive offices are located at 4120 International Parkway,
Suite 2000, Carrollton, Texas 75007, and our telephone number is (972) 662-4000.

MMDS LICENSES AND LEASES

We hold the licenses granted by the FCC for approximately 85% of our MDS
and MMDS channels. We lease from third-party license holders the rights to (1)
the remaining 15% of our MDS and MMDS channels and (2) all of our ITFS channels,
which generally comprise 20 of the 33 channels available in each market. All MDS
and MMDS licenses expire in either 2006 or 2011. Approximately 60% of our
MDS/MMDS licenses are for BTA channels that expire in 2006; the other 40% are
"incumbent" channels that expire in May 2011. ITFS licenses generally have a
term of 10 years. All licenses are subject to renewal by the FCC as described in
"Government Regulation." Although FCC custom and practice establish a
presumption of granting renewals of licenses, the presumption requires that the
licensee substantially comply with its regulatory obligations during the license
period, including construction obligations.

Each of our spectrum leases typically covers four ITFS channels or one to
four MDS/MMDS channels. The initial terms of our leases for ITFS spectrum
typically expire five to ten years after the license grant date, but in any
event may not exceed 15 years. The initial terms of the leases for MDS/MMDS
spectrum typically expire five to 10 years from the lease execution date. The
average remaining terms of most of our current ITFS and MDS/MMDS spectrum
leases, including all renewal terms, is approximately 10 years. Substantially
all of our ITFS spectrum leases contain a right of first refusal, which allows
us the right to match any offer for use of the spectrum for a period of time
after termination of the lease (generally one year). We believe that
substantially all of our MDS/MMDS spectrum leases allow for flexible use of the
spectrum, including for two-way data transmission. Approximately 75% of our ITFS
spectrum leases in our top 40 projected Internet markets conform to the FCC's
rules for flexible, two-way use of this spectrum. We believe that another 10% of
these ITFS channel leases, although entered into before the issuance of the two-
way rules, would be "grandfathered" under the FCC's rules and authorized for
flexible, two-way use of the spectrum.

We also hold authorizations for 90 BTAs in which we have the exclusive
right to apply for and develop available MDS and MMDS frequencies, subject to
our lease of MDS/MMDS channels in 10 BTAs and portions of four other BTAs to CS
Wireless Systems, Inc. ("CS Wireless"), a subsidiary of WorldCom, Inc.
("WorldCom"). Additionally, current FCC regulations generally require these BTAs
to be built out by August 2003. See "Government Regulation -- BTA Auction and
Service Requirements" in this report. As of February 28, 2003, we believe all of
the BTAs that we hold and consider important to our long-term business strategy
would be considered built out under current FCC rules, except for 19 BTAs.
However, we believe we have sufficient MMDS or ITFS spectrum leased in
approximately one-half of these remaining 19 BTAs to launch a 2G Internet
system. The rules proposal submitted to the FCC for the 2.5 GHz band and
discussed below requests the FCC to suspend the BTA build-out requirements while
the proceedings to consider new rules for the 2.5 GHz band are pending.

RULES PROPOSAL FOR 2.5 GHZ BAND

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 third generation, or "3G," wireless systems. However, new
technical and licensing rules are necessary in order to accommodate the
provision of portable and mobile 2G broadband wireless services. In October
2002, a coalition of MMDS and ITFS operators and licensees submitted a proposal
to the FCC to replace the existing regulations for the 2.5 GHz band with new
rules, including a new nationwide bandplan and geographic service areas that
would accommodate deployment of 2G broadband wireless services. Among other
things, the proposal requests the FCC to:

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

5

- 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,

- replace the existing system of multiple, interleaved 6-MHz channels in
MMDS/ITFS with substantially contiguous spectrum blocks in a lower (66
MHz), middle (42 MHz) and upper (66 MHz) portion of the 2.5 GHz band,

- 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,

- establish a market-by-market mechanism for transitioning from the old
bandplan to the new one, and

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

The proposal also requests that the FCC suspend BTA build-out requirements,
as well as individual station construction and maintenance rules, while the
proposed rulemaking is pending. The proposal further requests that current BTA
and individual station construction deadlines (e.g., August 2003 for BTAs, 12
months from the date of grant of the authorization for MMDS stations and 18
months from the date of grant of the authorization for ITFS stations) be
replaced with a uniform "substantial service" requirement at renewal of the
applicable authorization, similar to current rules for Wireless Communications
Service ("WCS") spectrum at 2.3 GHz. Under this proposal, a licensee would be
required to demonstrate that it is providing substantial service to a specified
geographic area in order for the FCC authorization to be renewed. See
"Business -- Government Regulation -- BTA Auction and Service Requirements" and
"WCS Licenses" in this report.

In October 2002, the FCC issued a public notice seeking comment on the
industry rules proposal. In March 2003, the FCC adopted a Notice of Proposed
Rulemaking ("NPRM") on the 2.5 GHz band. Among other things, the NPRM requests
public comment on operational, technical and procedural rule changes for the 2.5
GHz band, including the industry proposal to reconfigure the 2.5 GHz band. The
NPRM also proposes technical rules designed to increase flexibility of licensees
in the 2.5 GHz band, including rules governing fixed, portable and mobile
operations. See "Business -- Risk Factors -- Changes in the regulatory status of
the 2.5 GHz band may delay deployment of 2G broadband systems" in this report.

MARKETS/SPECTRUM HOLDINGS

We estimate that the BTAs and 35-mile protected service areas ("PSAs") in
our markets include approximately 8.4 million households. Estimated household
information is based on 1990 census bureau data and data from a commercially
available 2001 population projection database. The actual number of households
that can receive and/or transmit an adequate signal may vary significantly from
this estimate based on a number of factors, including transmitter height and
power, topography and the proximity of adjacent MMDS systems. In addition,
because of smaller cell radiuses typically associated with 2G MMDS technology,
it may be uneconomic to construct networks to serve all of the households in our
BTAs and PSAs. Therefore, our total addressable market may be significantly less
than 8.4 million households.

During the fourth quarter of 2002, we considered the potential effect of
the proposed new rules for the 2.5 GHz band, which we believe will accommodate
deployment of 2G broadband wireless services using less spectrum than with first
generation technology. We also evaluated the strategic importance of spectrum
leases in certain of our smaller markets and the associated cost of maintaining
these leases. Based on these considerations, we determined not to renew certain
spectrum leases, and otherwise informed spectrum lessors in non-strategic
markets of our intent to discontinue certain leases. As a result, we have
reduced our average spectrum per market from 150 MHz to approximately 130 MHz
per market, which we believe is more than sufficient to launch and maintain 2G
and future broadband Internet systems in our strategic markets.

6

The following table provides information as of February 28, 2003, regarding
the 93 markets in which we operate a wireless cable or broadband wireless
system, own the BTA authorization or hold additional MDS/MMDS/ITFS spectrum
rights. Certain of our spectrum rights are subject to pending applications for
new channel licenses, modifications to existing channel licenses or special
temporary and developmental authorizations, and must be reviewed by the FCC's
engineering and legal staff.

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

+ Operating wireless cable market.

++ Operating broadband wireless market.

(1) Unless otherwise noted, the number of channels available includes channels
(a) that are either licensed to us or leased to us from other license
holders or (b) for which we or our ITFS lessors have filed applications with
the FCC that we expect to be granted in 2003. The number of channels
available includes leased ITFS channels that may not currently be available
for two-way broadband wireless services.

(2) Eight commercial ITFS channels are subject to pending petitions for
reconsideration of the FCC's decision to declare the stations automatically
forfeited, which we believe will be granted.

In addition to MDS, MMDS and ITFS spectrum rights owned by Nucentrix, we
are a party to an agreement with CS Wireless under which CS Wireless agreed to
assign to us 20 MHz of WCS spectrum at 2.3 GHz in 19 markets, primarily in
Texas. We currently lease this spectrum under an exclusive lease agreement with
CS Wireless. Assignment of the WCS spectrum is subject to FCC approval. In June
2002, WorldCom Broadband Solutions, Inc., an affiliate of CS Wireless and
Nucentrix filed an application for FCC consent to the assignment of this
spectrum to Nucentrix. The application remains pending.

NETWORKS/SUPPLIERS

Our broadband wireless business is built around a network comprised of many
elements. At the core of our network is a broadband wireless platform that
controls when, where and how subscribers access our

9

network and how data is transported over the air between subscriber premises and
our services networks (e.g., the Internet for data services, the Public Switched
Telephone Network for voice services). This core wireless access system is the
focus of our 2G technology validation process.

On either side of this core wireless network are specific computer and
communications equipment components that are typically supplied by third party
vendors, and are necessary for a complete "end-to-end" system solution. These
components are generally commercially available, field proven technologies, such
as radio antennas, power amplifiers, point-to-point microwave equipment,
routers, gateways, switching equipment and communication servers from vendors
such as AML Wireless Systems, Inc., Andrew Corporation, Inc., Cisco Systems,
Inc., Hewlett-Packard Company, Juniper Networks, Inc., REMEC, Inc., Sun
Microsystems, Inc. and many others.

Next generation, or "2G," technology platforms, are characterized by:

- multi-cellular architectures using smaller cells to improve both the
coverage and capacity performance of the network,

- small, relatively inexpensive customer premises equipment ("CPE") that
can be located within the residence or place of business, with little or
no significant line-of-sight requirement, and typically installed or
configured by the customer, and

- nomadic and portable broadband services.

There currently are several vendors manufacturing 2G platforms. These
vendors include BeamReach Networks, Inc., IP Wireless, Inc., Navini Networks,
Inc., NextNet Wireless, Inc. and Soma Networks, Inc. Each of these vendors has
made unique engineering choices in the fundamental design of its system to best
position its technology for success. These choices include multiple access
method (e.g., CDMA, OFDM), duplexing method (frequency division duplexing and
time division duplexing) and the use of advanced access techniques such as
adaptive modulation and smart antennas. During the second half of 2002 and first
quarter of 2003, several of these vendors began commercial deployment of 2G
systems, both domestically and internationally. We expect to complete our
evaluation of the commercial viability and business case potential of 2G
platforms in the first half of 2003 and, by the end of the first quarter of
2004, deploy up to two 2G broadband wireless systems to validate the business
model for more wide-scale deployment after 2003.

COMPETITION

HIGH-SPEED INTERNET COMPETITION

The Internet access market is highly competitive. We face competition from
many Internet access and service providers with significantly greater financial
resources, well-established brand names and large, existing customer bases. Our
competition in this industry includes:

Internet Service Providers ("ISPs"). ISPs provide Internet access to
residential and business customers. These companies can:

- provide Internet access over incumbent local exchange carriers' ("ILECs")
networks at high speeds,

- offer digital subscriber line ("DSL")-based access using their own DSL
services, or DSL services offered by ILECs and others, and

- have significant and sometimes nationwide marketing presences and combine
these with strategic or commercial alliances with DSL-based incumbent and
competitive carriers. Significant ISPs include AOL Time Warner, Inc.
("AOL"), Microsoft Corporation and EarthLink, Inc.

Incumbent Local Exchange Carriers. ILECs, such as SBC Communications,
Inc., Verizon Communications, Inc. and Qwest Communications International, Inc.
("Qwest") have existing metropolitan area networks and circuit-switched local
access networks. Incumbent carriers have deployed commercial DSL services in
certain areas and are combining their DSL service with their own Internet access
services. The

10

incumbent carriers generally have an established brand name in their service
areas and possess sufficient capital to deploy DSL services rapidly.

Interexchange Carriers. Many of the interexchange carriers, such as AT&T
Corporation, WorldCom and Sprint, have the capability to support high-speed,
end-to-end networking services. These carriers have deployed large scale
networks, have large numbers of existing business and residential customers and
enjoy strong name recognition. These companies increasingly are bundling their
services to include high-speed local access combined with metropolitan and wide
area networks, and a full range of Internet services and applications. Other
carriers, such as Qwest and Level 3 Communications, Inc., are managing
high-capacity, nationwide Internet protocol, or "IP," networks and partnering
with ISPs to offer a range of services to businesses and consumers.

Cable Modem Service Providers. Cable modem service providers, like the
Time Warner Cable division of AOL, AT&T Broadband Corp., Comcast Corporation and
Cox Communications, Inc., among others, currently offer consumers and businesses
high-speed Internet access over hybrid fiber coaxial cable networks. Where
deployed, these networks provide local access services similar to our services,
and in some cases at higher speeds.

Satellite and Other Fixed Wireless Providers. We will face competition
from satellite-based systems. Hughes Network Systems, a unit of Hughes
Electronics Corporation (through its DirecWay brand), currently offers two-way
broadband satellite service. In addition, many local and regional ISPs use
unlicensed spectrum to offer terrestrial fixed wireless high-speed Internet
access.

Competitive Local Exchange Carriers. We expect competitive local exchange
carriers ("CLECs") to offer DSL-based data services. Traditional CLECs,
including Allegiance Telecom, Inc., McLeodUSA Incorporated and Birch Telecom,
have extensive fiber-based networks in numerous metropolitan areas and are
capable of providing voice and high-speed data services to businesses.

3G Wireless. We also expect more competition from 3G wireless providers, as
commercial mobile radio service providers begin to deploy 3G services in their
spectrum bands. The successful deployment of 3G wireless services could
significantly expand the availability of broadband services, especially to
consumers that currently are unserved by wireline connections.

Many of these competitors are offering, or may soon offer, and services
that will directly compete with some or all of our service offerings. We may not
be able to compete effectively, especially against established industry
competitors with significantly greater financial resources. We believe the
principal competitive factors that we face include:

- transmission speed,

- reliability of service,

- ability to bundle services,

- price performance,

- customer support,

- brand recognition,

- operating experience, and

- capital availability.

For a further discussion of competition in this industry, see
"Business -- Risk Factors -- The Internet access market is highly competitive.
Because many competitors in our markets are well-established and have resources
significantly greater than those available to us, we may not be able to
establish a significant number of Internet access customers in our markets" in
this report.

11

GOVERNMENT REGULATION

General. MDS, MMDS and ITFS services are subject to regulation by the FCC
under the Communications Act of 1934, as amended ("Communications Act"). The
Communications Act authorizes the FCC, among other things, to:

- issue, revoke, modify and renew station licenses,

- approve the assignment and/or transfer of control of such licenses,

- approve the location and technical parameters of MDS, MMDS and ITFS
transmission facilities (headends and base stations),

- regulate the type, configuration and operation of equipment used by MDS,
MMDS and ITFS systems,

- impose certain equal employment opportunity and other periodic reporting
requirements on MDS, MMDS and ITFS operators, and

- review and approve/disapprove certain terms of ITFS spectrum lease
agreements.

MDS, MMDS and ITFS Licenses. In our markets, a total of 32 six-MHz
channels and one four-MHz channel are available in the MDS, MMDS and ITFS
frequency bands. The FCC can license the 13 MDS and MMDS channels directly to
commercial entities for full-time operation without service restrictions. Except
in limited circumstances, the FCC generally can license 20 ITFS channels only to
qualified non-profit educational organizations. When using analog transmissions,
each of the ITFS channels must broadcast programming for educational purposes a
minimum of 20 hours per week. The remaining air time on ITFS channels may be
leased for commercial use, without further programming restrictions except that
the ITFS license holder, at its option, must be entitled to recapture up to an
additional 20 hours of air time per channel per week for educational
programming. When using digital transmissions, an ITFS licensee must reserve 5%
of the capacity of each 6 MHz channel for immediate ITFS use upon request. There
is no additional recapture requirement for an ITFS licensee when using digital
transmissions.

The FCC established MDS/MMDS spectrum in 1974 with the allocation of two
channels (MDS-1 and MDS-2/2A). In 1983, the FCC reallocated a total of eight
ITFS channels to MMDS to satisfy a growing demand for the delivery of video
entertainment programming to subscribers and to provide competition to hardwire
cable television systems. Simultaneous with this reallocation of spectrum, the
FCC amended its rules for the remaining ITFS channels to permit ITFS licensees,
subject to their meeting certain educational programming requirements, to lease
excess capacity to commercial MMDS service providers. ITFS channels originally
had been allocated solely for educational purposes.

In 1985, the FCC established a lottery procedure for awarding MDS and MMDS
station licenses. In 1990, the FCC shifted to a one-day cut-off period
application process, under which all mutually exclusive MDS and MMDS licenses
were issued on essentially a first-come, first-served basis. In 1995, the FCC
adopted rules under which MDS and MMDS applications for new stations would be
subject to a competitive bidding process, or spectrum auction. The FCC generally
considers applications to be mutually exclusive if the grant of one application
would effectively preclude the grant of one or more of the other applications
due to interference that cannot be avoided through cooperation of the parties.
Using the competitive bidding process, in 1996 the FCC auctioned off one
authorization for each of the 493 BTAs. Each BTA authorization holder is
permitted to apply for, and following FCC grant, to construct facilities to
provide services over any unlicensed MDS or MMDS channel within the BTA, and has
preferred rights to the available ITFS frequencies within the BTA, subject to
the superior rights of any qualified ITFS applicant. The MDS and MMDS licenses
issued or applied for before the BTA auction are commonly referred to as
"incumbent" MDS/MMDS licenses, while the MDS and MMDS station authorizations
issued pursuant to BTA ownership are commonly referred to as "BTA" MDS/MMDS
licenses.

The application and licensing process for ITFS stations is different from
those for MDS and MMDS stations. In 1995, the FCC adopted a national filing
window system. Under this system the FCC accepts applications for licenses for
new ITFS stations or major changes to existing ITFS licenses only if they are
filed

12

within specific windows, typically five days, set by the FCC. Applications filed
in a particular window are subject only to competing proposals filed in that
same window. Where two or more applications are filed within the same window and
are predicted to cause each other harmful electrical interference, licenses are
awarded by the FCC pursuant to a comparative selection process.

Generally, in the case of MDS, MMDS and ITFS stations, the FCC issues the
station licensee a conditional license, allowing construction of the station to
commence. The station may be constructed and operated only in accordance with
the parameters set forth in the license. Transmission generally must begin
within one year of grant of the conditional license in the case of incumbent
MDS/MMDS licenses, 18 months in the case of ITFS licenses and by August 2003 for
BTA MDS/MMDS licenses. As discussed above under "Rules Proposal for 2.5 GHz
Band," the industry proposal for new rules in the 2.5 GHz band requests that
that the FCC suspend the build-out requirements for BTAs and individual stations
while the proposed rulemaking is pending, and replace existing construction
deadlines with a "substantial service" requirement at renewal. If this or a
similar proposal is not adopted and construction deadlines for a license are not
met, then (1) the FCC may revoke the license or (2) in the case of the BTA
licenses, reduce the license service area if less than two-thirds of the
population of the BTA service area is capable of being reached by a station
signal by the expiration of the seven-year BTA build-out period. Although FCC
rules permit parties to request extensions of channel construction deadlines,
the FCC is not required to grant extensions. We believe that we have satisfied
all construction deadlines relating to our licensed stations except for those
licenses for which the deadline has not yet passed or for which we have received
an extension.

MDS, MMDS and ITFS licenses generally have terms of 10 years. All BTA
MDS/MMDS licenses expire on March 28, 2006. All incumbent MDS/MMDS licenses
expire on May 1, 2011. Licenses may be renewed through applications filed with
the FCC within a certain period before expiration of the license term, and
petitions to deny applications for renewal may be filed by other parties during
certain periods following the filing of such applications. The FCC may revoke or
cancel licenses for violations of the Communications Act or the FCC's rules and
policies, whether or not related to the license under review. Alien ownership
exceeding prescribed levels and conviction of certain criminal offenses may also
render a licensee or applicant unqualified to hold a license. Although FCC
custom and practice establish a presumption granting renewals of licenses, the
presumption requires that the licensee substantially comply with its regulatory
obligations during the license period.

FCC rules generally prohibit the sale for profit of an MDS or MMDS
conditional license or of a controlling interest in the conditional license
holder before construction of the station or, in certain instances, prior to the
completion of one year of operation. However, access to channels may be obtained
during these prohibited periods through the leasing of an MDS or MMDS license
holder's channel capacity. The granting of options to purchase a controlling
interest in a licensee or an option to purchase a license is also permitted
during these prohibited periods. During the lifetime of any such lease or option
agreement, the licensee must remain in control of its FCC license to avoid
violating FCC transfer-of-control rules. Our lease agreements with license
holders typically require the license holders, at our expense, to use their best
efforts, in cooperation with us, to make various required filings with the FCC
in connection with the maintenance and renewal of licenses. We believe this
reduces the likelihood that the FCC will revoke, cancel or fail to renew a
license.

BTA Auction and Service Requirements. In 1996, the FCC concluded its first
auction of available commercial MMDS spectrum in the 493 BTAs. Under the FCC's
rules, certain qualified small business auction winners, called "designated
entities," were permitted to pay off winning bids in installment payments. The
winner of a BTA has the exclusive right to apply for and develop the available
MDS and MMDS frequencies in the BTA, subject to certain specified interference
criteria that protect incumbent MDS and MMDS stations. Incumbent licensees also
must protect the BTA licensees from system interference caused by modifications
to incumbent stations, including power increases or base station relocations.

BTA auction winners currently have a "build-out" period through August
2003. During the build-out period, a BTA holder can initiate or expand service
within its BTA without competition from other MDS/ MMDS spectrum applicants
except in those areas and on those channels for which there is an incumbent

13

MDS/MMDS licensee. After the build-out period, a BTA holder can retain its
authorization for an entire BTA if its signal is capable of covering at least
two-thirds of the population within its BTA service area, excluding those who
are located within the protected service areas of incumbent MDS/MMDS stations
licensed to others. As discussed above, the industry proposal for new rules in
the 2.5 GHz band requests that the FCC suspend the build-out requirements for
BTAs while the proposed rulemaking is pending, and replace current BTA build-out
requirements with a "substantial service" requirement at renewal. If this or a
similar proposal is not adopted, and the BTA holder fails to meet the coverage
requirement after the build-out period, then the BTA license for the portion of
the BTA that is not capable of being served will be subject to forfeiture. The
FCC's rules allow BTAs to be partitioned and BTA licensees are permitted to
contract with other entities to allow them to file applications with the FCC for
available spectrum within the partitioned area. We expect the FCC to renew BTA
licenses after the expiration of their 10-year term if the authorization holder
satisfies the coverage requirement and is in compliance with the Communications
Act and the FCC's rules.

BTAs. We hold authorizations for 90 BTAs acquired in the 1996
auction.Failure to remit installment payments in a timely manner or to meet the
build-out deadlines could result in the forfeiture of some or all of the BTA
authorizations that we hold. We believe that we have satisfied the applicable
financial and coverage requirements, or that the FCC will suspend, extend or
otherwise modify the build-out requirement, to allow us to retain substantially
all our BTA authorizations in which we intend to operate. If the FCC does not
suspend, extend or otherwise modify the August 2003 build-out requirement, we
believe all of the BTAs that we hold and consider strategic to our long-term
business strategy would be considered built out under current FCC rules, except
for 19 BTAs. However, we believe we have sufficient MMDS or ITFS spectrum leased
in approximately one-half of these remaining 19 BTAs to launch a 2G Internet
system.

In October 1997, we entered into a lease and purchase option agreement with
CS Wireless for BTA channels in 10 BTAs and portions of four additional BTAs
already licensed to us. Under this agreement, CS Wireless has agreed to
reimburse us for all amounts paid to the FCC for the BTAs leased to CS Wireless.
The agreement also provides CS Wireless the option to purchase the leased BTA
channels. In July 2002, CS Wireless, along with its indirect parent WorldCom,
Inc., filed for protection under Chapter 11 of the U.S. Bankruptcy Code. CS
Wireless has reimbursed the Company for substantially all post-petition amounts
owed to us. Approximately $87,000 in prepetition amounts related to BTA
reimbursements remain unpaid. If CS Wireless assumes the BTA Agreement in its
Chapter 11 proceeding, it will be required to pay all prepetition amounts owed
to the Company.

WCS Licenses. In February 1997, the FCC reallocated and assigned the use
of the frequencies at 2305-2320 MHz and 2345-2360 MHz to WCS. WCS licensees are
permitted to provide fixed, mobile and radio location services throughout their
2.3 GHz band. In addition, satellite digital audio radio service ("SDARS") may
be provided on all frequencies in the band except for those at 2305-2310 MHz.
WCS licenses, which generally are awarded by the FCC through competitive
bidding, have terms of 10 years. Although the licenses carry with them a
"renewal expectancy," each WCS licensee is subject to certain "substantial
service" requirements that must be met during the initial license term.
"Substantial service" is defined by the FCC as "service which is sound,
favorable, and substantially above the level of mediocre service which just
might minimally warrant renewal." Failure by a licensee to meet this requirement
may result in a forfeiture of its license. We lease 20 MHz of WCS spectrum in 19
markets from CS Wireless, which spectrum is subject to an application for
assignment to Nucentrix that is pending at the FCC. Some SDARS providers have
proposed to deploy an extensive network of land-based repeaters that, if
authorized by the FCC, could create interference that substantially impairs the
use of WCS spectrum for two-way Internet, data and other services.

Transmission. The FCC also regulates transmitter locations and signal
strengths. The operation of an MDS, MMDS and ITFS system typically requires the
co-location of a commercially viable amount of spectrum operating under common
technical characteristics. To co-locate spectrum, an applicant must demonstrate
that its proposed signal does not violate interference standards in the
FCC-protected area of previously-authorized MDS, MMDS and ITFS stations. An MDS
and MMDS license holder generally is protected from interference from another
MDS or MMDS operator within a 35-mile radius of the base station called a
"protected service area." An ITFS license holder generally is entitled to
protection from electrical

14

interference to all of its receive sites. In addition, an ITFS station is
entitled to a 35-mile protected service area (1) during the use of the station's
excess channel capacity by an MMDS operator if it has requested and received a
protected service area from the FCC or (2) from all MDS, MMDS and ITFS station
licensees that implement two-way digital operations.

Two-Way Authorization. In September 1998, the FCC amended its rules to
allow for the use of MMDS spectrum for two-way digital services, including
high-speed Internet, data, voice and video services. As amended, these rules are
referred to as the "two-way rules." The two-way rules are intended to provide
licensees and operators in the MDS, MMDS and ITFS spectrum with the technical
and operational flexibility to add various digital two-way services to their
current offerings. The two-way rules permit the use of MDS, MMDS and ITFS
frequencies for both downstream and response transmissions. Two-way service is
provided through the use of "response" stations, such as at the customer's
premises, and response station "hubs," or base stations, which serve as
collection points for response transmissions. The two-way rules also permit a
cellular system design using a "signal booster station," or additional
transmission site not located at the base station, which is used either to
originate or relay signals to customers and also serve as a response station hub
for those customers.

Under the two-way rules, all MDS, MMDS and ITFS spectrum generally can be
used for upstream or downstream communications. All spectrum will continue to be
subject to the FCC's interference protection requirements and existing or future
spectrum capacity lease agreements. In addition, MDS, MMDS and ITFS operators
that operate digital two-way communications systems are permitted, subject to
certain limitations, to "shift" required ITFS educational programming to any
MDS, MMDS or ITFS channel within the same operating system, "load" ITFS
programming onto less than the total number of channels licensed to a particular
ITFS licensee or "swap" their spectrum for other spectrum in the same market.
However, channel swaps represent changes in licensees and require the filing of
applications with the FCC and receipt of FCC approval.

Flexible Use Authorization. In September 2001, after a period of study of
almost one year to identify additional spectrum for 3G wireless services, the
FCC decided not to relocate incumbent license holders and operators in the 2.5
GHz band, such as the Company, to other frequency bands. In connection with this
decision, the FCC also added a flexible use allocation to the 2.5 GHz band,
making this band available for advanced mobile services, including 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 the 2.5
GHz band with new rules, including a new nationwide bandplan and geographic
service areas that would accommodate deployment of 2G broadband wireless
services. The same month, the FCC issued a public notice seeking comment on the
proposal and, in March 2003, the FCC adopted a NPRM proposing technical rules
for fixed, portable and mobile operations in the 2.5 GHz band. See
"Business -- Rules Proposal for 2.5 GHz Band" in this report.

Regulation of Internet Service Providers. Congress has passed a number of
laws that concern the Internet, including the Digital Millennium Copyright Act,
the Children's Online Privacy Protection Act, the Children's Online Protection
Act and the Protection of Children from Sexual Predators Act of 1998. A number
of states and foreign countries have enacted or proposed similar legislation.
Generally, these laws provide liability limitations for Internet service
providers that do not knowingly engage in unlawful activity. We do not
anticipate that compliance with these laws will have an adverse impact on us.
However, we may be required to implement operating guidelines to comply with the
laws and could be subject to liability if we fail to implement appropriate
guidelines or otherwise violate any of these new laws.

Aside from the use of spectrum, the FCC has held that Internet access
services are "information services" not subject to FCC regulation. Nevertheless,
the FCC has held that Internet dial-up traffic is interstate traffic subject to
FCC jurisdiction. The U.S. Court of Appeals for the D.C. Circuit has remanded
that decision for the second time, and the FCC has not yet addressed the most
recent remand. There can, therefore, be no certainty that the providing of
Internet access services will continue to be free from FCC regulation.

15

Regulation of Telecommunications Services. If we begin providing wireless
telecommunications services or voice over IP services, we may be subject to a
variety of FCC and state regulation of our interstate and intrastate
telecommunications services, respectively. Although the FCC currently does not
consider voice over IP services to be telecommunications services, and thus does
not regulate them as such, this position could change. Moreover, the regulatory
status of voice over IP is unsettled at the state level, and a number of states
have indicated that they will assert or attempt to assert regulatory
jurisdiction over at least some voice over IP services. If we begin providing
voice over IP, we may be subject to regulation in some states but not in others.

The Cable Act. On October 5, 1992, Congress passed the Cable Television
Consumer Protection and Competition Act of 1992 (the "Cable Act"). Pursuant to
the Cable Act, effective October 6, 1993, commercial broadcasters may require
cable operators and other multichannel video service providers to obtain their
consent before retransmitting their signals. The FCC has exempted wireless cable
providers from the retransmission consent rules if the receive-site antenna is
either owned by the subscriber or within the subscriber's control and available
for purchase by the subscriber upon the termination of service. In all other
cases, wireless cable providers must obtain consent to retransmit broadcast
signals. We believe that we have obtained or requested substantially all
consents required to retransmit local broadcast signals in our wireless cable
markets. We cannot assure you that existing consents will be maintained or
renewed or that we will be able to obtain any additional necessary consents on
terms satisfactory to us, if at all. Unlike hardwire cable systems, wireless
cable systems are not required under the Cable Act and the FCC's "must carry"
rules to retransmit a specified number of local commercial and non-commercial
television or qualified low power television signals.

Copyright. Under the Federal copyright laws, permission from the copyright
holder generally must be secured before certain video programs may be
retransmitted. Under Section 111 of the Copyright Act of 1976, certain "cable
systems," including wireless cable providers, are entitled to engage in the
secondary transmission of broadcast programming without the prior permission of
the holders of copyrights in the programming if a compulsory copyright license
is secured. Such a license may be obtained upon the filing of certain reports
and the payment of certain fees set by copyright arbitration royalty panels. We
believe we have obtained all compulsory copyright licenses required for each of
our wireless cable markets.

Other Regulations. As a lessee of antenna structure space, we indirectly
(through contractual commitments) may be subject to Federal Aviation
Administration regulation and FCC registration for the construction, maintenance
and lighting of transmission towers and by certain local zoning regulations
affecting construction of towers and other facilities. Federal environmental
regulations, state and local environmental land use regulations and zoning
regulations also may apply.

SPECTRUM ALLOCATION PROCEEDINGS FOR ADVANCED WIRELESS SERVICES

We currently use spectrum at 2150-2160 MHz for upstream transmissions in
our two existing broadband wireless systems. 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. Under the Order, our licenses and
operations in the 2.1 GHz band would be relocated. In February 2003, the FCC
released a Notice of Proposed Rulemaking (the "Subsequent NPRM") to consider
possible relocation spectrum and procedures for MDS operations in the 2.1 GHz
band. However, in February 2003, the Wireless Communications Association
International, Inc. ("WCA"), the principal trade association for the MMDS
industry, filed a Petition for Reconsideration of the Order ("WCA Petition").
The WCA Petition seeks reconsideration of the Order because, among other
reasons, the Order purports to relocate 2.1 GHz licenses, many of which were
purchased under the FCC's BTA auction in 1996, without identifying proposed
comparable replacement spectrum or relocation reimbursement procedures.

In July 2002, prior to the issuance of the Order and the Subsequent NPRM,
the Company and the other major holders of MDS spectrum in the United States
(BellSouth Corporation, Sprint Corporation and WorldCom), along with WCA, 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-

16

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 reconsider the Order or
accept our proposal, nor can we determine at this time the impact that
relocation to another band would have on our operations. Relocation of our 2.1
GHz licenses and 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.

TRADEMARKS

We own common law trademark rights in and have United States trademark
registrations on the trademarks NUCENTRIX BROADBAND NETWORKS, NUCENTRIX,
CYBERWAVE, HEARTLAND CABLE TELEVISION and in the stylized mark HEARTLAND. We
consider these intellectual property rights important to our business.

EMPLOYEES

As of February 28, 2003, we had approximately 100 employees. None of our
employees is subject to a collective bargaining agreement. We have experienced
no work stoppages and believe that we generally have good relations with our
employees. We also use the services of independent contractors in our wireless
cable systems.

REORGANIZATION

On December 4, 1998, we filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") and disclosure statement under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware
(In re Heartland Wireless Communications, Inc., Case No. 98-2692 (JJF)). We
filed the Plan with the prepetition agreement from the holders of more than 70%
in principal amount of our $115 million 13% senior notes and $125 million 14%
senior notes to support the Plan. On March 15, 1999, the Bankruptcy Court
confirmed our Plan, which became effective on April 1, 1999 (the "Effective
Date"). As of the Effective Date we changed our name from Heartland Wireless
Communications, Inc. ("Heartland"), to Nucentrix Broadband Networks, Inc. We
also adopted Fresh Start Reporting as of the Effective Date. See
"MD&A -- Effects of Reorganization" in this report.

As of the Effective Date:

- all previously issued and outstanding common stock, options granted under
our stock option plans, warrants and any other equity interests in
Nucentrix were canceled,

- holders of our senior notes received 9,700,000 shares of newly issued
common stock, and

- holders of $40.2 million of convertible subordinated notes received
300,000 shares of newly issued common stock and warrants to purchase
825,000 shares of common stock at an exercise price of $27.63 per share,
subject to downward adjustment in the event of a sale or merger of the
Company.

Under the Plan we also were obligated to issue warrants to acquire an
additional 275,000 shares of common stock at an exercise price of $27.63 per
share, subject to downward adjustment in the event of a sale or merger of the
Company. These warrants were allocated pro rata to holders of Heartland common
stock, and substantially all of these warrants were issued in 2002.

TRANSACTIONS

In February 2003, we sold seven MDS/MMDS channels in Seminole, Texas to a
rural telephone cooperative for approximately $100,000. We estimate that the
channels include approximately 9,000 households in their coverage area.

17

In February 2003, we partitioned and sold our BTA rights in two counties in
Eastern New Mexico from our Amarillo, Texas BTA to a rural telephone cooperative
for $88,000. We estimate that the partitioned portion of the BTA includes
approximately 8,000 households in its coverage area, and that up to 13 MDS/MMDS
channels should be available for licensing.

In September 2002, in connection with a market interference agreement
entered into in 1996, we entered into an agreement to assign our Brownwood and
San Angelo, Texas BTAs and 21 BTA channels (12 in Brownwood and nine in San
Angelo) to a rural telephone cooperative for $210,000, net of BTA debt. We
estimate that the unencumbered portion of the BTAs includes approximately 32,000
households in its coverage area. This transaction is subject to FCC approval.

SEGMENT INFORMATION

Based on the criteria outlined in SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," Nucentrix is comprised of two
reportable segments: (1) wireless cable and (2) broadband wireless. See note
1(s) of the notes to consolidated financial statements included in Item 8 of
this report. Although revenues from our broadband wireless segment were
immaterial in 2002, 2001 and 2000, financial data regarding each of our segments
is contained in note 16 of the notes to consolidated financial statements
included in Item 8 hereof, which is incorporated herein by reference.

RISK FACTORS

Our business operations and the implementation of our long-term business
strategy are subject to significant risks inherent in our business, including,
without limitation, the risks and uncertainties described below. The occurrence
of any one or more of the risks or uncertainties described below could have a
material adverse effect on our financial condition, results of operations and
cash flows. Additionally, further discussion of these risk factors and other
risks may be found in Item 7, "MD&A" and elsewhere in this Item 1.

WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NECESSARY TO IMPLEMENT
OUR LONG-TERM BUSINESS STRATEGY ON SATISFACTORY TERMS AND CONDITIONS.

To implement our long-term business strategy, we will need additional
capital for capital expenditures, operating expenses, system development costs
and acquisition costs, including debt that may be assumed in future
acquisitions. We plan to finance these activities by debt or equity financings,
secured or unsecured credit facilities, vendor financing, sales of assets, joint
ventures or other arrangements. We cannot assure you that we will be able to
obtain the financing we will need to fund the implementation of our long-term
business strategy on satisfactory terms and conditions, if at all. If we incur
additional debt, we may have to dedicate a substantial portion of our cash flow
from operations to the payment of principal and interest, which may cause us to
be more vulnerable to competitive pressures and economic downturns. Our failure
to obtain additional financing in a timely manner and on acceptable terms would
adversely affect our ability to continue as a going concern and may require us
to delay, reduce or eliminate the launch of new high-speed Internet access
systems or sell some or a substantial portion of our assets.

WE ARE PURSUING A NEW BUSINESS THAT WE HAVE NOT PREVIOUSLY OPERATED ON A LARGE
SCALE. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR LONG-TERM BUSINESS
STRATEGY OR REVERSE OUR HISTORY OF LOSSES.

We historically have used our radio spectrum to provide wireless cable
services and incurred substantial operating and net losses from these
operations. The principal focus of our long-term business strategy currently is
to transition the use of our MDS, MMDS and ITFS spectrum to fixed, portable and
mobile broadband wireless services, such as high-speed Internet access. We have
launched commercial high-speed Internet access service in only two of our
markets, and the revenues that we have received in these two initial markets are
immaterial to date (approximately 1.4% of consolidated revenues in 2002). When
we determine to deploy additional markets, we intend to increase our capital
expenditures to develop and launch broadband wireless services in additional
markets, and we expect operating expenses from our broadband wireless operations
to exceed revenues from those operations until our customer base increases. As a
result, we anticipate that our

18

net and operating losses will continue until we successfully implement our
business strategy. We cannot assure you that we can develop, market and expand
our broadband wireless services in the two initial markets or any additional
markets to the extent necessary to successfully compete in the broadband
services industry.

WE EXPECT THAT OPEN TECHNOLOGY STANDARDS AMONG MMDS EQUIPMENT MANUFACTURERS
WILL LOWER EQUIPMENT AND OTHER COSTS FOR SERVICE PROVIDERS. THERE IS NO
ASSURANCE THAT THESE STANDARDS WILL EVOLVE.

We believe that open, or non-proprietary, manufacturing standards
ultimately are necessary in 2G MMDS technology to lower infrastructure and
customer premise equipment costs, and allow for interoperability and flexibility
for service providers. Although there are discussions among various vendors to
develop open standards in this area, there is no assurance that these standards
will evolve in the near future or at all. The failure of these standards to
evolve could result in higher operating costs and unacceptable operating
margins.

THE INTERNET ACCESS MARKET IS HIGHLY COMPETITIVE. BECAUSE MANY COMPETITORS IN
OUR MARKETS ARE WELL-ESTABLISHED AND HAVE RESOURCES SIGNIFICANTLY GREATER THAN
THOSE AVAILABLE TO US, WE MAY NOT BE ABLE TO ESTABLISH A SIGNIFICANT NUMBER OF
INTERNET ACCESS CUSTOMERS IN OUR MARKETS.

As we enter the high-speed Internet access business, we will be forced to
compete with numerous service providers, including the following:

- other ISPs which have developed high-speed access capabilities such as
DSL along with their existing services,

- ILECs which are providing DSL-based services in addition to their
existing wide area, metropolitan and local area networks,

- interexchange carriers, which are expanding their networks to support
high-speed local access, including DSL-based services and a full range of
Internet services and applications,

- cable modem service providers offering high-speed access services to
consumers and businesses,

- satellite and other fixed wireless data service providers, which have
deployed or are developing broadband two-way data and voice services,

- CLECs, which are offering high-speed data and other services, and

- 3G wireless providers, which are expected to offer broadband mobile
wireless services and capabilities.

Many of our competitors are well-established and have larger and better
developed networks and systems, longer-standing relationships with customers and
suppliers, greater name recognition and significantly greater financial,
technical and marketing resources than we have. Many of these companies can
subsidize competing services with revenues from other services and have ready
access to capital markets. As competition increases in the high-speed Internet
access market, we anticipate intensified downward pricing pressure for our
services. If we are unable to compete effectively it will adversely affect our
ability to successfully implement our business strategy.

WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR LONG-TERM
BUSINESS STRATEGY BECAUSE IT INCLUDES OPERATIONS THAT HAVE NOT BEEN WIDELY
DEPLOYED ON A COMMERCIAL BASIS. OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET
ACCEPTANCE COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY.

Our primary business strategy of providing broadband wireless services over
MMDS spectrum has not been widely deployed on a commercial basis. The success of
our long-term business strategy depends on our ability to develop and market our
high-speed Internet access service at profitable rates. We will face a number of
difficulties and uncertainties generally associated with new businesses, such
as:

- lack of consumer acceptance,

- difficulty in obtaining financing,

19

- competition from providers using more traditional and commercially proven
sources for these services,

- advances in competing technologies, and

- changes in laws and regulations.

We have launched commercial high-speed Internet access service in only two
of our existing markets, and we cannot assure you that businesses and consumers
will accept our service as a commercially viable alternative to other means of
Internet access.

WE ARE SUBJECT TO EXTENSIVE FEDERAL LAWS, RULES AND REGULATIONS. THE LAWS,
RULES AND REGULATIONS TO WHICH WE ARE SUBJECT COULD CHANGE AT ANY TIME IN AN
UNPREDICTABLE MANNER.

Our continued ability to acquire, lease and maintain MDS, MMDS and ITFS
spectrum, which is vital to our operations, is subject to extensive regulation.
These regulations directly affect the breadth of services we are able to offer,
as well as the rates, terms and conditions of those services. We also are
affected indirectly by other governmental regulations of companies that offer
competing services. Regulations and their application are subject to continual
change as a result of new legislation, regulations adopted from time to time by
regulatory authorities and judicial interpretation of these laws and
regulations. We are not able to predict the extent to which any change in the
regulatory environment could affect our business. We cannot assure you that
changes in legislation, regulations and interpretations would not have a
significant adverse impact on our ability to implement our business strategy.

Aside from the use of spectrum, the FCC has held that Internet access
services are "information services" not subject to FCC regulation. Nevertheless,
the FCC has held that the Internet dial-up traffic is interstate traffic subject
to FCC jurisdiction. The U.S. Court of Appeals for the D.C. Circuit has remanded
that decision for the second time, and the FCC has not yet addressed the most
recent remand. There can, therefore, be no certainty that the providing of
Internet access services will continue to be free from FCC regulation. Moreover,
if we begin providing wireless telecommunications services or voice over IP
services, we will be subject to FCC and state regulation of our interstate and
intrastate telecommunications services, respectively, and may be subject to
regulation of our voice over IP services.

CHANGES IN THE REGULATORY STATUS OF THE 2.5 GHZ BAND MAY DELAY DEPLOYMENT OF 2G
BROADBAND SYSTEMS.

Use of the 2.5 GHz band for 2G fixed, portable and mobile services will
require an extensive rulemaking proceeding at the FCC to adopt technical,
operating and licensing rules in this band. The failure to finalize interference
rules in the 2.5 GHz band on a timely basis could delay, limit or prevent the
launch of fixed, portable or mobile services in this band.

WE COULD BE REQUIRED TO RELOCATE EXISTING AND FUTURE OPERATIONS IN THE 2.1 GHZ
BAND TO ACCOMMODATE 3G MOBILE SYSTEMS.

We currently use the 2.1 GHz band in our two existing broadband wireless
networks. In November 2002, the FCC issued an 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. Under the Order, our licenses
and operations in the 2.1 GHz band would be relocated. In February 2003, the FCC
released a subsequent Notice of Proposed Rulemaking to consider possible
relocation spectrum and procedures for MDS operations in the 2.1 GHz band.
However, in February 2003, WCA filed a Petition for Reconsideration of the
Order. We are not able to predict with certainty whether the FCC will reconsider
the Order, nor can we determine at this time the impact that relocation would
have on our operations; however, relocation of 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.

20

WE DEPEND ON FCC-REGULATED LICENSES AND SPECTRUM LEASES. THE FAILURE TO
MAINTAIN SPECTRUM RIGHTS IN VARIOUS MARKETS COULD ADVERSELY AFFECT OUR ABILITY
TO TIMELY IMPLEMENT OUR BUSINESS STRATEGY.

We depend upon licenses granted to us by the FCC and leases with other FCC
license holders for access to spectrum capacity necessary to operate our
Internet business. These licenses are subject to renewal as determined by the
FCC. FCC licenses also specify construction deadlines by which channel
transmissions must begin, which, if not met, would permit the FCC to revoke the
license. We cannot assure you that:

- the FCC will renew our licenses as their initial terms expire,

- our spectrum lessors will continue to hold valid licenses for their
spectrum,

- we will be able to renew our spectrum leases on terms acceptable to us,
or

- the FCC will grant requests for extensions of construction deadlines.

The failure to maintain FCC licenses and spectrum leases will reduce the
spectrum available for our use. If we fail to maintain sufficient FCC licenses
or spectrum leases in markets where we operate or in which we intend to launch
two-way Internet access service, then the resulting reduction in spectrum
capacity could have a material adverse effect on our ability to:

- serve our existing Internet access customer base,

- serve increasing customer demand for high-speed Internet access service,
and

- add services such as voice over IP or wireless telecommunications
services.

We cannot assure you that we will be able to obtain replacement spectrum or
other acceptable alternatives in a market if we lose an FCC license or spectrum
lease in that market.

OUR BASIC TRADING AREA, OR "BTA," AUTHORIZATIONS ARE SUBJECT TO FORFEITURE IF
WE DEFAULT ON OUR PURCHASE PRICE PAYMENTS OR FAIL TO MEET CERTAIN SERVICE
REQUIREMENTS. THE COSTS OF THE BUILD-OUT TO SATISFY OUR BTA SERVICE
REQUIREMENTS COULD BE MATERIAL.

We acquired authorizations for over 90 BTAs in August 1996 at a total cost
of approximately $19.8 million. As of February 28, 2003, $8.4 million in
principal amount of this debt remained payable quarterly through August 2006.
Each BTA is subject to an individual installment note. If we fail to make one or
more scheduled installment payments on a BTA note after any applicable grace
period, that BTA authorization may be forfeited to the FCC.

To retain a BTA authorization, we must provide a required level of service
in the BTA by August 2003. We will satisfy the service requirement for a BTA
under current FCC regulations if we construct MDS and MMDS stations capable of
providing a signal to at least two-thirds of the BTA population outside of the
service areas of other MDS and MMDS operators within our BTAs. The industry
proposal for new rules for the 2.5 GHz band requests that the FCC suspend BTA
build-out requirements while a proposed rulemaking is pending, and replace those
requirements with a uniform "substantial service" requirement at renewal of the
BTA authorizations in 2006. If the FCC does not adopt this or a similar
proposal, then a BTA authorization for the portion of the BTA that is not
capable of being served may be subject to forfeiture. Constructing MDS and MMDS
channels capable of providing service to the required population in
unconstructed BTAs could require substantial capital expenditures.

THE CONVERSION OF OUR EXISTING WIRELESS CABLE SUBSCRIBERS WILL REQUIRE US TO
MARKET, SELL AND INSTALL DIRECTV PROGRAMMING SERVICES TO EXISTING SUBSCRIBERS
WHO CHOOSE TO ACCEPT THE CONVERSION OFFER. WE DO NOT EXPECT OUR EXISTING
WIRELESS CABLE SUBSCRIBER BASE TO GENERATE MATERIAL REVENUES OR CASH FLOWS FOR
THE COMPANY BEYOND 2003.

Our sales agency agreements with DIRECTV and Pegasus require us to market,
sell and install DIRECTV programming packages to our existing wireless cable
subscribers, except for approximately 5,700 subscribers in Central Texas, to
whom Time Warner Cable has agreed to market, sell and install a conversion

21

offer. The failure of the Company or Time Warner Cable to effectively market,
sell or install conversion offers, or poor subscriber response to the conversion
program, will reduce the amounts payable by DIRECTV, Pegasus and Time Warner
Cable to us for converted subscribers. Except for a nominal residual royalty 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
generate material revenues or cash flows for the Company beyond 2003. Although
we intend to reduce expenditures associated with our wireless cable business,
ongoing costs of maintaining our strategic FCC spectrum licenses and leases, as
well as other corporate overhead, will exceed revenues as we implement the
conversion program.

WE DEPEND ON KEY PERSONNEL. IF WE LOSE OUR CHIEF EXECUTIVE OFFICER OR CERTAIN
OTHER MEMBERS OF SENIOR MANAGEMENT, OUR ABILITY TO IMPLEMENT OUR LONG-TERM
BUSINESS STRATEGY COULD BE ADVERSELY AFFECTED.

Our future success largely depends on the expertise of Carroll D. McHenry,
our Chief Executive Officer, President and Chairman of the Board, and certain
other members of senior management. We have employment agreements with Mr.
McHenry and other members of senior management, but do not maintain a key person
life insurance policy on the life of Mr. McHenry or other members of senior
management.

BUILDING AND TOWER OWNERS CONTROL ACCESS TO CERTAIN STRATEGIC ANTENNA SITES.

We will be required to obtain rights from building and tower owners to
install our antennas and other equipment to provide service to our customers. We
cannot assure you that we will be able to obtain, at costs or on terms
acceptable to us, the rights necessary to expand our services as planned.

OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGY CHANGES.

The high-speed Internet access industry is subject to rapid technological
change, frequent new service introductions and evolving industry standards. We
believe that our future success will depend largely on our ability to anticipate
or adapt to these changes and to offer, on a timely basis, services that meet
evolving standards. We cannot predict the extent to which competitors using
existing or currently undeployed methods of delivery of Internet access services
will compete with our services. We cannot assure you that:

- existing, proposed or undeveloped technologies will not render our
broadband wireless systems less profitable or less viable,

- we will have the resources to acquire new technologies or to introduce
new services that could compete with future technologies, or

- we will be successful in responding to technological changes in a timely
and cost effective manner.

WE MAY BE LIABLE FOR INFORMATION SENT THROUGH OUR NETWORK.

The law relating to the liability of Internet access providers for
information carried on, stored on or disseminated through their network is
unsettled. A number of private lawsuits seeking to impose liability upon
Internet access providers currently are pending or have been adjudicated. In
addition, legislation has been enacted and new legislation has been proposed at
both the federal and state levels as well as in foreign countries that imposes
or would impose liability for the transmission of or prohibits the transmission
of certain types of information on the Internet, including sexually explicit and
gambling information. While no one has ever asserted a claim against us relating
to this issue, someone may assert a claim of that type in the future and may be
successful in imposing liability on us. Although we carry Internet liability
insurance, it may not be adequate to compensate claimants or may not cover us if
we become liable for information carried on or disseminated through our
networks.

22

WE HAVE A LARGE PORTION OF OUR COMMON STOCK HELD BY A SMALL NUMBER OF OUR
STOCKHOLDERS. THIS CONCENTRATION OF OWNERSHIP CAN AFFECT STOCKHOLDER VOTES AND
CAUSE OUR STOCK PRICE TO BE VOLATILE IN THE PUBLIC TRADING MARKET.

A large portion of our common stock is held by a small number of
stockholders. As a result, these stockholders are able to influence the outcome
of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduces the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.

ITEM 2. PROPERTIES

We currently lease approximately 21,000 square feet of office space for our
executive offices in Carrollton, Texas. We also lease approximately 9,600 square
feet of space for telemarketing, customer care operations and training
facilities in Denison, Texas. We believe that the facilities described above are
leased at fair market value and are adequate for the foreseeable future.

The principal physical assets of our operating systems consist of satellite
signal reception equipment, radio transmitters and transmission antennas and
customer premises equipment. We lease space or have options to lease space for
our broadband wireless operations on about 100 communications towers. The leases
and options have terms from one to 15 years.

ITEM 3. LEGAL PROCEEDINGS

Settlement of Late Fee and Other Lawsuits. From time to time we have been
a party to several purported class action lawsuits alleging that we overcharged
our customers for administrative late fees, and that we breached various state
consumer lease and credit laws and federal privacy and notice statutes. As of
the date of filing of our last Quarterly Report on Form 10-Q, four of these
lawsuits remained pending:

- Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a Heartland
Cable Television (98-05-8388-CV), filed in May 1998 in the 79th Judicial
District Court in Brooks County, Texas (dismissed and appealed),

- John Nolen, Jr., et al. v. Nucentrix Broadband Networks, Inc.
(DC-00-155), filed in May 2000 in the 229th Judicial District Court in
Duval County, Texas,

- Nolen, et al. v. Nucentrix Broadband Networks, Inc., et al. (L-00CV134),
filed in October 2000 in U.S. District Court for the Southern District of
Texas, Laredo Division (dismissed and appealed), and

- Perez, et al. v. Nucentrix Broadband Networks, Inc. (01-141-D), filed in
March 2001 in the 105th Judicial District Court in Kleberg County, Texas.

In December 2002, the U.S. Supreme Court denied the plaintiff's application
for writ of certiorari in the federal Nolen lawsuit. In addition, in December
2002 we removed the state court cases in Nolen and Perez to federal court.

In January 2003, we entered into a Settlement Agreement with all named
plaintiffs in the lawsuits listed above, as well as all named plaintiffs in
prior similar lawsuits, settling all claims brought by these plaintiffs in such
matters.

Other. We are involved in routine legal and regulatory proceedings
incident to our business. We do not believe that any other pending legal or
regulatory matter will have a material adverse effect on our consolidated
financial condition, results of operations or cash flows.

23

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

There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2002.

Our annual meeting of stockholders for 2003 is scheduled for May 13, 2003.
This date has changed by more than 30 days from the June 28 date of our 2002
annual meeting of stockholders. Therefore, in accordance with the Exchange Act,
the dates originally disclosed in our proxy statement for the 2002 annual
meeting by which stockholder proposals for the 2003 annual meeting must be
delivered to Nucentrix for purposes of Rule 14a-8 and Rule 14a-4(c) of the
Exchange Act have been changed to April 2, 2003, as described below.

To qualify for inclusion in the proxy statement and form of proxy for our
2003 annual meeting of stockholders, under Rule 14a-8 of the Exchange Act we
must receive a proposal intended by a stockholder for presentation at that
meeting at our principal executive offices on or before April 2, 2003. Under
Rule 14a-4(c) of the Exchange Act, the Board of Directors may exercise
discretionary voting authority under proxies solicited by it on any matter
properly presented by a stockholder at our 2003 annual meeting that the
stockholder does not seek to have included in our proxy statement under Rule
14a-8 of the Exchange Act if, except as described in the following sentence, the
proxy statement discloses the nature of the matter and how the Board of
Directors intends to exercise its discretion to vote on such matter. If we first
receive notice of such matter after April 2, 2003, the Board of Directors may
exercise discretionary voting authority on any matter as permitted under Rule
14a-4(c)(2), without including any discussion of the matter in the proxy
statement for the 2003 annual meeting. We reserve the right to reject, rule out
of order or take other appropriate action on any proposal that does not comply
with the requirements described above and other applicable requirements.

PART II

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

Common Stock. Our common stock is traded on The Nasdaq Stock Market under
the symbol "NCNX." The following sets forth the high and low sale prices of our
common stock as reported on The Nasdaq Stock Market for the last two fiscal
years.

The closing sale price of our common stock on March 14, 2003, was $2.05 per
share. The number of record holders of common stock as of March 14, 2003, was
17.

Equity Compensation Plan Information. The following table provides
information regarding all equity compensation plans as of December 31, 2002,
that provide for the award of securities or grant of options,

24

warrants or rights to purchase securities of Nucentrix to employees or any other
person. We do not have any equity compensation plans that have not been approved
by our stockholders.

DIVIDENDS

We have not paid any cash dividends on our common stock, and do not intend
to pay cash dividends in the foreseeable future. Our Board of Directors may
reexamine our dividend policy from time to time. However, if we raise capital in
the future through financings, the terms of these financings may restrict or
prohibit us from paying any dividends on our common stock.

25

ITEM 6. SELECTED FINANCIAL DATA

The following table presents summary historical financial and other data
for Nucentrix. As a result of the application of Fresh Start Reporting in
connection with the Plan, financial information as of December 31, 2002, 2001,
2000 and 1999, and for the years ended December 31, 2002, 2001 and 2000, and the
period from the Effective Date to December 31, 1999 (the "Successor Period"), is
presented on a different basis than the financial information as of December 31,
1998, and for the year ended December 31, 1998, and for the period from January
1, 1999, to the Effective Date (collectively, the "Predecessor Period"). See
Item 1, "Business -- Reorganization" in this report. The selected historical
financial data presented below as of and for each of the years in the five year
period ended December 31, 2002, is derived from the audited consolidated
financial statements of Nucentrix. Historically, we have used our spectrum
primarily to deliver wireless cable services. In 2002, we began to convert our
wireless cable subscriber base to clear our spectrum to provide broadband
wireless Internet, data and other services. Therefore, our historical results
are not necessarily indicative of our future results as we pursue our business
strategy as described in Item 1, "Business -- Overview." You should read the
financial data below together with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and with Nucentrix's
consolidated financial statements, including the notes thereto, included
elsewhere in this report.

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

(1) In the fourth quarter of 2002, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, we wrote down systems and equipment,
and license and leased license investments (spectrum licenses and leases),
to estimated fair value, which resulted in a non-cash impairment charge of
$4.8 million. In the fourth quarter of 2001, in accordance with SFAS No. 121
(which has been superseded by SFAS No. 144), we also wrote down systems and
equipment, and license and leased license investments to estimated fair
value, which resulted in a non-cash impairment charge of $14.1 million. See
Item 7, "MD&A -- Results of Operations for the Three Years Ended December
31, 2002 -- Impairment of Long-Lived Assets," and note 3 to the consolidated
financial statements included in this report. In the second and third
quarters of 1998, we wrote down license and leased license investments,
systems and equipment and other long-lived assets to estimated fair value,
which resulted in a non-cash impairment charge of $105.8 million.

(2) We filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on December 4, 1998. Our Plan was confirmed on March
15, 1999, and became effective on April 1, 1999. Accordingly, we have
reclassified our prior senior and subordinated notes, which were subject to
compromise in the reorganization, to "Liabilities Subject to Compromise" at
December 31, 1998. Expenses related to our reorganization, such as
professional fees and administrative expenses, were classified as
"Reorganization costs." See note 2 to the consolidated financial statements
included in this report.

(3) Loss per basic and diluted common share for each period presented has been
calculated using the provisions of SFAS No. 128, "Earnings per Share."
Earnings per share information has not been presented for the Predecessor
Period because Nucentrix was recapitalized on the Effective Date, in
connection with the Plan, and accordingly, per share amounts are not
comparable between the

27

Predecessor Period and the Successor Period. See note 2 to the consolidated
financial statements included in this report.

(4) "EBITDA," or earnings before interest, taxes, depreciation and amortization,
for 2002 and 2001 includes non-cash charges for impairment of long-lived
assets of $4.8 million and $14.1 million, respectively. EBITDA is widely
used by analysts, investors and other interested parties as a measure of
operating results in the Internet, cable television and telecommunications
industries, due to the significant initial capital investment typically
required by companies in these 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 ("GAAP") and should not be considered as an
alternative to net income or net loss 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.

A reconciliation of EBITDA to net income (loss) is as follows:

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

OVERVIEW

General. We provide broadband wireless Internet and wireless subscription
television services using radio spectrum licensed by the 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 BTA authorization, or otherwise license
or lease MDS, MMDS and ITFS spectrum, in 93 markets covering an estimated 8.4
million total households. On average, we own or lease approximately 130 MHz of
spectrum per market. 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. See Item 1, "Business -- Overview" in this report.

Historically, we have used our spectrum to provide wireless subscription
television services, commonly referred to as "wireless cable." We presently have
wireless cable transmission facilities constructed and

28

operating in 43 markets in seven states. At February 28, 2003, we had
approximately 13,600 wireless cable customers, including approximately 13,200
customers who subscribed only to programming service provided over our MMDS
spectrum, and 400 "combo" subscribers who subscribed to both our MMDS
programming service and to DIRECTV programming service sold by us. In addition,
at February 28, 2003, there were approximately 18,000 customers who received
only DIRECTV programming sold by us. In March 2002, as part of our long-term
plan to clear our spectrum for broadband Internet and other advanced wireless
services, we announced the signing of agreements with DIRECTV, Pegasus and Time
Warner Cable to convert substantially all of our wireless cable subscribers to
programming provided by these entities. See Item 1, "Business -- Conversion of
Wireless Cable Business" in this report.

Revenues. Our revenues currently 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 the conversion program discussed in
Item 1, "Business," in this report). 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 in 2002 (approximately 1.4% of consolidated
revenues), 2001 (approximately 1% of consolidated revenues) and 2000 (less than
1% of consolidated revenues).

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.

Effective January 1, 2001, 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. For recognition of wireless cable installation revenue, this period was
three years in 2001 and one year in 2002. For recognition of DIRECTV
installation and agency revenue, this period was three years in 2001 and 2002. A
chargeback reserve is recorded for all DIRECTV contingencies. Prior to 2001,
wireless cable installation revenue was offset against the nonrecoverable
portion of installation costs, with the excess cost capitalized and amortized to
depreciation expense over the expected subscriber relationship period of three
years. Prior to 2001, DIRECTV installation revenue (cash received directly from
the customer in conjunction with the sale) was offset against direct incremental
costs, with the resulting amount recorded as a net asset. This asset, referred
to as "subscriber acquisition costs," was amortized as a component of Selling,
General and Administrative expense in proportion to the revenues projected to be
generated over the expected subscriber relationship period. Revenue from our
agency relationship with DIRECTV (other than monthly service fees) was
recognized as the contingencies related to each revenue component were resolved.
A chargeback reserve was not recorded for canceled subscribers. The Company
revised the application of its SFAS No. 51 accounting for wireless cable
installation and DIRECTV revenues prospectively, effective January 1, 2001, as
discussed above. See "MD&A -- Revised Application of Accounting Policy in 2001"
in this report.

System Operations Expenses. System operations expenses include channel
lease payments, wireless cable programming costs, labor, and overhead, and costs
related to service calls and disconnects, transmitter site and tower rentals,
and certain repairs and maintenance expenditures. Programming costs, with the
exception of minimum payments, channel lease payments, and repairs and
maintenance, are variable expenses based on the number of subscribers.

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
include office and administrative costs of operating our 43 wireless cable and
two 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. 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 expected subscriber

29

relationship period of three years. Prior to 2001, the direct incremental cost
was offset by DIRECTV installation revenue, with only the resulting excess cost
recorded as subscriber acquisition costs and amortized as a component of SG&A
expense in proportion to revenues projected to be generated over the expected
subscriber relationship period. The Company revised the application of its SFAS
No. 51 accounting for DIRECTV installation revenue prospectively, effective
January 1, 2001, as discussed above. See Item 7, "MD&A -- Revised Application of
Accounting Policy in 2001" in this report.

Depreciation and Amortization Expense. 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 in the accompanying consolidated balance sheets, and are amortized
over the useful life of the asset (currently 12 months) for the recoverable
portion and the estimated average subscription term (currently 12 months) for
the nonrecoverable portion of such costs. Prior to January 1, 2002, the
recoverable portion of such costs was amortized over an estimated useful life of
five years, and the nonrecoverable portion was amortized over an estimated
average subscription term of three years. The nonrecoverable portion of the cost
of a wireless cable installation becomes fully depreciated upon disconnection of
the subscriber. Prior to 2001, the Company capitalized only the excess of
nonrecoverable costs of wireless cable installations over installation revenue.
The Company revised the application of its SFAS No. 51 accounting for wireless
cable nonrecoverable installation costs prospectively, effective January 1,
2001, as discussed above. See "MD&A -- Revised Application of Accounting Policy
in 2001" in this report.

EBITDA. EBITDA, or earnings before interest, taxes, depreciation and
amortization, for 2002 and 2001 includes non-cash charges for impairment of
long-lived assets of $4.8 million and $14.1 million, respectively. EBITDA is
widely used by analysts, investors and other interested parties as a measure of
operating results in the Internet, cable television and telecommunication
industries due to the significant initial capital investment typically required
by companies in these industries. EBITDA is also widely accepted as a financial
indicator of a company's ability to incur and service indebtedness. EBITDA is
not a financial measure determined by GAAP and should not be considered an
alternative to net income or net loss 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.
See note (4) to the Selected Financial Data contained in Item 6 of this report,
for a reconciliation of the differences between our EBITDA and net loss.

30

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002

The following table summarizes the operating results for the years ended
December 31, 2002, 2001 and 2000:

Revenues. Our revenues were $35.2 million in 2002, $49.8 million in 2001
and $61.0 million in 2000 representing a 29% decrease from 2001 to 2002, and an
18% decrease from 2000 to 2001. The average number of wireless cable subscribers
for the year ended December 31, 2002, was 60,600 compared to 94,000 and 121,000
for the years ended December 31, 2001 and 2000, respectively. In addition,
during the years ended December 31, 2002, 2001 and 2000, we had 20,300, 23,000
and 16,500 average subscribers, respectively, who received only DIRECTV
programming sold by us. Beginning in January 2000, we did not include these
customers in our reported wireless cable 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 decline in revenues from 2001 to 2002 and from 2000 to 2001 was
primarily due to fewer total wireless cable subscribers resulting from:

- the closing in 2002 of 14 of our wireless cable systems (see Item 1,
"Business -- Conversion of Wireless Cable Business" in this report),

- decreased sales and marketing as we continued to shift our principal
business focus from wireless cable to broadband wireless services,

- price increases for our wireless cable service in the first and third
quarters of 2001 which resulted in increased disconnects by video
subscribers in 2001, and

- the suspension, in seven markets in March 2000, of our offer of video
programming provided solely over MMDS frequencies in anticipation of
transitioning this spectrum to Internet services.

In addition, in 2001 the Company adjusted the fair value of its liabilities
at Fresh Start by $2.5 million, and correspondingly reduced revenues that had
been deferred and recognized since Fresh Start. Also, in connection with its
revised application of SFAS No. 51 in 2001, the Company established a $2.2
million chargeback reserve for canceled subscribers. These two changes resulted
in a reduction in total revenues in 2001 of $4.7 million. See "MD&A -- Revised
Application of Accounting Policy in 2001" in this report.

This decline was partially offset by a revision in policy for recognizing
wireless cable and DIRECTV installation revenue and revenue received from our
agency relationship with DIRECTV (except for continuing

31

monthly service fees, which are recognized as received). Prior to 2001, wireless
cable installation revenue was offset against the nonrecoverable portion of
installation costs, with the excess cost capitalized and amortized to
depreciation expense over the expected subscriber relationship period. Prior to
2001, DIRECTV installation revenue (cash received directly from the customer in
conjunction with the sale) was offset against direct incremental costs, with the
resulting amount recorded as a net asset and amortized to SG&A in proportion to
the revenues projected to be generated over the expected subscriber relationship
period. Beginning in 2001, these revenues are now 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 three years. This
resulted in $3.4 million of additional revenues in 2001.

Average monthly recurring revenue per subscriber was $38.18, $37.06 and
$35.44 for the years ended December 31, 2002, 2001 and 2000, respectively. The
increase over these periods is due to overall higher priced packages being
purchased by our subscribers, including increased purchases of premium
programming and price increases for wireless cable services.

We expect to convert the remainder of our wireless cable subscriber base to
satellite programming provided by DIRECTV and Pegasus, and cable programming
provided by Time Warner Cable, in 2003. Except for a nominal residual royalty
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 beyond
2003. See Item 1, "Business -- Conversion of Wireless Cable Business" in this
report. We expect to recognize revenues associated with the conversion of
subscribers to DIRECTV and Pegasus to the extent of direct selling costs
incurred, and the remainder to be deferred and amortized to income over the
expected subscriber relationship period of three years. A chargeback reserve
will be recorded for all DIRECTV contingencies. We do not expect the decline in
revenues to be offset materially by an increase in revenues from our Internet
business in 2003, as we plan to deploy no more than two 2G Internet systems
before the end of the first quarter of 2004. See Item 1, "Business -- Business
Strategy" in this report.

System Operations Expense. System operations expense was $20.5 million in
2002, $25.7 million in 2001 and $28.4 million in 2000. As a percentage of
revenues, system operations expense was 58% in 2002, 52% in 2001 and 47% in
2000. The decrease in system operations expense over the periods presented was
primarily due to lower programming expense as a result of fewer subscribers.
System operations expense as a percent of revenue increased in all three years
due to lower overall revenues and higher costs under certain spectrum leases
that were renegotiated in preparation for providing broadband wireless services,
and due to the fixed portion of technical labor in certain wireless cable
markets which has been reduced to minimum levels with the decline in
subscribers. We expect system operations expense to decrease further in 2003 in
connection with the conversion of our wireless cable subscriber base. See Item
1, "Business -- Conversion of Wireless Cable Business" in this report.

SG&A Expense. SG&A expense was $21.0 million in 2002, $25.5 million in
2001 and $32.8 million in 2000. As a percent of revenues, SG&A expense was 60%
in 2002, 51% in 2001 and 54% in 2000. SG&A expense decreased annually from 2000
through 2002 due to savings from the consolidation of certain offices and
management in our wireless cable markets, lower wireless cable marketing
expenses, and a reduction in start-up and general and administrative costs,
principally incurred in the first quarter of 2001, related to our broadband
wireless business. SG&A expense as a percent of revenues increased from 2001 to
2002 primarily because of lower overall revenues and the fixed portion of SG&A
expenses related to the conversion of our wireless cable subscribers. The
reduction in overall SG&A was partially offset by increased costs related to the
development of our broadband wireless business and related personnel and
infrastructure at the end of 2000 and the beginning of 2001, and business and
corporate overhead allocable to our broadband wireless operations in 2000 and
the beginning of 2001. Broadband wireless SG&A decreased from 2001 to 2002,
primarily due to a reduction in force and related cost savings caused by a delay
in availability of a 2G technology platform. We expect overall SG&A expenses to
continue to decline in 2003 as wireless cable television field offices are
closed and related administrative costs are reduced.

32

Depreciation and Amortization. Depreciation and amortization expense was
$20.6 million in 2002, $25.7 million in 2001 and $27.3 million in 2000. The
decrease in depreciation and amortization expense from 2000 to 2002 is
principally due to the aging of customer equipment in our wireless cable and
DIRECTV businesses, much of which is fully depreciated and, to a lesser extent,
the sale of used equipment during the three years. 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. These decreases were 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 effective January 1, 2002. We expect depreciation and
amortization to decrease in 2003 as wireless cable assets are fully depreciated,
and wireless cable market operations are closed upon conversion of our wireless
cable subscriber base as discussed above.

Impairment of Long-Lived Assets. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. In the fourth quarter of 2002, we reviewed our systems and
equipment, and license and leased license investment assets (spectrum licenses
and leases) for impairment in accordance with the requirements of SFAS No. 144.
In our review, we considered, among other factors, (i) the uncertainties of
raising capital for our long-term business plan, (ii) the strategic importance
of spectrum licenses and leases in smaller or less-densely populated markets,
and the likelihood of deployment of 2G Internet systems in such markets within
the next three years, (iii) a declining demand for analog MMDS video equipment
in the resale market and (iv) the reduction in personnel in our wireless cable
business, which affects our ability to retrieve and resell wireless cable CPE.
In analyzing our spectrum licenses and leases, we retained the services of a
third party to perform a fair market valuation.

In the fourth quarter of 2001, we reviewed our systems and equipment, and
license and leased license investment assets for impairment in accordance with
the requirements of SFAS No. 121, which has been superseded by SFAS No. 144.
Events and circumstances that we considered in this review included (i) the
expected conversion of substantially all of our wireless cable subscribers to
satellite and cable programming provided by other companies, (ii) the need to
continue evaluating the development of technology for MMDS service which likely
would delay deployment of new Internet markets beyond 2002, and (iii) the
uncertainties associated with raising capital required to implement our
long-term business plan. In determining whether an impairment was required for
systems and equipment, we examined the future cash flows expected to be
generated from these assets and the amount that we estimated could be realized
for these assets in an orderly disposition, if required. In analyzing our
license and leased license investment assets, we retained the services of a
third party to provide a fair market valuation.

As a result of our review and the third party valuation, we determined that
non-cash impairment charges of $4.8 million and $14.1 million were required in
2002 and 2001, respectively, to write down systems and equipment and license and
leased license investments to estimated fair value, as follows:

Although the third party market valuation of our aggregate license and
leased license investment assets was substantially in excess of our aggregate
carrying cost, as required by SFAS No. 144 in 2002 and SFAS No. 121 in 2001, we
examined these assets on an individual market basis and determined that the
carrying value related to 20 markets in 2002 and ten markets in 2001 should be
written down in the total amounts of $2.4 million and $9.4 million,
respectively.

Our estimates of future gross revenues and operating cash flows, the
remaining estimated lives of long-lived assets, or both could be reduced in the
future due to changes in, among other things, technology, government regulation,
available financing or competition. As a result, the carrying amounts of
long-lived assets could be reduced by additional amounts which would be material
to the Company's financial condition and results of operations.

33

Operating Loss. We generated operating losses of $31.7 million ($26.8
million excluding the impairment of long-lived assets) in 2002, $41.2 million
($27.1 million excluding the impairment of long-lived assets) in 2001 and $27.5
million in 2000. The slight improvement in operating losses from 2001 to 2002
(excluding impairment of long-lived assets) resulted from lower depreciation and
amortization expense discussed above, partially offset by lower revenues from
our wireless cable business. The slight improvement in operating losses
(excluding the impairment of long-lived assets) from 2000 to 2001 resulted from
lower programming expense, decreased marketing costs and other SG&A savings
discussed above, and lower depreciation and amortization expense. Compared to
2002, we expect operating losses in 2003 to increase as our revenue from
wireless cable subscribers continues to decrease and we allocate most of our
resources to maintain our spectrum assets and develop our broadband and other
wireless services.

EBITDA. EBITDA was a negative $11.1 million for the year ended December
31, 2002, a negative $15.5 million for the year ended December 31, 2001 and a
negative $202,000 for the year ended December 31, 2000. The decrease in EBITDA
from 2000 to 2002 was primarily due to non-cash charges for impairment of
long-lived assets in 2002 and 2001 of $4.8 million and $14.1 million,
respectively, decreased wireless cable revenues resulting from fewer subscribers
as we continued to shift our principal focus to developing our broadband
wireless services, and from start-up and SG&A costs related to our broadband
wireless operations. Excluding the non-cash impairment charges we incurred in
2002, we expect negative EBITDA to increase materially in 2003, as we complete
the conversion of our wireless cable subscribers and clear our spectrum for our
broadband wireless business. See note (4) to the Selected Financial Data
contained in Item 6 of this report, for a reconciliation of the differences
between our EBITDA and net loss.

Interest Income. Interest income was $318,000 in 2002, $984,000 in 2001
and $2.0 million in 2000. The decrease in interest income from 2000 to 2002 was
due to declining earnings on smaller unrestricted cash balances. Average
interest rates were 2.7% in 2002, 4.8% in 2001 and 6.3% in 2000.

Interest Expense. Interest expense was $1.1 million in 2002, $1.2 million
in 2001 and $1.4 million in 2000. Interest expense decreased from 2000 to 2002
due to lower principal balances on our BTA debt and capital leases. Interest
rates on our capital lease obligations in 2002 were an average of 14.9%. The
interest rate on other notes payable in 2002 was 9.5%.

Other income (expense). Other income in 2002 includes $600,000 in gain
recognized on the conversion of our wireless cable subscribers to programming
provided by Time Warner Cable, as well as the recognition of a deferred gain on
the sale and leaseback of 34 of our towers during 1999 and 2000. Other income in
2001 included the recognition of the deferred gain on the sale and leaseback of
the towers, as well as a $100,000 gain from the sale of our equity interest in a
Mexican MMDS company. During the first and third quarters of 2000, we received
$3.8 million and $723,000, respectively, in exchange for our equity interest in
Wireless One, Inc. ("Wireless One"). The entire amount was recognized as other
income, as our investment balance had been reduced to zero. Other income during
2000 also included the recognition of the deferred gain on the tower sale and
leaseback described above.

Income Tax Benefit. Federal income tax law related to reorganizations
generally requires that the amount of income from discharge of indebtedness that
occurs in connection with a Chapter 11 bankruptcy be used to reduce federal tax
attributes. Generally, the reduction is applied to reduce net operating loss
carryforwards, followed by other tax attributes including the basis of certain
assets and the tax basis of subsidiary stock ("Tax Attribute Reduction"). An
election exists to reduce the basis of depreciable assets first, which can be
favorable under certain circumstances. Management elected to apply the required
reduction first to tax basis in depreciable assets, and then to net operating
loss carryforwards. The amount of reduction in depreciable assets was
approximately $56 million. The amount of reduction in net operating loss
carryforwards was approximately $118 million, leaving approximately $222 million
in remaining net operating loss carryforwards at December 31, 2000. Net
operating loss carryforwards at December 31, 2002, were $269 million, and expire
in years 2013 through 2021. See note 11 of the consolidated financial statements
included in Item 8 of this report. No income tax benefit was recorded for the
years ended December 31, 2002, 2001 and 2000.

34

Net Loss. We have recorded net losses since our inception. Our net loss
was $31.4 million ($26.5 million excluding the non-cash impairment of long-lived
assets) in 2002, $40.9 million in 2001 ($26.8 million excluding the non-cash
impairment of long-lived assets) and $22.1 million in 2000. Excluding the gain
of $4.8 million in 2000 discussed below, net loss in 2000 was $26.9 million. The
net loss from 2000 to 2002 was primarily impacted by the following:

- lower wireless cable revenue and programming costs related to fewer
subscribers,

- the impact of revising the application of SFAS No. 51 in 2001,

- cost savings from consolidation of certain market offices and management,

- decreased subscription television marketing expenses,

- the impairment of long-lived assets in 2001 and 2002, and

- a gain of $4.8 million during 2000 on the exchange of our equity interest
in Wireless One.

Loss per share for the year ended December 31, 2002 was $3.01 ($2.55
excluding the non-cash impairment of long-lived assets), compared to $3.95
($2.59 excluding the non-cash impairment of long-lived assets) per share in 2001
and $2.17 in 2000. Compared to 2002, we expect our net loss in 2003 to increase
as our wireless cable market operations are closed upon conversion of our
wireless cable subscriber base.

BALANCE SHEET AS OF DECEMBER 31, 2002, COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 2001

Material changes to balance sheet accounts from 2001 to 2002 were as
follows:

- The decrease in cash and cash equivalents resulted primarily from use of
cash for system operations, including spectrum maintenance, and from net
loss caused by declining revenues from our wireless cable business and
other factors discussed above under "Net Loss".

- The decrease in restricted assets resulted from the transfer of
restricted cash to operating cash upon cancellation of letters of credit
to certain vendors.

- The decrease in subscriber receivables resulted primarily from a decrease
of approximately 60,000 average wireless cable subscribers.

- The decrease in systems and equipment, and license and leased license
investment was primarily due to the impairment of long-lived assets, a
decrease in the estimated useful life for wireless cable equipment and
depreciation and amortization for 2002.

- The increase in net other assets resulted from an increase in subscriber
acquisition costs, which are the direct incremental costs incurred in
generating a customer relationship with DIRECTV. These costs include
material, equipment and labor and are recorded as a net asset and
amortized as a component of SG&A expense over the expected subscriber
relationship period of three years. This asset increased in 2002 due to
more conversions of subscribers to DIRECTV.

- The increase in accounts payable and accrued liabilities is primarily due
to an increase in deferred revenue from converting subscribers to DIRECTV
and Pegasus, as discussed above, and accrued spectrum lease payments.
This increase was partially offset by lower accrued programming and lower
accrued compensation and benefits. Installation revenue and revenue
received from our agency relationship with these providers 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 three years. This increase was slightly offset by
a decrease in accrued programming due to fewer wireless cable subscribers
and a decrease in accrued compensation due to fewer employees.

- The increase in other long-term liabilities is primarily due to an
increase in the long-term portion of deferred revenue related to
subscriber conversions discussed above.

35

LIQUIDITY AND CAPITAL RESOURCES

The broadband wireless business is capital-intensive. Since inception, we
have spent funds to lease or otherwise acquire MMDS spectrum rights in various
markets and operating systems, to construct wireless cable 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
advanced 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 and
voice over IP.

The growth of our business by using our spectrum to provide fixed, portable
or mobile broadband Internet service will require substantial capital
expenditures. We expect that 2G MMDS technology will provide improved coverage
capabilities by addressing line-of-sight limitations that exist in first
generation equipment, and will allow customers to install and upgrade customer
premises equipment themselves. We believe these improvements will 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 2G broadband wireless system providing
high-speed Internet access in a typical market will involve an initial capital
expenditure of approximately $1.5 million to $1.7 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 $400 and $900 depending upon the type of
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 an Internet system
during the start-up period.

Cash used in operations was $6.4 million during the year ended December 31,
2002, compared to $2.9 million during the year ended December 31, 2001. Cash
used in operations during 2002 resulted primarily from our net loss of $31.4
million, offset by depreciation and amortization of $20.1 million, non-cash
impairment charges of $4.8 million and payment of accrued property taxes and
other liabilities. Cash used in operations during 2001 was primarily due to
increased subscriber acquisition costs related to our DIRECTV agency
relationship, and severance payments related to a reduction in force in the
first quarter and to pay accrued property taxes and other liabilities. Cash used
in operations of $1.9 million during 2000 included our net loss of $22.1
million, offset by depreciation and amortization of $27.3 million and by higher
revenue received from our agency relationship with DIRECTV due to higher
installs in 2000.

Cash used in investing activities principally relates to the acquisition
and installation of subscriber equipment, the upgrade of transmission equipment
in certain markets, and the acquisition of MMDS spectrum rights, offset by the
sale of MMDS spectrum rights that are not a part of our strategic plan. Cash
provided by investing activities during the year ended December 31, 2002 was
$271,000, compared to cash used in investing activities of $1.8 million in 2001
and $4.6 million in 2000. The improvement in cash provided by investing
activities is due to substantially lower spending for the acquisition and
installation of subscriber premise 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 investing activities during 2001
included expenditures for engineering, legal, site acquisition and other costs
related to the acquisition of MMDS spectrum rights. Cash used in investing
activities in 2000 of $4.6 million included expenditures related to our
applications for two-way licenses, partially offset by $4.5 million from the
exchange of our equity interest in Wireless One and approximately $780,000 from
the sale-leaseback of our communications towers.

Cash used in financing activities during 2002 was $1.8 million, compared to
$2.0 million during 2001 and $285,000 during 2000. Cash used in financing
activities during 2002 and 2001 included payments on our BTA debt and capital
lease obligations related to the sale and leaseback of our 34 communications
towers. Cash

36

used in financing activities during 2000 also included principal payments on our
BTA debt and capital lease obligations. This was partially offset by $1.5
million in cash proceeds received from the exercise of employee stock options.

At February 28, 2003, we had approximately $4.7 million of unrestricted
cash and cash equivalents. As set forth in note 1(b) to the consolidated
financial statements, the consolidated financial statements contained in this
report have been prepared on a "going concern" basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. In conjunction with their 2002 year end audit, our independent
accountants have issued an audit opinion with respect to our 2002 consolidated
financial statements which includes an explanatory paragraph describing
conditions that raise substantial doubt about our ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. We expect that cash on
hand of $4.7 million at February 28, 2003, 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.

As discussed in Item 1, "Business -- Business Strategy," during the first
half of 2003 we will seek to raise $15 million -- $20 million for maintenance of
existing strategic spectrum resources, operating expenses and to fund the
deployment of up to two 2G Internet systems. We have retained Houlihan Lokey as
our financial advisor in connection with this potential financing. We also may
seek to raise additional capital if we consummate any significant acquisitions
or strategic alliances, or determine that market conditions are appropriate for
such financing. Options for raising capital include the sale of debt or equity
securities, borrowings under secured or unsecured loan arrangements, including
vendor equipment financing, and sales of assets. There can be no assurance that
financing will be available on acceptable terms or in a timely manner, if at
all.

EFFECTS OF REORGANIZATION

Our company and certain of our subsidiaries file a consolidated federal
income tax return. Subsidiaries in which we own less than 80% of the voting
stock will file separate federal income tax returns. We have had no material
state or federal income tax expense since inception. As of December 31, 1999,
and before taking into consideration the effects of the reorganization, we had
approximately $366.8 million in net operating losses for U.S. federal income tax
purposes, expiring in years 2013 through 2019. We estimate that approximately
$38 million of the above losses relate to various acquisitions and as such are
subject to certain limitations.

We adopted Fresh Start Reporting on the April 1, 1999, Effective Date of
our Plan in accordance with SOP 90-7. Fresh Start Reporting resulted in a new
reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities subject to compromise also
were adjusted to zero in the debt discharge portion of the Fresh Start Reporting
entry. In addition, on the Effective Date our outstanding common stock was
canceled and newly issued shares of common stock and warrants were distributed
to certain creditors in satisfaction of their claims against us. In connection
with the debt discharge, we recorded an extraordinary gain of approximately $174
million.

Federal income tax law generally requires that the amount of income from
discharge of indebtedness that occurs in connection with a Chapter 11 bankruptcy
be used to reduce federal tax attributes. Generally, the reduction is applied to
reduce net operating loss carryforwards, followed by other tax attributes
including the basis of certain assets and the tax basis of subsidiary stock. An
election exists to reduce the basis of depreciable assets first, which can be
favorable under certain circumstances. Management has elected to apply the
required reduction first to tax basis in depreciable assets, and then to net
operating loss carryforwards. The amount of reduction in the tax basis of
depreciable assets was approximately $56 million, leaving approximately $183
million in remaining basis in depreciable assets. The amount of reduction in net
operating loss carryforwards was approximately $118 million, leaving
approximately $222 million in remaining net operating loss carryforwards at
December 31, 2000. Net operating loss carryforwards at December 31, 2002, were
$269 million, and expire in years 2013 through 2021. See note 11 of the
consolidated financial statements included in Item 8 of this report.

37

In addition to the permanent Tax Attribute Reduction, we also must limit
the annual deduction of pre-bankruptcy net operating losses and "built-in
deductions" to an amount no greater than the fair market value of Nucentrix
immediately after the reorganization, multiplied by the long-term tax exempt
rate. The annual limitation applicable to our pre-bankruptcy net operating
losses and "built-in" deductions currently is estimated to be approximately $7.3
million.

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 included in Item 8 of this report. The Company believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.

Revenues currently 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 the conversion program discussed in Item 1,
"Business" of this report). 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 wireless cable
subscribers and systems because revenues and subscribers from Internet business
were immaterial in 2002 (approximately 1.4% of consolidated revenues).

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.

Effective January 1, 2001, 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. For recognition of wireless cable installation revenue, this period was
three years in 2001 and one year in 2002. For recognition of DIRECTV
installation and agency revenue, this period was three years in 2001 and 2002. A
chargeback reserve is recorded for all DIRECTV contingencies. Prior to 2001,
wireless cable installation revenue was offset against the nonrecoverable
portion of installation costs, with the excess cost capitalized and amortized to
depreciation expense over the expected subscriber relationship period of three
years. Prior to 2001, DIRECTV installation revenues (cash received directly from
the customer in conjunction with the sale) were offset against direct
incremental costs, with the resulting amount recorded as a net asset. This
asset, referred to as "subscriber acquisition costs," was amortized as a
component of SG&A expense in proportion to the revenues projected to be
generated over the expected subscriber relationship period. Revenue from our
agency relationship with DIRECTV (other than monthly service fees) was
recognized as the contingencies related to each revenue component were resolved.
A chargeback reserve was not recorded for canceled subscribers. The Company
revised the application of its SFAS No. 51 accounting for wireless cable
installation and DIRECTV revenues prospectively, effective January 1, 2001, as
discussed above. See Item 7, "MD&A -- Revised Application of Accounting Policy
in 2001" in this report.

The direct costs of wireless cable installations include reception
materials and equipment on subscriber premises and installation labor, which are
amortized over the useful life of the asset (presently 12 months) for the
recoverable portion and the estimated average subscription term (presently 12
months) for the nonrecoverable portion of such costs. Prior to January 1, 2002,
the recoverable portion of such costs was amortized over an estimated useful
life of five years, and the nonrecoverable portion was amortized over an
estimated average subscription term of three years. The nonrecoverable portion
of the cost of a subscriber installation becomes fully depreciated upon
disconnection of the subscriber. Prior to 2001, the Company capitalized only the
excess of non-recoverable costs of wireless cable installations over
installation revenues.

38

The Company revised the application of its SFAS No. 51 accounting for wireless
cable non-recoverable installation costs prospectively, effective January 1,
2001, to discontinue the netting of installation fees against nonrecoverable
costs of subscriber installations. See Item 7, "MD&A -- Revised Application of
Accounting Policy in 2001" in this report.

Our revenue recognition for wireless cable and DIRECTV installation
revenue, and amortization of the recoverable portion of direct costs of wireless
cable installations, is based on assumptions regarding our expected subscriber
term. The expected subscriber terms of 12 months for wireless cable and three
years for DIRECTV currently used for these purposes is based on historic
subscriber churn rates and the expected remaining terms of our wireless cable
subscribers. Effective January 1, 2002, we reduced our estimate of the expected
subscriber terms of wireless cable subscribers from three years to 12 months, as
we plan to convert substantially all of these subscribers to satellite and cable
programming in 2003. See "Business -- Conversion of Wireless Cable Business" in
this report. The reduced estimate did not have a material effect on revenues in
our consolidated financial statements. If a different subscriber term was used,
the revenue amounts reported could be materially different than amounts reported
in this report, and if the subscriber term changes in future years, the revenue
amounts reported in future years may not be comparable to the years reported in
this report.

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 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 useful lives. Our licenses and leased license investments, which
include our FCC licenses and spectrum leases, are amortized from the inception
of service in each market. In accordance with SFAS No. 144, we review our
long-lived assets and certain intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the net asset exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. In the fourth quarters of 2002 and 2001, we wrote down our
license and leased license investments and systems and equipment by $4.8 million
and $14.1 million, respectively. See Item 7, "MD&A -- Results of Operations for
the Three Years Ended December 31, 2002 -- Impairment of Long-Lived Assets" and
note 3 of the consolidated financial statements included in Item 8 of this
report. Effective January 1, 2002, we reduced the estimated remaining useful
life of our systems and equipment for wireless cable operating systems from 3-10
years to one year and the estimated remaining useful life of our license and
leased license investment from 12.5-15 years to 10 years. These changes
increased net loss for the year ended December 31, 2002, by $3.5 million, or
$0.33 per share. See note 13 of the consolidated financial statements included
in Item 8 of this report.

REVISED APPLICATION OF ACCOUNTING POLICY IN 2001

The Company revised its application of SFAS No. 51, Financial Reporting by
Cable Television Companies ("SFAS No. 51"), for its wireless cable service and
DIRECTV programming service during the fourth quarter of 2001, retroactively
effective to the beginning of 2001. Prior to this revision:

- wireless cable installation revenue was offset against the nonrecoverable
portion of installation costs, with the excess cost capitalized and
amortized to depreciation expense over the expected subscriber
relationship period of three years,

- the excess nonrecoverable costs of a wireless cable installation over
installation revenue were capitalized and amortized to depreciation
expense over the expected subscriber relationship period of three years,

39

- DIRECTV installation revenue was offset against direct incremental costs,
with the resulting amount recorded as a net asset,

- this asset, referred to as "subscriber acquisition costs," was amortized
as a component of SG&A expense in proportion to the revenues projected to
be generated over the expected subscriber relationship period, and

- revenue from our agency relationship with DIRECTV (other than monthly
service fees) was recognized as the contingencies related to each revenue
component were resolved; a chargeback reserve was not recorded for
canceled subscribers.

The revised application of SFAS No. 51 resulted in the following changes to
the Company's accounting practices:

- 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, the remainder is deferred and
amortized to income over the expected subscriber relationship period and
a chargeback reserve is recorded for all DIRECTV contingencies (for
recognition of wireless cable installation revenue, the expected
subscriber relationship period was three years in 2001 and one year in
2002; for recognition of DIRECTV installation and agency revenue, this
period was three years in 2001 and 2002), and

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

Since the revised application of SFAS No. 51 was retroactively effective to
the beginning of 2001, financial information for the first three quarters of
2001 was revised. The revised application of SFAS No. 51 resulted in $3.2
million of additional revenue in the first three quarters of 2001. Also, in
connection with its revised application of SFAS No. 51 in 2001, the Company
reduced revenues to establish a $2.2 million chargeback reserve for canceled
subscribers. In addition, in 2001 the Company adjusted the fair value of its
liabilities at Fresh Start and correspondingly reduced revenues that had been
deferred and recognized since Fresh Start for a net reduction in revenues in the
first three quarters of $2.2 million. Other miscellaneous adjustments reduced
revenues in the first three quarters a total of approximately $200,000. For
periods prior to 2001, neither the revised application of SFAS No. 51 nor the
other changes discussed above had a material impact on the Company's
consolidated financial statements.

COMMITMENTS AND CONTINGENCIES

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 and, in February 2003, WSNet announced that it would
discontinue operations at the end of that month. We now pay programmers directly
for the monthly programming that we continue to deliver to our remaining
wireless cable subscribers. However, for programming delivered in September
2002, we paid WSNet approximately $550,000. WSNet did not remit this amount to
the various programmers from whom we received programming. In February 2003,
WSNet notified us that it intended to reject its agreement with us in its
Chapter 11 proceedings. 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
believe we have a claim against WSNet or its creditors 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.

40

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 (purchase installments for spectrum license
acquisitions and settlement payments), as summarized below.

PAYMENTS DUE BY YEAR

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 February 28, 2003, 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 consolidated
statements of operations. In addition, the consolidated balance sheets in this
report include a current liability of approximately $850,000 for accrued
spectrum lease payments as of December 31, 2002.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.

RECENTLY ISSUED ACCOUNTING PRINCIPLES

Statement of Financial Accounting Standards No. 144. Effective January 1,
2002, we adopted 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, and supersedes SFAS No. 121.

Statement of Financial Accounting Standards No. 148. In December 2002,
FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure -- an amendment of FASB Statement No. 123." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 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. This statement is effective for fiscal years ending
after December 15, 2002. We have adopted the disclosure requirements of SFAS No.
148 and the adoption of this standard had no material effect on our financial
condition, cash flows or results of operations.

41

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

We are not exposed to market risk from changes in 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 December 31, 2002. The fair value of our long-term
debt at December 31, 2002, is estimated to be $9.1 million based on the overall
rate of the long-term debt of 9.5% and an overall maturity of five 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 are not currently evaluating the future use of any such
financial instruments.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this item is included on pages F-1 through
F-23 of this annual report on Form 10-K, which information is incorporated
herein by reference.

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

The information called for by this item previously has been reported by the
registrant on Form 8-K and, therefore, is not included in this report.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item will be included in our Proxy Statement for our
Annual Meeting of Stockholders to be held May 13, 2003, and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The response to this item will be included in our Proxy Statement for our
Annual Meeting of Stockholders to be held May 13, 2003, and is incorporated
herein by reference.

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

The response to this item required by item 201(d) of Regulation S-K is
incorporated herein by reference to the information contained in "Equity
Compensation Plan Information," in Part II, Item 5 of this report. The balance
of the response to this item will be included in our Proxy Statement for our
Annual Meeting of Stockholders to be held May 13, 2003, and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item will be included in our Proxy Statement for our
Annual Meeting of Stockholders to be held May 13, 2003, and is incorporated
herein by reference.

ITEM 14. 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

42

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 IV

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

(a) 1. Financial Statements. The following financial statements are filed
as part of this Form 10-K:

2. Financial Statement Schedules. The following financial statement
schedule is filed as part of this Form 10-K:

All other schedules are omitted because they are not applicable or not
required or because the required information is included in the financial
statements or notes thereto.

3. Exhibits. Reference is made to the Index to Exhibits immediately
following Schedule II on page S-1 of this report for a list of all exhibits
filed as a part of this report.

(b) Reports on Form 8-K

None.

43

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.

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)

Date: March 25, 2003

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 capacities and on the dates indicated.

44

CERTIFICATIONS

I, Carroll D. McHenry, certify that:

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

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

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

4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me 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 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 functions):

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

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

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

/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)

Date: March 25, 2003

45

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Nucentrix Broadband Networks, Inc.

We have audited the accompanying consolidated balance sheet of Nucentrix
Broadband Networks, Inc. and subsidiaries as of December 31, 2002 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nucentrix
Broadband Networks, Inc. and subsidiaries as of December 31, 2002 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in note 1(b)
to the consolidated financial statements, the Company's recurring losses from
operations and the resulting dependence upon access to additional financing and
the Company's current negative working capital position raise substantial doubt
about its ability to continue as a going concern. Management's plans with regard
to these matters are also discussed in note 1(b). The consolidated financial
statements and financial statement schedule do not include any adjustments that
might result from the outcome of this uncertainty.

KBA GROUP LLP

Dallas, Texas
February 21, 2003

F-1

Independent Auditors' Report

The Board of Directors
Nucentrix Broadband Networks, Inc.

We have audited the accompanying consolidated balance sheet of Nucentrix
Broadband Networks, Inc. and subsidiaries as of December 31, 2001 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2001 and 2000. In connection with our
audits of the consolidated financial statements, we also have audited the
accompanying financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nucentrix
Broadband Networks, Inc. and subsidiaries as of December 31, 2001, and the
results of their operations and their cash flows for the years ended December
31, 2001 and 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in note 1(b)
to the consolidated financial statements, the Company's recurring losses from
operations and the resulting dependence upon access to additional financing
raise substantial doubt about its ability to continue as a going concern.
Management's plans with regard to these matters are also discussed in note 1(b).
The consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.

KPMG LLP

Dallas, Texas
April 4, 2002

F-2

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
F-3

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.
F-4

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.
F-5

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.
F-6

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) DESCRIPTION OF BUSINESS

Nucentrix Broadband Networks, Inc. ("Nucentrix" or the "Company") provides
broadband wireless Internet and wireless subscription television services using
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. On average, the Company owns or leases 130 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. Nucentrix also provides wireless
subscription television service, commonly referred to as "wireless cable," in 43
markets.

In March 2002, as part of the Company's long-term plan to focus on the use
of its spectrum for 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. The
Company expects to complete the conversion of its wireless cable business in
2003. Except for a nominal residual royalty payment and recognition of deferred
revenue related to cash received at the time of conversion, the Company does not
expect its existing wireless cable subscriber base to generate material revenues
or cash flows for the Company beyond 2003. Substantially all revenues reported
in the Company's consolidated financial statements for the years ended December
31, 2002, 2001 and 2000, are related to the Company's wireless cable business.

(b) GOING CONCERN AND LIQUIDITY

Nucentrix's 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 incurred operating losses of $31.7 million, $41.2 million and
$27.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The growth of the Company's business by using its spectrum to
provide fixed, portable or mobile broadband Internet service using second
generation, or "2G," MMDS technology 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.

At February 28, 2003, the Company had approximately $4.7 million
(unaudited) of unrestricted cash and cash equivalents. The Company expects that
cash on hand and cash generated from its 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.

During the next six months the Company will seek to raise $15 million -$20
million for maintenance of existing strategic spectrum resources, operating
expenses and to fund the deployment of up to two 2G Internet systems. The
Company has retained a financial advisor in connection with this potential
financing. The Company also may seek to raise additional capital if it
consummates any significant acquisitions or strategic alliances, or determines
that market conditions are appropriate for such financing. Options for raising
capital include the sale of debt or equity securities, borrowings under secured
or unsecured loan arrangements, including vendor equipment financing, and sales
of assets. There can be no assurance that financing will be available on
acceptable terms or in a timely manner, if at all.

F-7

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The consolidated financial statements do not include any adjustments that
might result from the outcome of the uncertainties discussed above.

(c) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Nucentrix and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

(d) CASH AND CASH EQUIVALENTS

Nucentrix considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consist of money market funds, overnight repurchase agreements and
other investment securities.

(e) RESTRICTED ASSETS

At December 31, 2001, restricted assets consisted of bank certificates of
deposit with an original maturity of less than one year. These investments were
considered held to maturity and were stated at amortized cost which approximated
fair value. The Company had pledged these certificates of deposit as letters of
credit for capital leases with remaining terms of less than one year. As of
December 31, 2002 these certificates of deposit and underlying letters of credit
had expired and the funds were transferred to unrestricted cash.

(f) IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144 "Accounting for the Impairment or Disposal or Long-Lived Assets,"
effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed of." Both of these standards
require that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the net asset exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

(g) SYSTEMS AND EQUIPMENT

Systems and equipment are recorded at cost and principally include the cost
of transmission equipment as well as direct costs of subscriber installations
(see note 4). Upon installation, depreciation and amortization of systems and
equipment is recorded on a straight-line basis over the estimated useful lives,
from one to 16 years during the years ended December 31, 2001 and 2000.
Effective January 1, 2002, the Company revised its estimate of the remaining
useful life of its systems and equipment to between one and four years.

The direct costs of wireless cable subscriber installations include
reception materials and equipment on subscriber premises and installation labor,
which are amortized over the useful life of the asset (presently 12 months) for
the recoverable portion and the estimated average subscription term (presently
12 months) for the nonrecoverable portion of such costs. Prior to January 1,
2002, the recoverable portion of such costs was amortized over an estimated
useful life of five years, and the nonrecoverable portion was amortized over an
estimated average subscription term of three years. The nonrecoverable portion
of the cost of a wireless cable installation becomes fully depreciated upon
disconnection of the subscriber. Prior to 2001, the Company capitalized only the
excess of nonrecoverable costs of subscriber installations over installation
revenues. The Company revised its accounting for wireless cable nonrecoverable
installation costs prospectively, effective

F-8

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 1, 2001, to discontinue the netting of installation revenues against
nonrecoverable costs of subscriber installations.

In the fourth quarter of 2002, Nucentrix wrote down the value of its
systems and equipment to fair market value (estimated by management), in
accordance with SFAS No. 144 (see note 3). In the fourth quarter of 2001,
Nucentrix also wrote down the value of its systems and equipment to fair market
value (estimated by management), in accordance with SFAS No. 121 (see note 3).
The Company's remaining systems and equipment will be amortized over the
estimated remaining useful life of one to four years.

(h) LICENSE AND LEASED LICENSE INVESTMENT

License and leased license investment includes costs incurred to acquire
and/or develop MMDS and ITFS spectrum rights and are amortized on a
straight-line basis over 15 years beginning with inception of service in each
market since the Effective Date and 12.5 years for those markets that existed at
the Effective Date (see note 2).

In the fourth quarter of 2002, Nucentrix wrote down the value of its
license and leased license investment assets to estimated fair market value in
accordance with SFAS No. 144 (see note 3). In the fourth quarter of 2001,
Nucentrix also wrote down the value of its license and leased license investment
assets to estimated fair market value in accordance with SFAS No. 121 (see note
3). The re-valued license and leased license investment assets are being
amortized over the average remaining life of 10 years.

(i) REVENUE RECOGNITION

Revenues currently consist primarily of monthly fees paid by wireless cable
subscribers for basic programming, premium programming, equipment rental and
other miscellaneous fees and revenues from the Company's agency relationship
with DIRECTV (which include revenues from the conversion of wireless cable
subscribers). 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 wireless cable subscribers and
systems because revenues from the Company's Internet business were approximately
1.4% of consolidated revenues in 2002.

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 service fee will be
reduced.

Effective January 1, 2001, wireless cable and DIRECTV installation revenue
and revenue received from the Company's 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. For recognition of wireless cable installation revenue, this period was
three years in 2001 and one year in 2002. For recognition of DIRECTV
installation and agency revenue, this period was three years in 2001 and 2002. A
chargeback reserve is recorded for all DIRECTV contingencies. Prior to 2001,
wireless cable installation revenue was offset against the nonrecoverable
portion of installation costs, with the excess cost capitalized and amortized to
depreciation expense over the expected subscriber relationship period of three
years. Prior to 2001, DIRECTV installation revenue (cash received directly from
the customer in conjunction with the sale) was offset against direct incremental
costs, with the resulting amount recorded as a net asset. This asset, referred
to as "subscriber acquisition costs," was amortized as a component of selling,
general and administrative ("SG&A") expense in proportion to the revenues
projected to be generated over the expected subscriber relationship period.
Revenue from the agency relationship with DIRECTV (other than monthly service
fees) was recognized, as the contingencies related to each revenue component
were resolved. A chargeback reserve

F-9

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was not recorded for canceled subscribers. The Company revised its accounting
for wireless cable installation and DIRECTV revenues prospectively, effective
January 1, 2001, as discussed above.

(j) INCOME TAXES

Nucentrix utilizes the asset and liability method for accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Based on this policy, deferred tax assets net of deferred tax
liabilities have been fully reserved.

(k) 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 530,000 and 796,100 shares of common
stock at December 31, 2002 and 2001, respectively, and outstanding warrants to
purchase 1,099,635 and 825,000 shares of common stock at December 31, 2002 and
2001, respectively, were not included in the computation of diluted loss per
share because their effects are antidilutive.

(l) USE OF ESTIMATES

Preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

(m) CONCENTRATIONS OF CREDIT RISK AND ACCOUNTS RECEIVABLE

Nucentrix's subscribers and the related accounts receivable are primarily
wireless cable subscribers. Nucentrix establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific subscribers,
historical trends and other information.

(n) SUBSCRIBER ACQUISITION COSTS

Subscriber acquisition costs consist of the direct incremental costs
incurred in generating a customer relationship with DIRECTV (materials,
equipment and labor). These costs are amortized as a component of SG&A expense
over the expected customer term of three years.

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NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(o) OTHER ASSETS

Other assets are comprised primarily of purchased software.

(p) RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the
current year presentation.

(q) STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation plan using
the intrinsic value-based method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations. As such, compensation expense is recorded on the date
of grant to the extent the current market price of the underlying stock exceeds
the exercise price. Nucentrix recorded a net credit to compensation expense of
$237,000 in 2002 and a charge to compensation expense of $251,000 in 2001
related to the issuance of stock options. The credit recorded in 2002 arose in
connection with the reversal of compensation charges for options that were
forfeited. Had Nucentrix determined compensation based on the fair value at the
grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based
Compensation" as amended by SFAS No. 148, net loss and loss per share would have
been increased as indicated below:

Compensation cost is reflected over the options' vesting period of five to
seven years.

(r) COMPREHENSIVE INCOME

Comprehensive income includes net income and other comprehensive income
which is generally comprised of changes in the fair value of available-for-sale
marketable securities, foreign currency translation adjustments and adjustments
to recognize additional minimum pension liabilities. For all periods presented,
comprehensive income (loss) and net income (loss) are the same amount.

(s) SEGMENT REPORTING

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that public companies report operating segments based
upon how management allocates resources and assesses

F-11

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

performance. Based on the criteria outlined in SFAS No. 131, Nucentrix is
comprised of two reportable segments: (i) wireless cable, and (ii) broadband
wireless (see note 16).

(t) RECENTLY ISSUED ACCOUNTING PRINCIPLES

Statement of Financial Accounting Standards No. 144. Effective January 1,
2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for impairment or disposal of long-lived assets, and supersedes SFAS
No. 121.

Statement of Financial Accounting Standards No. 148. In December 2002,
FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FASB Statement No. 123." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 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. This statement is effective for fiscal years ending
after December 15, 2002. The Company has adopted the disclosure requirements of
SFAS No. 148 and the adoption of this standard had no material effect on its
financial condition, cash flows or results of operations.

(2) REORGANIZATION

On December 4, 1998, the Company filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the District of Delaware. On March 15, 1999, the
Bankruptcy Court confirmed the Plan, which became effective on April 1, 1999
(the "Effective Date").

(3) IMPAIRMENT OF LONG-LIVED ASSETS

In the fourth quarter of 2002, the Company reviewed its systems and
equipment, and license and leased license investment assets (spectrum licenses
and leases) for impairment in accordance with the requirements of SFAS No. 144.
In this review, the following factors were considered, among others, (i) the
uncertainties of raising capital for the Company's long-term business plan, (ii)
the strategic importance of spectrum licenses and leases in smaller or
less-densely populated markets, and the likelihood of deployment of 2G Internet
systems in such markets within the next three years, (iii) a declining demand
for analog MMDS video equipment in the resale market, and (iv) the reduction in
personnel in the Company's wireless cable business, which affects its ability to
retrieve and resell wireless cable customer premises equipment. In analyzing its
licensed and leased license investment assets, spectrum licenses and leases, the
Company retained the services of a third party to perform a fair market
valuation.

In the fourth quarter of 2001, the Company reviewed its systems and
equipment, and license and leased license investment assets for impairment in
accordance with the requirements of SFAS No. 121, which was replaced by SFAS No.
144. Events and circumstances that the Company considered in this review
included (i) the expected conversion of substantially all of our wireless cable
subscribers to satellite and cable programming provided by other companies, (ii)
the need to continue evaluating the development of technology for MMDS service
which likely would delay deployment of new Internet markets beyond 2002, and
(iii) the uncertainties associated with raising capital required to implement
the Company's long-term business plan. In determining whether an impairment was
required for systems and equipment, the Company examined the future cash flows
expected to be generated from these assets and the amount that it estimated
could be realized for these assets in an orderly disposition, if required. In
analyzing its license and leased

F-12

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

license investment assets, the Company retained the services of a third party to
provide a fair market valuation.

As a result of the Company's analysis and the third party valuation, the
Company determined that non-cash impairment charges of $4,843,000 and
$14,100,000 were required in 2002 and 2001, respectively, to write down systems
and equipment and license and leased license investments to estimated fair
value, as follows:

Although the third party market valuation of the Company's aggregate
license and leased license investment assets was substantially in excess of its
aggregate carrying cost, as required by SFAS No. 144 in 2002 and SFAS No. 121 in
2001, the Company examined these assets on an individual market basis and
determined that the carrying value related to 20 markets in 2002 and 10 markets
in 2001 should be written down in the total amounts of $2,425,000 and
$9,369,000, respectively.

The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both could be reduced in
the future due to changes in, among other things, technology, government
regulation, available financing or competition. As a result, the carrying
amounts of long-lived assets could be reduced by additional amounts which would
be material to the Company's financial position and results of operations.

(4) SYSTEMS AND EQUIPMENT

Systems and equipment consists of the following at December 31, 2002 and
2001:

See note 3 for discussion of systems and equipment write-down in the fourth
quarters of 2002 and 2001.

In the fourth quarter of 1999, Nucentrix sold 30 of its communication
towers to SBA Towers, Inc. ("SBA Towers") for approximately $6.2 million in a
transaction accounted for as a sale-leaseback (see note 7). This transaction
resulted in a deferred gain of approximately $3.8 million. The sale of four
additional tower sites was closed in the second and third quarters of 2000 for
approximately $830,000, resulting in a deferred gain of approximately $450,000.
During the years ended December 31, 2002, 2001 and 2000, $417,000, $417,000 and
$400,000, respectively, of the total $4.2 million gain was recognized as other
income. The remaining deferred gain is included in other long-term liabilities
(long-term portion) and accrued liabilities (current portion) on the
accompanying consolidated balance sheet as of December 31, 2002.

F-13

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the fourth quarter of 2002, Nucentrix retired the portion of its
subscriber premises equipment which was no longer in service due to the decrease
in the Company's wireless cable business. The net carrying value of this
equipment had been reduced to zero through depreciation and as a portion of the
impairment charge of $2,418,000 in 2002 (see note 3).

(5) FCC LICENSES AND OPERATING LEASES

License and leased license investment consists primarily of costs incurred
in connection with the Company's acquisition and development of FCC spectrum
rights. Spectrum rights represent the right to use capacity on spectrum operated
under a license received from the FCC or leased from the licensee. These assets
are recorded at cost and amortized using the straight-line method over the
assets' estimated useful lives. Accumulated amortization on license and leased
license investment was $26.9 million and $22.1 million at December 31, 2002 and
2001, respectively. Additions to license and leased license investment of
$161,000 and $5.2 million during 2002 and 2001, respectively, consisted of
engineering and other costs related to the preparation and filing of
applications with the FCC for two-way use of the Company's spectrum, as well as
the cost to acquire new licenses in several markets. See note 3 for discussion
of license and leased license investment write-down in the fourth quarters of
2002 and 2001.

Nucentrix depends on leases with third parties for some of its spectrum
rights. FCC licenses generally must be renewed every 10 years. All licenses are
subject to renewal by the FCC. Although FCC custom and practice establish a
presumption of granting renewals of licenses, the presumption requires that the
licensee substantially comply with its regulatory obligations during the license
period.

Spectrum lease agreements generally require payments based on the greater
of specified minimums or amounts based upon subscriber levels or revenues.
Spectrum lease payments generally begin upon the completion of construction of
transmission equipment and facilities and upon approval for operation under FCC
rules. For certain leases, payments begin upon grant of the spectrum rights.
Spectrum lease expense was $3.7 million, $3.6 million and $3.5 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

Nucentrix also has other operating leases for office space, vehicles,
equipment, and transmission tower space. Rent expense incurred in connection
with these leases was $2.6 million, $2.8 million and $2.6 million for the years
ended December 31, 2002, 2001 and 2000, respectively.

Future minimum lease payments due under noncancellable leases at December
31, 2002, are as follows:

F-14

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consists of the following at
December 31, 2002 and 2001:

(7) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations at December 31, 2002 and 2001,
consists of the following:

In December 1999, Nucentrix entered into capital lease agreements with SBA
Towers to lease back space on 34 towers that Nucentrix sold to SBA Towers in
1999 and 2000 (see note 4). A lease obligation of $2.2 million was recorded in
connection with the lease of 30 of the towers as of December 31, 1999, and an
additional obligation of $294,000 was recorded when the sale of the four
remaining towers closed during 2000. These capital lease obligations have an
initial term of 10 years, with three (3) five-year renewal options.

Other notes payable at December 31, 2002 and 2001, relate to the
acquisition of BTAs from the FCC. The notes payable to the FCC bear interest at
9.5%, payable quarterly over ten years beginning November 1996. Quarterly
principal payments (currently $475,000) are payable over the remaining eight
years beginning November 1998. The notes payable to the FCC are secured by the
underlying BTA authorizations issued by the FCC.

In October 1997, Nucentrix and CS Wireless Systems, Inc. ("CS Wireless")
entered into a lease and purchase option agreement ("BTA Agreement") for certain
spectrum rights associated with 10 BTAs and portions of four additional BTAs
(collectively, the "Leased BTAs") awarded to Nucentrix at a total cost of
approximately $5.2 million. Under the BTA Agreement, CS Wireless reimburses
Nucentrix for principal and interest paid to the FCC for the Leased BTAs. As of
December 31, 2002 and 2001, the amount of FCC debt related to the Leased BTAs
totaled $1.5 million (net of current portion of $519,000) and $2.0 million (net
of current portion of $400,000), and CS Wireless' obligation to the Company has
been recorded as a receivable. In July 2002, CS Wireless, along with its
indirect parent WorldCom, Inc., filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. CS Wireless has reimbursed the Company for substantially
all post-petition amounts owed to the Company under the BTA Agreement.
Approximately $87,000 in prepetition

F-15

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts related to BTA reimbursements remains unpaid. If CS Wireless assumes the
BTA Agreement in its Chapter 11 proceeding, it will be required to pay all
prepetition amounts due and owing to the Company.

Aggregate maturities of long-term debt and capital lease obligations as of
December 31, 2002, for the five years ending December 31, 2007, are as follows:
2003 -- $2.8 million; 2004 -- $2.3 million; 2005 -- $2.6 million; 2006 -- $2.2
million; and 2007 and thereafter -- $1.4 million.

(8) OTHER LONG-TERM LIABILITIES

Other long-term liabilities at December 31, 2002 and 2001, consists of the
following:

(9) ACQUISITIONS/DISPOSITIONS

Fayetteville and Fort Smith, Arkansas Acquisition. In April 2001, the
Company completed the purchase of certain of the MMDS spectrum licenses, leases
and related assets of Smithco of Ft. Smith, Inc. and Smithco Investments of West
Memphis, Inc., in Fort Smith, Arkansas in exchange for the issuance of
approximately 153,000 shares of common stock of the Company, valued at $4.2
million as of the date of filing of the Company's Form 10-Q for the first
quarter of 2001, in which the Company initially announced this transaction. The
153,000 shares of common stock includes up to approximately 16,000 shares
issuable over two years. In addition, the Company entered into new MDS spectrum
leases for three channels (18 MHz) in Fort Smith and new ITFS spectrum leases
for 20 channels (120 MHz) in each of Fort Smith and Fayetteville, Arkansas. The
Company also assumed a lease and purchase agreement for four MMDS channels (24
MHz) in Fort Smith that provides for the payment of $337,000 in cash through
September 2002.

Exchange of Equity Interest in Wireless One, Inc. In January 2000, the
Company exchanged 2,911,725 shares of common stock in Wireless One, Inc.
("Wireless One") for approximately $3.8 million, pursuant to Wireless One's plan
of reorganization under Chapter 11 of the Bankruptcy Code. In July 2000, an
additional 547,783 shares of common stock in Wireless One was exchanged for
approximately $700,000. After these transactions, Nucentrix retained no equity
interest in Wireless One. Losses recorded in prior years for Wireless One had
reduced the carrying amount of the Company's investment to zero. Accordingly,
the proceeds have been classified as a gain on sale of assets and included in
other income in the consolidated statement of operations for the year ended
December 31, 2000.

(10) STOCKHOLDERS' EQUITY

(A) STOCK OPTIONS

The Company's First Amended and Restated 1999 Share Incentive Plan provides
for the grant of options to purchase a maximum of 1,300,000 shares of common
stock of the Company. Options vest according to schedules set by the
Compensation Committee of the Board of Directors.

F-16

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of option activity during 2000, 2001 and 2002 follows:

The following table summarizes information about stock options outstanding
at December 31, 2002:

At December 31, 2001, the number of options exercisable and the weighted
average exercise prices of those options were 391,474 and $13.22, respectively.

The per share weighted average fair values of stock options granted during
fiscal years 2002, 2001 and 2000, estimated on the dates of grant using the
Black-Scholes option pricing model, were as follows:

The following weighted-average assumptions for stock options granted during
fiscal years 2002, 2001 and 2000 were used:

F-17

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(B) WARRANTS

On April 1, 1999, under the terms of the Plan, holders of convertible
subordinated notes received warrants ("Initial Warrants") to purchase 825,000
shares of common stock at an exercise price of $27.63 per share, subject to
downward adjustment in the event of a sale or merger of the Company. These
warrants expire in October 2007. In June 2002, upon resolution of certain
litigation claims, the Company issued additional warrants ("Additional
Warrants") to purchase 274,635 shares. The terms of the Additional Warrants are
the same as the Initial Warrants. The Initial Warrants and Additional Warrants
represent substantially all of the warrants that the Company is required to
issue under the Plan.

(11) INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2002, 2001
and 2000, differed from the amount computed by applying the U.S. federal income
tax rate of 35% to income (loss) before income taxes as a result of the
following:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001, are presented below:

The net changes in the total valuation allowance for the years ended
December 31, 2002, 2001 and 2000 were increases (decreases) of $1.7 million,
$17.5 million and ($62.4) million, respectively. In assessing the

F-18

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

realizability of deferred tax assets, Nucentrix considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets depends on the
generation of future taxable income during the periods in which the temporary
differences become deductible. Nucentrix considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon these considerations, Nucentrix
has fully reserved all deferred tax assets to the extent that such assets exceed
deferred tax liabilities.

As a result of the cancellation of debt in connection with the Company's
reorganization in 1999, federal tax law requires that the amount of income from
discharge of indebtedness that occurs in connection with a Chapter 11 bankruptcy
be used to permanently reduce federal tax attributes. These reductions may be
applied to one or more tax items, including but not limited to pre-bankruptcy
net operating loss carryforwards, the tax basis of certain assets and the tax
basis of subsidiary stock. Management has elected to apply the required
reduction first to tax basis in depreciable assets, and then to net operating
loss carryforwards. The amount of reduction in the tax basis of depreciable
assets was approximately $56 million. The amount of reduction in net operating
loss carryforwards was approximately $118 million, leaving approximately $222
million in remaining net operating loss carryforwards at December 31, 2000. The
net operating loss carryforwards at December 31, 2002 are $269 million and
expire in years 2013 through 2021. Nucentrix estimates that approximately $31
million of the carryforwards at December 31, 2002 relate to various acquisitions
and are subject to certain limitations.

In addition to the permanent Tax Attribute Reduction, the Company also must
limit the annual deduction of pre-bankruptcy net operating losses and "built-in
deductions" to an amount no greater than the fair market value of the Company
immediately after the restructuring, multiplied by the long-term tax exempt
rate. This annual limitation is currently estimated to be approximately $7.3
million.

(12) BENEFIT PLAN

The Company sponsors a 401(k) savings plan in which substantially all
employees are eligible to participate upon completion of six months of service.
The plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended. The plan permits eligible employees to contribute up to
20% of their compensation, subject to the annual maximum allowed by the Internal
Revenue Service. The Company may make discretionary matching contributions to
the plan. The Company began making discretionary matching contributions to the
plan for the 2001 plan year on April 1, 2001, and contributed $139,000 and
$113,000 during the years ended December 31, 2002 and 2001, respectively. The
Company made no discretionary matching contributions during the year ended
December 31, 2000.

(13) CHANGE IN ACCOUNTING ESTIMATE

Effective January 1, 2002, 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 one year, and its estimated useful life of license and
leased license investment from 12.5-15 years to 10 years. These changes
increased net loss for the year ended December 31, 2002, by $3.5 million or
$0.33 per share. The changes were made to better reflect the remaining estimated
useful life of systems and equipment and license and leased license investment,
and more accurately match depreciation and amortization 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 1(a) and (b), above.

(14) COMMITMENTS AND CONTINGENCIES

WSNet. The Company has a programming arrangement with World Satellite
Network, Inc. ("WSNet"), under which the Company pays WSNet to obtain and manage
certain of the video programming
F-19

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that the Company delivers to its 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 and, in February 2003, announced that it would cease
operations at the end of that month. The Company now pays programmers directly
for the monthly programming that the Company continues to deliver to its
remaining wireless cable subscribers. However, for programming delivered for
September 2002, the Company paid WSNet approximately $550,000. WSNet has not
remitted this amount to the various programmers from whom the Company received
programming. In February 2003, WSNet notified the Company that it intended to
reject its agreement with the Company in its Chapter 11 proceeding. 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 believes it
has a claim against WSNet or its creditors 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, the Company 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.

Settlement of Securities Litigation. Nucentrix and certain of its former
officers and directors were co-defendants in securities litigation styled
Coates, et al. v. Heartland Wireless Communications, Inc., et al.
(3-98-CV-0452-D) and Thompson, et al. v. David E. Webb, et al. (98-371-D),
originally filed in February 1998 and July 1998, respectively. In 2001, the
parties in the Coates and Thompson lawsuits executed settlement agreements for
the respective lawsuits. In January 2002, the court in Thompson approved the
settlement and entered a Final Judgment and Order of Dismissal with prejudice in
this matter. In March 2002, the Court of Appeals in Coates dismissed the appeal
pursuant to the settlement agreement entered into in that lawsuit. All amounts
payable by the defendants in the settlement of both the Coates and Thompson
lawsuits were covered by the proceeds from the Company's primary directors and
officers liability insurance policy. Accordingly, this settlement did not have a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company.

Settlement of Other Litigation. From time to time the Company has been a
party to purported class action lawsuits alleging that the Company overcharged
its customers for administrative late fees, and that the Company breached
various state consumer lease and credit laws and federal privacy and notice
statutes. These lawsuits included the following:

- Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a Heartland
Cable Television (98-05-8388-CV), filed in May 1998 in the 79th Judicial
District Court in Brooks County, Texas (dismissed and appealed),

- John Nolen, Jr., et al. v. Nucentrix Broadband Networks, Inc.
(DC-00-155), filed in May 2000 in the 229th Judicial District Court in
Duval County, Texas,

- Nolen, et al. v. Nucentrix Broadband Networks, Inc., et al. (L-00CV134),
filed in October 2000 in U.S. District Court for the Southern District of
Texas, Laredo Division (dismissed),

- Perez, et al. v. Nucentrix Broadband Networks, Inc. (01-141-D), filed in
March 2001 in the 105th Judicial District Court in Kleberg County, Texas,

- Garcia v. Heartland Wireless Communications, Inc. (01-04-10449CV), filed
in April 2001 in the 79th Judicial District Court in Brooks County, Texas
(dismissed and appealed),

- Torres v. Nucentrix Broadband Networks, Inc. (01-61022-1), filed in
September 2001 in County Court at Law No. 1 in Nueces County, Texas,

- Santellana v. Nucentrix Broadband Networks, Inc. (S-01-6109-CV-B), filed
in November 2001 and pending in the 156th Judicial District Court in San
Patricio County, Texas (dismissed),

F-20

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- Ysasi and Garcia v. Nucentrix Broadband Networks, Inc., DIRECTV, Inc., et
al. (C-02-001), filed in January 2002 in U.S. District Court for the
Southern District of Texas, Corpus Christi Division (dismissed), and

- Santellana v. Nucentrix Broadband Networks, Inc. and DIRECTV, Inc.
(C-02-079), filed in February 2002 and pending in U.S. District Court for
the Southern District of Texas, Corpus Christi Division (dismissed).

In January 2003, the Company entered into a Settlement Agreement with all
named plaintiffs in the lawsuits listed above, as well as all named plaintiffs
in prior similar lawsuits, settling all claims brought by these plaintiffs in
such matters. This settlement did not have a material adverse effect on the
consolidated financial condition, results of operations or cash flows of the
Company

Dismissal of State Court Action. 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 the Company had undervalued the
enterprise value in the chapter 11 proceeding of its 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.

General. The Company is a party to other legal and regulatory proceedings,
a majority of which are incidental to its business. In the opinion of
management, and after consideration for amounts recorded in the accompanying
consolidated financial statements, the ultimate effects of such other matters
are not expected to have a material adverse effect on the consolidated financial
condition, results of operations or cash flows of the Company.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and estimated fair value
of Nucentrix's financial instruments at December 31, 2002 and 2001. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.

The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximate the carrying amounts of these assets and
liabilities because of the short maturity of these instruments.

The carrying value of bank certificates of deposit approximates fair value
since the term of the underlying deposits is short-term at the reporting date.
The carrying amount of the lease receivable approximates fair value since the
interest rate (9.5% at December 31, 2002) equates to the market rate of
interest. The fair value of the long-term debt is based on management's
estimates derived from current rates offered for similar borrowings.

F-21

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) SEGMENT REPORTING

Based on the criteria outlined in SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," Nucentrix is comprised of two
reportable segments: (i) wireless cable and (ii) broadband wireless.

A reconciliation from the segment information to net loss for the years
ended December 31, 2002, 2001 and 2000, is as follows:

F-22

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total expenditures for additions to long-lived assets during the years
ended December 31, 2002, 2001 and 2000, are as follows:

Total assets as of December 31, 2002, 2001 and 2000, are as follows:

(A) Revenues from the wireless cable segment's agency relationship with
DIRECTV represent approximately $4.1 million, $2.1 million and $6.3 million of
the Company's consolidated revenue for the years ended December 31, 2002, 2001
and 2000, 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 segments.

(C) The Company measures segment profit or loss, as reviewed by the
Company's "chief operating decision maker" (as defined in SFAS No. 131), as
operating loss before depreciation and amortization.

(17) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables present unaudited financial data of Nucentrix for each
quarter of 2002 and 2001.

F-23

SCHEDULE II

NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

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(a) Accounts written off.

(b) Recognized as a component of deferred tax assets.

S-1

INDEX TO EXHIBITS

Exhibits followed by an (*) constitute management contracts or compensatory
plans or arrangements.

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+ Filed herewith.