SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-QSB

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________

Commission File Number
1-8232

Name of Registrant
NBI, INC.

State of Incorporation IRS Employer I.D. Number
Delaware 84-0645110
Address
850 23rd Avenue, Suite D
Longmont, Colorado 80501
(303) 684-2700

Check whether the issuer (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.

[X] YES [ ] NO

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

Class Outstanding at February 7, 2003
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 8,103,320

NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended December 31, 2002

PAGE
--------
PART I - FINANCIAL INFORMATION
<s> <c>
Consolidated Financial Statements (Unaudited) 3 - 6

Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 15

Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 23

Controls and Procedures 24

PART II - OTHER INFORMATION

Exhibits and Reports on Form 8-K 25

NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)

December 31, June 30,
2002 2002
----------- ---------
(Unaudited) (Audited)
ASSETS
------
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 197 $ 199
Accounts receivable, less allowance for doubtful accounts
of $269 and $279, respectively 919 1,257
Inventories, net 2,947 3,262
Other current assets 110 132
-------- --------
Total current assets 4,173 4,850

Property, plant and equipment, net 7,627 8,057
Note receivable from related party 2,258 2,300
Other assets, net 327 288
-------- --------

$14,385 $15,495
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Short-term borrowings and current portion of notes payable $ 3,272 $ 3,435
Current portion of capital lease obligation 46 41
Accounts payable 1,911 1,833
Accrued liabilities and other 714 747
-------- --------
Total current liabilities 5,943 6,056

Long-term liabilities:
Notes payable 2,786 2,951
Capital lease obligation 926 947
Deferred income taxes 64 64
Postemployment disability benefits 109 119
Deferred gain from sale of real estate, net of taxes 881 881
-------- --------
Total liabilities 10,709 11,018
-------- --------
Commitments and contingencies

Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421
shares of Series A Cumulative Preferred Stock issued and
outstanding (liquidation preference value of $5,074) 5 5
Capital in excess of par value - preferred stock 4,380 4,380
Common stock - $.01 par value; 20,000,000 shares authorized;
10,130,520 shares issued 101 101
Capital in excess of par value - common stock 6,566 6,566
Accumulated deficit (6,508) (5,707)
-------- --------
4,544 5,345
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 3,676 4,477
-------- --------

$14,385 $15,495
======== ========

<FN>

See accompanying notes.

NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)

Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------- ------- ------- -------
<s> <c> <c> <c> <c>
Revenues:
Sales $3,149 $3,574 $ 5,423 $6,708
Rental and service 533 580 1,216 1,253
Royalty revenue, net 21 26 21 26
------- ------- -------- -------
3,703 4,180 6,660 7,987
------- ------- -------- -------

Costs and expenses:
Cost of sales 2,642 2,749 4,900 5,251
Cost of rental and service 435 434 887 883
Marketing, general and administrative 698 862 1,513 1,695
------- ------- -------- -------
3,775 4,045 7,300 7,829
------- ------- -------- -------

Income (loss) from operations (72) 135 (640) 158

Other income (expense):
Interest income 31 44 62 90
Other income and expenses, net 9 3 20 3
Interest expense (116) (128) (234) (269)
------- ------- -------- -------
(76) (81) (152) (176)
------- ------- -------- -------

Income (loss) before income taxes (148) 54 (792) (18)
Income tax benefit (provision) 4 (17) (9) (11)
------- ------- -------- -------

Net income (loss) (144) 37 (801) (29)

Dividend requirement on preferred stock (128) (128) (256) (256)
------- ------- -------- -------

Loss attributable to common stock $ (272) $ (91) $(1,057) $ (285)
======= ======= ======== =======

Loss per common share - basic and diluted $ (.03) $ (.01) $ (.13) $ (.04)
======= ======= ======== =======

Weighted average number of common
shares outstanding 8,103 8,103 8,103 8,103
======= ======= ======== =======

<FN>

See accompanying notes.

NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)

Six Months Ended
December 31,
2002 2001
------ ------
<s> <c> <c>
Cash flows from operating activities:
Net loss $(801) $ (29)
Adjustments to reconcile net loss to net cash flow
provided by (used in) operating activities:
Depreciation and amortization 535 647
Provisions for bad debts and returns 3 53
Inventory reserve provisions 56 48
Gain on sales of property and equipment (12) --
Other (10) (10)
Changes in assets -- decrease (increase):
Accounts receivable 335 (831)
Inventories 259 (528)
Other current assets 22 (81)
Other assets (12) 1
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 18 555
Income taxes payable -- 5
------ ------
Net cash flow provided by (used in) operating
activities 393 (170)
------ ------

Cash flows from investing activities:
Proceeds from sales of property and equipment 69 --
Purchases of property and equipment (132) (155)
------ ------
Net cash flow used in investing activities (63) (155)
------ ------

Cash flows from financing activities:
Collections on note receivable 42 163
Net borrowings (payments) on line of credit (79) 529
Payments on notes payable (249) (316)
Payments on capital lease obligation (16) (17)
Loan costs paid (30) -
------ ------
Net cash flow provided by (used in) financing
activities (332) 359
------ ------

Net increase (decrease) in cash and cash equivalents (2) 34

Cash and cash equivalents at beginning of period 199 270
------ ------

Cash and cash equivalents at end of period $ 197 $ 304
====== ======

<FN>

See accompanying notes.

NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)

Six Months Ended
December 31,
2002 2001

<s> <c> <c>
Supplemental disclosures of cash flow information:

Interest paid $ 219 $272
===== ====

Income taxes paid $ 17 $ 3
===== ====

Noncash purchases of property, plant and equipment included in
accounts payable and accrued liabilities at end of period $ 73 $ 32
===== ====

Loan fees incurred included in accounts payable at end of period $ 29 $ --
===== ====

<FN>

See accompanying notes.

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Preparation
- ----------------------------------

The accompanying financial statements have been prepared in accordance with
the requirements of Form 10-QSB and include all adjustments (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of NBI, Inc. (the "Company") and its
wholly-owned subsidiaries. All significant intercompany accounts and profits
have been eliminated.

Revenue from sales of products is recognized when title passes, generally when
the goods are shipped, except for goods shipped on consignment. Revenue is
recognized from products shipped on consignment when the consignee sells the
goods. Freight charges billed to customers are included in revenue. The
Company recognizes royalty revenues from sublicensees under its decoder
license as earned when the sublicensee has substantially completed the work
per the terms of the sales agreement. The royalty revenues are presented net
of related royalties earned by the master licensor. The Company incurs
minimum royalties expense when the minimum royalties payable under the terms
of the license agreement are estimated to exceed the royalties earned based
upon revenues. The minimum royalty expense is included in marketing, general
and administrative expenses.

On August 19, 1999, the Board of Directors voted to sell the assets of the
Company's wholly-owned subsidiary, NBI Properties, Inc. ("NBI Properties"), to
an entity that is 100% owned and controlled by its CEO. Therefore, the
Company had classified its hotel operation as a discontinued operation at that
time. However, as of June 30, 2002 the Company determined that the sale would
not be completed within the next twelve months, therefore the hotel operation
was reclassified as a continuing operation for the three and six months ended
December 31, 2002 and 2001. There were no other adjustments in the financial
statements as a result of this change. Certain other items in the fiscal 2002
financial statements have been reclassified to conform to the fiscal 2003
manner of presentation.

Note 2 - Going Concern and Management's Plan
- ---------------------------------------------------

L.E. Smith Glass Company ("L.E. Smith") has consistently been unable to repay
the overborrowings on its revolving line of credit with Sky Bank which are
required to be repaid promptly. L.E. Smith was also in arrears on certain
payments related to its revolving line of credit and bank term note payable in
July and August, 2002. In addition, L.E. Smith has not been able to meet
certain financial ratios required under the loan agreement covering L.E.
Smith's revolving line of credit and bank term note payable ("Loan Agreement").
However, on August 23, 2002, L.E. Smith and Sky Bank entered into a
forbearance agreement and amendment related to L.E. Smith's revolving line of
credit and bank term note ( "Forbearance Agreement" and "Amendment" ), whereby
Sky Bank has agreed to forbear from exercising its rights and remedies with
respect to the existing defaults by L.E. Smith under the Loan Agreement
provided there is no event of default by L.E. Smith under the terms of the
Forbearance Agreement which expires on July 7, 2003. In conjunction with the
Forbearance Agreement and Amendment, the due date of the bank term note has
been extended to March 5, 2008 with monthly interest only payments allowed for
September 5, 2002, and February 5, 2003 through August 5, 2003; monthly
principal payments of $34,000 plus interest will be due for all other months
during the term of the note. Sky Bank has authorized L.E. Smith to exceed its
borrowing base by a maximum of $800,000 ("Allowed Overborrowings"). In
exchange, Bellevue Partners, L.P. ( "Bellevue Partners" ), an entity that is
100% owned and controlled by NBI's CEO, has agreed to make unscheduled
principal payments totaling $500,000 on its note to the Company's wholly-owned
subsidiary, Willowbrook Properties, Inc. ( "Willowbrook Properties" ) from
the sale of certain outparcels, and Willowbrook Properties has assigned its
interest in these payments to Sky Bank ( see Note 14 ). The Allowed
Overborrowings will be reduced by the amount of these payments as they are
received by the bank. As of February 5, 2003, the borrowings under L.E.
Smith's revolving line of credit exceeded the allowed borrowing base by
$729,000, $71,000 below the maximum Allowed Overborrowings. The Forbearance
Agreement prohibits L.E. Smith from making any payments to NBI or any of its
subsidiaries. The Forbearance Agreement also requires the Company to obtain
written agreements with its vendors and other creditors regarding revised
payment terms acceptable to the bank. The Company has been working with its
vendors and creditors on revised payment terms and is in the process of
obtaining written agreements

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

with them. The Company has obtained an extension of time from Sky Bank to
March 5, 2003 in which to obtain these written agreements. With this
extension, the Company is in compliance with the terms of the Forbearance
Agreement.

As of December 1, 2002, L.E. Smith was six months in arrears on its monthly
payments on its note payable to the Pennsylvania Department of Community and
Economic Development ("PADCED"). However, on December 13, 2002, L.E. Smith
obtained a six-month deferral of principal payments on this note. In January
2003, the Company paid PADCED all of the past due interest as well as the
regular loan payment scheduled for January 1, 2003. However, L.E. Smith has
been unable to pay various other liabilities when due as required under the
PADCED loan agreement. This condition causes the note payable to PADCED to be
subject to immediate demand at the option of the holder. Therefore, the
Company has included the entire balance of this note payable in current
liabilities at December 31, 2002, as was also required at June 30, 2002.

The Company has incurred significant losses for the six months ended December
31, 2002 and during fiscal 2002 and 2001 and had a significant working capital
deficit at December 31 and June 30, 2002. In addition, a large amount of L.E.
Smith's accounts payable are significantly past due. These conditions raise
substantial doubt about the Company's ability to continue as a going concern,
as expressed by our independent auditors in an explanatory paragraph in their
audit report dated September 5, 2002 on our June 30, 2002 financial
statements. The accompanying Consolidated Financial Statements do not contain
any adjustments that might result from the outcome of this uncertainty. The
Forbearance Agreement and Amendment with Sky Bank significantly reduces the
amount of principal payments required on the Company's long-term debt in
fiscal 2003. L.E. Smith is also working with its accounts payable vendors to
obtain extended terms. Furthermore, management has been working on
significantly reducing its costs and expenses, including significantly
reducing its health insurance costs through a new collective bargaining
agreement which it obtained on November 26, 2002 (see Note 8) and savings
expected from other cost control measures.

The Company also is working on increasing its sales volume and gross profit at
L.E. Smith. Due to intense foreign competition and the unfavorable economic
conditions in the United States during the last two years, it has been
difficult for L.E. Smith to generate sufficient sales volume to allow it to
obtain the critical mass required in its production facility for it to be
profitable.

L.E. Smith is currently in discussions with other glass manufacturers to
develop marketing partnerships that would help increase sales volumes for each
party. This is possible when the companies offer different types of products
and consequently do not directly compete with one another. For example, one
company may be an automated glass manufacturer which sells to the mass market,
however, their manufacturing plant is not able to handle smaller quantities
efficiently. In those situations requiring smaller quantities, they would
sell L.E. Smith handmade products. In return, L.E. Smith could sell some of
that company's products to its customers when large quantities were required.
In addition, L.E. Smith has the capability to produce colored and decorated
glass, whereas another company may have the ability to produce leaded crystal
which L.E. Smith does not. Through a marketing partnership, two or three
companies become stronger by capitalizing on each other's strength.

In addition, L.E. Smith must find a way to be closer to the end-user. Today's
distribution methods are very expensive for manufacturers. In highly
competitive situations, the Company is often unable to sell its products or
does so at inadequate margins because of the mark-up required by the retailer.
For many years, L.E. Smith has had an on-site factory outlet store that has
been profitable. Therefore, the Company has decided on a retail strategy of
opening retail stores in several outlet locations over the next year. These
stores will be opened both independently and through joint ventures with
marketing partners. These retail outlets will do several things to improve
our Company. First, it will allow us to improve our margins because we have
eliminated several layers of distribution. Second, it allows us to increase
our sales volume by taking advantage of an increasing trend in retail markets
towards outlet and discount stores, away from pricey shopping malls. In
October 2002, the Company acquired retail space for an outlet store in
Lancaster, Pennsylvania which it opened in mid-November 2002. However, the
sales from this store have been very disappointing due to the poor retail
market and inclement weather. The Company will also increase its marketing
efforts related to

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

a new line of home building products that it has been developing including
glass sinks, glass tiles, and glass blocks, as well as glass used in various
architectural projects.

However, there can be no assurance that the Company will be successful in
increasing its sales and gross profit and reducing its costs and expenses; nor
can there be any assurance that L.E. Smith's creditors will grant the Company
extended payment terms.

Note 3 - Cash and Cash Equivalents
- ----------------------------------------

Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.

Note 4 - Inventories
- -----------------------

Inventories are comprised of the following amounts, which are presented net of
reserves totaling $254,000 and $198,000 at December 31 and June 30, 2002,
respectively:

December 31, June 30,
2002 2002

<s> <c> <c>
Raw materials $ 501 $ 590
Work in process 580 638
Finished goods 1,847 2,017
Food and beverage inventory 19 17
------ ------
$2,947 $3,262
====== ======

Note 5 - Note Receivable from Related Party
- --------------------------------------------------

In conjunction with the sale of the land and construction-in-progress of
Willowbrook Properties, on December 17, 1999, the Company received a note
receivable in the amount of $2.7 million from Bellevue Partners, an entity
which is 100% owned and controlled by NBI's CEO (see Note 14). The note bears
interest at the rate of two-year Treasury Notes plus 200 basis points with a
rate of 5.05% determined on December 31, 2001 for all of calendar 2002, a rate
of 3.602% determined on December 31, 2002 for all of calendar 2003, and the
rate to be redetermined each succeeding December 31 for the following calendar
year's rate. The note is collateralized by a second security interest in the
property and is payable in quarterly installments of interest only with the
entire outstanding principal balance plus any accrued but unpaid interest to
be paid in full on December 31, 2006. On August 23, 2002 Willowbrook
Properties assigned its rights to $500,000 of future payments on the note
receivable to Sky Bank (see Notes 2 and 14). At December 31, 2002, the note
receivable balance was $2,258,000.

Note 6 - Income Taxes
- -------------------------

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
or six months ended December 31, 2002 or 2001.

Note 7 - Deferred Gain from Sale of Operation
- -----------------------------------------------------

The Company has accounted for the sale of a majority of the assets of
Willowbrook Properties in accordance with Statement of Financial Accounting
Standards ( "SFAS" ) No. 66, "Accounting for Sales of Real Estate". The terms
of the sale do not meet the requirements of SFAS No. 66 for recognition of
gain until the purchase price is paid in full in cash. Consequently, the
Company recorded a deferred gain on the sale of $881,000 during fiscal 2000,
which is net of selling expenses of $48,000 and net of approximately $40,000
of related income taxes. (See Note 14.)

Note 8 - Contingencies
- -------------------------

L.E. Smith purchases natural gas under a long-term contract. In September
2000 and then in May 2001, the Company contracted for natural gas for the
periods October 1 through September 30, 2001 and 2002, respectively, at a
fixed cost per unit with no minimum volume requirements. L.E. Smith's current
contract expired on September 30, 2002 and the Company is currently purchasing
natural gas at market rates. The Company is in the process of trying to
obtain a new natural gas contract; however, due to L.E. Smith's poor financial
condition, it may be unable to obtain a contract for fixed natural gas prices.
If this occurs, L.E. Smith will be forced to continue to fulfill its natural
gas requirements at market rates which historically rise during the winter
months and would be not be limited. This could have a material adverse impact
on the Company's financial condition.

A majority of L.E. Smith's employees are covered by a new collective
bargaining agreement, obtained on November 26, 2002, which expires on March 1,
2004.

During the third quarter of fiscal 2002, the Company exercised its option for
the first new renewal period, April 1, 2002 through September 30, 2002, under
its master license agreement for its decoder business. For the first renewal
period, the Company was required to pay royalties equal to the greater of
$150,000 or 5% of the net decoder sales and services generated under the
license, including decoder sales and services produced by sublicensees. The
Company included $75,000 in marketing, general and administrative expenses for
the quarter ended September 30, 2002 related to the amount of minimum royalty
expense in excess of royalties payable based upon net decoder sales and
services. The master license expired on September 30, 2002. During the
second quarter of fiscal 2003, the Company obtained a nonexclusive license
from the master licensor covering NBI and its existing sublicensees for the
period October 1 through December 31, 2002. For the term of this nonexclusive
license, the Company was required to pay royalties equal to the greater of
$25,000 or 5% of the net decoder sales and services generated under the
license. The Company included $11,000 in marketing, general and
administrative expenses for the quarter ended December 31, 2002 related to the
amount of minimum royalty expense in excess of royalties payable based upon
net decoder sales and services. The nonexclusive license expired on December
31, 2002 and the Company has no further liability remaining under this
license. In January 2003, the Board of Directors decided not to renew this
license and to exit the decoder business. The Company has estimated that it
will have minimal expenses associated with the closure of this business.

Note 9 - Stockholders' Equity
- --------------------------------

The Company has authorized 20,000,000 shares of $.01 par value common stock.
At December 31, 2002, 10,130,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,103,320 shares issued and

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

outstanding at December 31, 2002. At December 31, 2002, 1 million registered
common stock purchase warrants at $1.20 per share issued in conjunction with
the Company's preferred stock offering in fiscal 1999 were outstanding. The
Company has authorized 5,000,000 shares of preferred stock with a par value of
$.01 per share, and has designated 2,000,000 preferred shares as Series A
Cumulative Preferred Stock. At December 31, 2002, 507,421 registered shares
of Series A Cumulative Preferred Stock were issued and outstanding.

The Company reported dividend requirements of $128,000 and $256,000
attributable to its preferred stock for each of the three and six month
periods ended on December 31, 2002 and 2001. On September 3, 1999, $252,000
in dividends were paid, consisting of $182,000 in cash and 7,421 in additional
shares of preferred stock, valued at $70,000, per the elections of the
holders. No dividends have been declared or paid subsequently. Cumulative
unpaid dividends totaled approximately $1,794,000 as of December 31, 2002.

On December 31, 2002, warrants to purchase 1.7 million shares of the Company's
common stock at $.89 per share, previously issued in conjunction with its
acquisition of a children's paint manufacturer, expired (see Note 14).

Note 10 - Income Per Common Share
- ---------------------------------------

NBI calculates earnings per share in accordance with SFAS No. 128, which
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income (loss) available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the earnings
of an entity.

Because the Company incurred a net loss attributable to common stockholders
for each of the three and six month periods ended December 31, 2002 and 2001,
none of its outstanding options or warrants were included in the computation
of diluted earnings per share as their effect would be anti-dilutive.

The options and warrants outstanding at December 31, 2002 were as follows:

Number
Exercise Outstanding at
Price December 31, 2002
-------- -----------------
<s> <c>
Stock options:
$ .22 350,000
$ .38 201,000
$ .77 400,000

Warrants:
$1.20 1,000,000
-----------
1,951,000
===========

Note 11 - Stock Options
- ----------------------------

In December 2002, the Financial Accounting Standards Board ("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,
this statement 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

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

effect of the method used on reported results. The Company has adopted the
disclosure requirements effective December 31, 2002.

The following provides pro forma information regarding net income (loss) as if
compensation cost for the Company's stock option plan had been determined in
accordance with the fair value based method as required by SFAS No. 148.

Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
------ ------ -------- ------
(Amounts in thousands)

<s> <c> <c> <c> <c>
Net loss attributable to common
stockholders - as reported $(272) $ (91) $(1,057) $(285)
====== ====== ======== ======

Net loss attributable to common
stockholders - proforma $(274) $ (92) $(1,061) $(286)
====== ====== ======== ======

Net loss per common share - as reported $(.03) $(.01) $ (.13) $(.04)
====== ====== ======== ======

Net loss per common share - proforma $(.03) $(.01) $ (.13) $(.04)
====== ====== ======== ======

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
grants issued during fiscal 2002: no dividend yield; expected volatility of
85.15%; risk-free interest rate of 3.94%; and expected lives of 4 years. No
other options have been granted that would affect fiscal 2003 or 2002.

Note 12 - Seasonal Variations of Operations
- -------------------------------------------------

L.E. Smith: Excluding the effect of its significant customer, L.E. Smith
typically has its strongest revenue performance during the first and second
fiscal quarters due to seasonal variations. Generally, the third and fourth
fiscal quarters' revenues from L.E. Smith are moderately to significantly
lower than in the first and second quarters. However, historically these
trends have been materially affected by fluctuations in the timing of orders
from its significant customer, which do not have consistent trends. In fiscal
2002, L.E. Smith did not experience the seasonal increase in sales during its
first and second quarters as seen historically, due to the slow economy. L.E.
Smith experienced a substantial decline in revenues during the first quarter
of fiscal 2003 primarily related to cash constraints imposed on L.E. Smith by
its bank due to its ongoing overborrowed position until August 23, 2002 when
L.E. Smith obtained the Forbearance Agreement from the bank. These cash
constraints severely limited L.E. Smith's ability to produce and ship goods
during that time period.

Belle Vernon Holiday Inn: The Belle Vernon Holiday Inn generally has its
strongest revenue performance during the first fiscal quarter due to seasonal
variations, followed by the second fiscal quarter revenues which are
moderately lower. Typically revenues from the hotel in the fourth fiscal
quarter are significantly lower than in the first quarter and revenues in the
third fiscal quarter are substantially lower.

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 13 - Segment Reporting
- -------------------------------

The Company's main operations are in the glass manufacturing and hotel
industries. The glass manufacturer sells its glass products primarily to
traditional and specialty retailers throughout the United States, as well as
to manufacturers/wholesalers, the food service market and through an on-site
retail store. The hotel is an 80-room full-service Holiday Inn hotel. In
addition, the Company has the right to use and sublicense certain patented
decoder technology under a master license agreement with the right to
manufacture and sell decoders made in accordance with such patent. The
decoder is a small translucent plastic-like piece that is used in marketing
activities in which a hidden message is revealed when the decoder is placed
against a colored field on a computer screen. Information by segment and a
reconciliation to reported amounts are as follows:

Corporate,
Glass Hotel Other, and Consoli-
Manufac- Opera- Decoder Elimina- dated
turing tions Business tions Total

Three Months Ended December 31, 2002:

<s> <c> <c> <c> <c> <c>
Revenues from external customers $ 3,149 $ 533 $ 21 $ -- $ 3,703
======== ======= ====== ======= ========

Operating profit (loss) $ 55 $ (39) $ (22) $ (66) $ (72)
======== ======= ====== ======= ========

Three Months Ended December 31, 2001:

Revenues from external customers $ 3,574 $ 580 $ 26 $ -- $ 4,180
======== ======= ====== ======= ========

Operating profit (loss) $ 249 $ 14 $ (72) $ (56) $ 135
======== ======= ====== ======= ========

Six Months Ended December 31, 2002:

Revenues from external customers $ 5,423 $1,216 $ 21 $ -- $ 6,660
======== ======= ====== ======= ========

Operating profit (loss) $ (392) $ 52 $(167) $ (133) $ (640)
======== ======= ====== ======= ========

Total assets at December 31, 2002 $10,011 $2,454 $ 3 $1,917 $14,385
======== ======= ====== ======= ========

Six Months Ended December 31, 2001:

Revenues from external customers $ 6,708 $1,253 $ 26 $ -- $ 7,987
======== ======= ====== ======= ========

Operating profit (loss) $ 256 $ 104 $ (86) $ (116) $ 158
======== ======= ====== ======= ========

Total assets at December 31, 2001 $12,334 $2,895 $ 116 $1,860 $17,205
======== ======= ====== ======= ========

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 14 - Related Party Transactions
- -----------------------------------------

In conjunction with NBI's purchase of a children's paint manufacturer in 1995,
the sellers were issued warrants to purchase 1.7 million shares of the
Company's common stock at a price of $.89 per share; this included warrants to
purchase 935,000 shares issued to the Company's CEO, Jay H. Lustig. All of
the warrants expired on December 31, 2002.

Prior to NBI's 1999 Annual Meeting of Stockholders, the Company received a
fairness opinion regarding its proposed sale of the majority of the assets of
Willowbrook Properties and all of the capital stock of NBI Properties to
entities which are 100% owned and controlled by its CEO. The fairness opinion
concluded that the transaction was fair from a financial point of view. The
terms and conditions of the proposed transaction were approved at NBI's Annual
Meeting of Stockholders on December 16, 1999. The Company has not yet
completed the sale of all of the capital stock of NBI Properties and does not
anticipate it being completed within the next year.

On December 17, 1999, the Company closed on the sale of a majority of the
assets of Willowbrook Properties, to Bellevue Partners, an entity which is
100% owned and controlled by NBI's CEO. The Company has accounted for the
sale in accordance with SFAS No. 66, "Accounting for Sales of Real Estate".
The terms of the sale do not meet the requirements of SFAS No. 66 for
recognition of gain until the purchase price is paid in full in cash.
Consequently, the Company recorded a deferred gain on the sale of $881,000
during fiscal 2000, which is net of selling expenses of approximately $48,000
and net of approximately $40,000 of related income taxes. The Company
obtained a note receivable from Bellevue Partners in conjunction with this
transaction. (See Notes 5 and 7.)

In conjunction with L.E. Smith's Forbearance Agreement and Amendment, Sky Bank
has authorized L.E. Smith to exceed its borrowing base by a maximum of
$800,000. In exchange, Bellevue Partners has agreed to make unscheduled
principal payments totaling $500,000 on its note to Willowbrook Properties
from the sale of certain outparcels, and Willowbrook Properties has assigned
its interest in these payments to Sky Bank. The Allowed Overborrowings will
be reduced by the amount of these payments as they are received by the bank.
(See Notes 2 and 5.)

The Company believes that these transactions were in its best interests, were
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and were in connection with bona fide business
purposes of the Company.

Note 15 - Recent Accounting Pronouncements
- -------------------------------------------------

In June 2001, the FASB finalized SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria and, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141. SFAS No. 142 requires, among other
things, that companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS No. 142 requires that
companies identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
an indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS No.
142. This Statement was effective July 1, 2002 for the Company. The adoption
of these Statements had no material impact on the financial statements.

NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the carrying amount of the long-lived asset. SFAS No. 143 was effective July
1, 2002 for the Company. The adoption of this Statement had no material
impact on the financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" . SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet the
criteria for such classification in APB Opinion No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 was also effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" . SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes the adoption of this
Statement will have no material impact on its consolidated financial
statements.

In December 2002, the 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, this statement 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. The
Company has adopted the disclosure requirements effective December 31, 2002
(see Note 11).

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003

The statements in this discussion contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, that are not
historical facts. The forward-looking statements are based upon the Company's
current expectations and are subject to known and unknown risks,
uncertainties, assumptions and other factors. Should one or more of such
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the actual results could differ materially from those contemplated
by the forward-looking statements. Factors that may affect such
forward-looking statements include, among others, ability to obtain financing,
loss of significant customers, reliance on key personnel, competitive factors
and pricing pressures, availability and pricing of raw materials and natural
resources, labor disputes, limitations on the utilization of net operating
loss carryforwards, adequacy of insurance coverage, inflation and general
economic conditions. The Company does not intend to update such
forward-looking statements.

CRITICAL ACCOUNTING POLICIES

We prepare the consolidated financial statements of NBI, Inc. in conformity
with accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and assumptions
that we believe are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The significant
accounting policies which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:

Accounts Receivable: We perform ongoing credit evaluations of our customers
and adjust credit limits based upon payment history and the customer's current
creditworthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. We continually review and refine these estimates; however, we
cannot guarantee that we will be able to accurately estimate credit losses on
our accounts receivable. L.E. Smith currently has one significant customer,
and at times has large sales to one or more individual customers that
constitute a significant amount of the Company's accounts receivable balance.
A significant change in the liquidity or financial position of such customer
could have a material adverse impact on the collectibility of our accounts
receivables and our future operating results.

Inventories: Inventories are valued at the lower of the actual cost to
manufacture or the current estimated market value. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated future usage and sales. Our
estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if our inventory is determined to be
overvalued or undervalued, we would be required to recognize such operating
income or such costs, respectively, in our cost of goods sold at the time of
such determination. Any significant unanticipated changes in demand could
have a significant impact on the value of our inventory and our reported
operating results. In addition, the Company performs a physical inventory
each fiscal year-end and provides a provision during the year for the
estimated book-to-physical write-down based upon historical information. If
the actual book-to-physical write-down varies significantly from our estimate,
such variance would be recorded to cost of goods sold at fiscal year-end and
could have a significant impact on our reported operating results.

Deferred Income Tax Assets: The Company has substantial federal and various
state net operating loss carryforwards and has provided a full valuation
allowance for the related net deferred tax assets. In the future, if
sufficient evidence of the Company's ability to generate future taxable income
becomes apparent, the Company may then be allowed to reduce its valuation
allowance. A significant portion of these carryforwards are from
pre-reorganization net operating losses and would be required to be utilized
first. In accordance with fresh start accounting adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, if the Company has a reduction in its valuation
allowance, any income tax benefit attributable to pre-reorganization net
operating losses are reported as an addition to capital in excess of par value
rather than credited to the income tax provision. Any reduction

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

in the valuation allowance attributable to post-reorganization net operating
losses would then be credited to the income tax provision.

Minimum Royalties: The agreement with our master licensor related to our
decoder business requires us to pay royalties equal to the greater of 5% of
net decoder sales and services generated under the license, including decoder
sales and services produced by sublicensees, or the contractual amount of
minimum royalty payments. The Company incurs minimum royalties expense when
the minimum royalties payable under the terms of the agreement are estimated
to exceed the royalties incurred based upon net decoder sales and services.
We continually evaluate the amount of estimated decoder sales and services to
be generated under the license and royalties payable to the master licensor.
The minimum royalty expense is charged to marketing general and administrative
expense based upon our estimates. While we believe that our estimate of net
decoder sales and services to be generated under the license and minimum
royalties expense is reasonable, if the actual decoder sales and services vary
significantly from our estimate, the amount of minimum royalty expense could
be overstated or understated between quarters within each term under the
master license agreement.

Contingent Liabilities: We account for contingencies in accordance with SFAS
No. 5, "Accounting for Contingencies" . SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as legal actions, disputed charges and other
claims requires us to use our judgment. While we believe that our accruals for
these matters are adequate, if the actual loss from a loss contingency is
significantly different than the estimated loss, our results of operations may
be overstated or understated.

Revenue Recognition: The Company recognizes revenue from sales of products
when title passes, generally when the goods are shipped, except for goods
shipped on consignment. Revenue is recognized from products shipped on
consignment when the consignee sells the goods. Freight charges billed to
customers are included in revenue. Service and rental revenue from the hotel
operations is recognized when provided. The Company recognizes royalty
revenues from sublicensees under its decoder license as earned when the
sublicensee has substantially completed the work per the terms of the sales
agreement. The royalty revenues are presented net of related royalties earned
by the master licensor.

RESULTS OF OPERATIONS

Sales revenue totaled $3,149,000 for the three months ended December 31, 2002,
compared to sales revenue of $3,574,000 for the same period in the prior
fiscal year, reflecting a decline of $425,000, or 11.9%. The decrease
resulted from the weak economy combined with sales momentum and customer
confidence lost during the period of severe financial difficulties before L.E.
Smith obtained the Forbearance Agreement with its bank on August 23, 2002. In
addition, L.E. Smith closed one retail outlet in September and had poor
results from the new Lancaster store opened in mid-November. However, these
declines were partially offset by increases of $148,000 and $183,000 in sales
to its significant customer and a home-party customer obtained during the
second quarter of fiscal 2002. Sales revenue totaled $5.4 million for the six
months ended December 31, 2002 compared to sales revenue of $6.7 million for
the same period in the prior fiscal year reflecting a decrease of $1.3 million
or 19.2%. In addition to the decline experienced in the second quarter of
fiscal 2003 compared to 2002, L.E. Smith experienced a substantial decline in
revenues during July and August of 2002 compared to the prior year primarily
because Sky Bank tightly restricted L.E. Smith's borrowings under its line of
credit due to its ongoing overborrowed position until August 23, 2002 when
L.E. Smith obtained the Forbearance Agreement from the bank. These cash
constraints severely limited L.E. Smith's ability to produce and ship goods
during that time period. However, L.E. Smith's revenues in September 2002
were comparable with the same period in the prior year. L.E. Smith had a
decrease of $156,000 in sales to its largest customer during the first quarter
of fiscal 2003 primarily due to the cash constraints, resulting in relatively
flat revenues from this customer for the six months ended December 31, 2002
compared to 2001. L.E. Smith also experienced declines in

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

sales to many of its customers resulting from the weak economy. However, L.E.
Smith did have the addition of $133,000 in revenues during the first quarter
of fiscal 2003 from the home-party customer obtained during fiscal 2002,
resulting in an increase of $316,000 in revenues from this customer for the
six months ended December 31, 2002 compared to 2001.

Rental and service revenues totaled $533,000 for the second quarter of fiscal
2003, a decrease of $47,000, or 8.1% compared to $580,000 for the same period
in the prior fiscal year. Fiscal year-to-date, rental and service revenues
totaled $1,216,000, a decrease of $37,000 or 3.0% compared to $1,253,000 for
the six months ended December 31, 2001. These decreases resulted primarily
from a moderate decrease in the occupancy rate, particularly during the second
quarter of fiscal 2003, partially offset by a slight increase in the average
daily room rate. The decline in occupancy rates was primarily due to the poor
economy as well as inclement weather for the second quarter of fiscal 2003.

Net royalty revenue totaled $21,000 for the three and six months ended
December 31, 2002 compared to $26,000 for the same periods in the prior fiscal
year. Due to the poor sales results and high costs required to maintain a
license to sell the decoders, in January 2003, the Board of Directors decided
not to renew its license and to exit the decoder business.

Cost of sales as a percentage of related revenue was 83.9% for the quarter
ended December 31, 2002, compared to 76.9% for the same period in fiscal 2002.
The resulting decline in gross margin was primarily due to significantly lower
sales volume available to cover fixed costs and increased sales discounting
partially offset by significantly reduced labor costs and other expenses,
resulting from cost controls, as well as a decrease of $68,000 in depreciation
expense as many of L.E. Smith's assets acquired by the Company effective
August 1, 1995 became fully depreciated in August 2002. Cost of sales as a
percentage of related revenue was 90.4% for the six months ended December 31,
2002, compared to 78.3% for the same period in fiscal 2002. The resulting
decline in gross margin was primarily due to substantially lower sales volume,
increased sales discounting and higher insurance expenses (an increase of
$39,000). These items were partially offset by significantly reduced labor
costs and most other expenses resulting from cost controls and low production
during July and August due to cash constraints, and a decrease of $116,000 in
depreciation expense.

Cost of rental and service as a percentage of related revenue was 81.6% for
the second quarter of fiscal 2003 compared to 74.8% for the second quarter of
fiscal 2002. For the six months ended December 31, 2002 and 2001, cost of
rental and service as a percentage of related revenue was 72.9% compared to
70.5%. The related declines in gross margin resulted from the decreased
revenue during the second quarter of fiscal 2003, as well as general cost
increases partially offset by lower depreciation expense (declines of $9,000
and $16,000, respectively) as many of the hotel's assets acquired by the
Company effective August 4, 1995 became fully depreciated in August 2002.

Marketing, general and administrative expenses totaled $698,000 and $1,513,000
for the three and six months ended December 31, 2002, respectively, compared
to $862,000 and $1,695,000 for the same periods in fiscal 2002, reflecting
decreases of $164,000, or 19.0%, and $182,000, or 10.7%, respectively. The
decreases were primarily due to significantly lower sales commissions
(decreases of $32,000 and $72,000, respectively) related to the decline in
sales revenue, the sales mix and increased price discounting, reduced bad debt
provisions (decreases of $26,000 and $51,000, respectively), and significant
savings from cost control measures. In addition, the Company recorded savings
of $55,000 in sales and marketing expenses associated with the decoder
business during the second quarter of fiscal 2003 mainly because the minimum
royalties expense for the minimum royalties in excess of the amount of
royalties earned based upon decoder sales and services were $11,000 for the
second quarter of fiscal 2003 compared to $64,000 for the second quarter of
fiscal 2002. However, year-to-date the Company experienced increased sales
and marketing expenses associated with the decoder business (an increase of
$76,000) as there were $86,000 of minimum royalty expense in fiscal 2003
year-to-date compared to $64,000 in fiscal 2002 and other decoder expenses
were lower during the same period in fiscal 2002 during the start-up of the
decoder business. Due to the poor sales results and high costs required to
maintain a license to sell the decoders, in January 2003, the Board of
Directors decided not to

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

renew its license and to exit the decoder business. The Company has estimated
that it will have minimal expenses associated with the closure of this
business.

Interest income totaled $31,000 and $62,000 for the three and six months ended
December 31, 2002 compared to $44,000 and $90,000 for the same periods in the
prior fiscal year. The decrease was primarily due to a decline in the average
interest rate and in the average balance outstanding on the note receivable
from a related party.

Interest expense totaled $116,000 and $234,000 for the three and six months
ended December 31, 2002 compared to $128,000 and $269,000 for the same periods
in the prior fiscal year. The decrease was primarily due to lower interest
rates, related to declines in the prime rate, and a lower average balance of
debt outstanding, partially offset year-to-date by a 1% increase in interest
rates effective October 1, 2001 (from prime to prime plus 1%) on L.E. Smith's
bank financing due to its failure to meet certain financial ratios during
fiscal 2001.

The Company recorded an income tax benefit of $4,000 and an income tax
provision of $9,000 for the three and six months ended December 31, 2002.
Income tax provisions totaling $17,000 and $11,000, respectively, were
recorded for the same periods in the prior fiscal year. These benefits and
provisions include state and other income taxes and are based upon book
income. The net deferred tax assets arising from the pre-tax losses incurred
for the six months ended December 31, 2002 have been fully allowed for because
the Company has not been able to determine that it is more likely than not
that such deferred tax assets will be realized. In accordance with
fresh-start accounting, the income tax provisions recorded include non-cash
charges to the extent that the Company expects to use its pre-reorganization
net operating loss carryforwards. These charges are reported as an addition
to capital in excess of par value, rather than as a credit through the income
tax provision. There were no non-cash components included in the income tax
benefit and provision for the three months ended December 31, 2002 and 2001.

DISCONTINUED OPERATIONS

On August 19, 1999, the Board of Directors voted to sell the assets of the
Company's wholly-owned subsidiary, NBI Properties, to an entity that is 100%
owned and controlled by its CEO. Therefore, the Company had classified its
hotel operation as a discontinued operation at that time. However, as of June
30, 2002 the Company determined that the sale would not be completed within
the next twelve months, therefore the hotel operation was reclassified as a
continuing operation for the six months ended December 31, 2002 and 2001.
There were no other adjustments in the financial statements as a result of
this change.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's total assets decreased $1.1 million to $14.4 million at December
31, 2002 from $15.5 million at June 30, 2002. The decrease was primarily due
to significant decreases in accounts receivable, due to inclusion of $130,000
decoder receivables and more slower paying accounts at June 30, 2002,
inventory, resulting from low production related to cash constraints, and
property, plant and equipment, primarily related to depreciation. The Company
had working capital deficits of $1,770,000 and $1,206,000 at December 31 and
June 30, 2002, respectively. The increase of $564,000 in the working capital
deficit was primarily due to the decreases in accounts receivable and
inventory as well as the loss incurred during the first six months of fiscal
2003.

The Company significantly reduced its capital expenditures during fiscal 2002
and during the first six months of fiscal 2003 and did not have any
significant construction-in-progress outstanding at December 31, 2002. The
Company plans to continue restricting its capital expenditures.

The Company expects its working capital requirements in the next fiscal year
to be met by internally generated funds including interest income and
unscheduled principal payments on the note receivable from a related party.
The hotel's

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

bank loan agreement indirectly limits the amount of cash distributions it can
make to the parent company through a covenant requiring the maintenance of a
minimum cash flow to debt service ratio. Short-term borrowings under an
existing line of credit can also be used for L.E. Smith's working capital
requirements. However, L.E. Smith has consistently been unable to repay the
overborrowings on its revolving line of credit which are required to be repaid
promptly. L.E. Smith was also in arrears on certain payments related to its
revolving line of credit and bank term note payable in July and August, 2002.
In addition, L.E. Smith has not been able to meet certain financial ratios
required under the Loan Agreement covering L.E. Smith's revolving line of
credit and bank term note payable. Then, on August 23, 2002, L.E. Smith
and Sky Bank entered into a Forbearance Agreement and Amendment related to
L.E. Smith's revolving line of credit and bank term note, whereby Sky Bank has
agreed to forbear from exercising its rights and remedies with respect to the
existing defaults by L.E. Smith under the Loan Agreement provided there is no
event of default by L.E. Smith under the terms of the Forbearance Agreement
which expires on July 7, 2003. In conjunction with the Forbearance Agreement
and Amendment, the due date of the bank term note has been extended to March
5, 2008 with monthly interest only payments allowed for September 5, 2002, and
February 5, 2003 through August 5, 2003; monthly principal payments of $34,000
plus interest will be due for all other months during the term of the note.
Sky Bank has authorized L.E. Smith to exceed its borrowing base by a maximum
of $800,000. In exchange, Bellevue Partners has agreed to make unscheduled
principal payments totaling $500,000 on its note to Willowbrook Properties
from the sale of certain outparcels, and Willowbrook Properties has assigned
its interest in these payments to Sky Bank. The Allowed Overborrowings will
be reduced by the amount of these payments as they are received by the bank.
As of February 5, 2003, the borrowings under L.E. Smith's revolving line of
credit exceeded the allowed borrowing base by $729,000, $71,000 below the
maximum Allowed Overborrowings. The Forbearance Agreement prohibits L.E.
Smith from making any payments to NBI or any of its subsidiaries. The
Forbearance Agreement also requires the Company to obtain written agreements
with its vendors and other creditors regarding revised payment terms
acceptable to the bank. The Company has been working with its vendors and
creditors on revised payment terms and is in the process of obtaining written
agreements with them. The Company has obtained an extension of time from Sky
Bank to March 5, 2003 in which to obtain these written agreements. With this
extension, the Company is in compliance with the Forbearance Agreement. (See
Note 2 to the Consolidated Financial Statements.)

As of December 1, 2002, L.E. Smith was six months in arrears on its monthly
payments on its note payable to PADCED. However, on December 13, 2002, L.E.
Smith obtained a six-month deferral of principal payments on this note. In
January 2003, the Company paid PADCED all of the past due interest as well as
the regular loan payment scheduled for January 1, 2003. However, L.E. Smith
has been unable to pay various other liabilities when due as required under
the PADCED loan agreement. This condition causes the note payable to PADCED
to be subject to immediate demand at the option of the holder. Therefore, the
Company has included the entire balance of this note payable in current
liabilities at December 31, 2002, as was also required at June 30, 2002. (See
Note 2 to the Consolidated Financial Statements.)

The Company has incurred significant losses for the six months ended December
31, 2002 and during fiscal 2002 and 2001 and had a significant working capital
deficit at December 31 and June 30, 2002. In addition, a large amount of L.E.
Smith's accounts payable are significantly past due. These conditions raise
substantial doubt about the Company's ability to continue as a going concern,
as expressed by our independent auditors in an explanatory paragraph in their
audit report dated September 5, 2002 on our June 30, 2002 financial
statements. The accompanying Consolidated Financial Statements do not contain
any adjustments that might result from the outcome of this uncertainty. The
Forbearance Agreement and Amendment with Sky Bank significantly reduces the
amount of principal payments required on the Company's long-term debt in
fiscal 2003. L.E. Smith is also working with its accounts payable vendors
to obtain extended terms. Furthermore, management has been working on
significantly reducing its costs and expenses, including significantly reducing
its health insurance costs through a new collective bargaining agreement which
it obtained on November 26, 2002 (see Note 8 to the Consolidated Financial
Statements) and savings expected from other cost control measures.

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

L.E. Smith is currently in discussions with other glass manufacturers to
develop marketing partnerships that would help increase sales volumes for each
party. This is possible when the companies offer different types of products
and consequently do not directly compete with one another. For example, one
company may be an automated glass manufacturer which sells to the mass market,
however, their manufacturing plant is not able to handle smaller quantities
efficiently. In those situations requiring smaller quantities, they would sell
L.E. Smith handmade products. In return, L.E. Smith could sell some of that
company's products to its customers when large quantities were required. In
addition, L.E. Smith has the capability to produce colored and decorated
glass, whereas another company may have the ability to produce leaded crystal
which L.E. Smith does not. Through a marketing partnership, two or three
companies become stronger by capitalizing on each other's strength.

In addition, L.E. Smith must find a way to be closer to the end-user. Today's
distribution methods are very expensive for manufacturers. In highly
competitive situations, the Company is often unable to sell its products or
does so at inadequate margins because of the mark-up required by the retailer.
For many years, L.E. Smith has had an on-site factory outlet store that has
been profitable. Therefore, the Company has decided on a retail strategy of
opening retail stores in several outlet locations over the next year. These
stores will be opened both independently and through joint ventures with
marketing partners. These retail outlets will do several things to improve
our Company. First, it will allow us to improve our margins because we have
eliminated several layers of distribution. Second, it allows us to increase
our sales volume by taking advantage of an increasing trend in retail markets
towards outlet and discount stores, away from pricey shopping malls. In
October 2002, the Company acquired retail space for an outlet store in
Lancaster, Pennsylvania which it opened in mid-November 2002. However, the
sale from this store have been very disappointing due to the poor retail
market and inclement weather. The Company will also increase its marketing
efforts related to a new line of home building products that it has been
developing including glass sinks, glass tiles, and glass blocks, as well as
glass used in various architectural projects.

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

The following summarizes the Company's aggregate contractual obligations as of
December 31, 2002:

Total payments due during
Six Months fiscal years ended June 30,
Ended ---------------------------
June 30, 2004 2006 There-
Total 2003 & 2005 & 2007 after
------- ------ ------ ------ -------
(Amounts in thousands)
<s> <c> <c> <c> <c> <c>
Line of credit(a) $ 2,721 $2,721 $ -- $ -- $ --
Long-term notes payable
- Sky Bank(a) 1,911 34 737 804 336
- State of Pennsylvania Machinery
& Equipment Loan Fund note(b) 322 322 -- -- --
- Other notes payable 1,104 30 126 259 689
Present value of capital
lease obligation 972 26 88 106 752
Operating leases 1,424 145 380 276 623
Purchase obligation 42 42 -- -- --
CEO employment agreement(c) 53 53 -- -- --
Other 14 10 4 -- --
------- ------ ------ ------ ------

Total contractual obligations $ 8,563 $3,383 $1,335 $1,445 $2,400
======= ====== ====== ====== ======

<FN>

(a) L.E. Smith has consistently been unable to repay the overborrowings on its
revolving line of credit which are required to be repaid promptly. L.E. Smith
was also in arrears on certain payments related to its revolving line of
credit and bank term note payable in July and August 2002. In addition, L.E.
Smith has not been able to meet certain financial ratios required under the
Loan Agreement. On August 23, 2002, L.E. Smith and Sky Bank entered into a
Forbearance Agreement and Amendment to L.E. Smith's revolving line of credit
and bank term note, whereby Sky Bank has agreed to forbear from exercising its
rights and remedies with respect to the existing defaults by L.E. Smith under
the Loan Agreement provided there is no event of default by L.E. Smith under
the terms of the Forbearance Agreement which expires on July 7, 2003. As of
February 5, 2003, the borrowings under L.E. Smith's revolving line of credit
exceeded the allowed borrowing base by $729,000, $71,000 below the maximum
allowed overborrowings. See previous discussion in this "Liquidity and
Capital Resources" section.

(b) As of December 1, 2002, L.E. Smith was six months in arrears on its
monthly payments on its note payable to PADCED. However, on December 13,
2002, L.E. Smith obtained a six-month deferral of principal payments on this
note. In January 2003, the Company paid PADCED all of the past due interest
as well as the regular loan payment scheduled for January 1, 2003. However,
L.E. Smith has been unable to pay various other liabilities when due as
required under the PADCED loan agreement. This condition causes the note
payable to PADCED to be subject to immediate demand at the option of the
holder. Therefore, the Company has included the entire balance of this note
payable in current liabilities at December 31, 2002, as was also required at
June 30, 2002.

(c) Under the terms of an agreement with the Company's CEO ("CEO Agreement"),
the Company pays its CEO, Jay H. Lustig, an annual salary of $60,000. The CEO
Agreement runs for one-year terms which expire on June 30. The CEO Agreement
also provides that the Company will pay Mr. Lustig an annual bonus of 10% of
the Company's pre-tax profits, if any, derived from all sources, but only to
the extent such 10% figure exceeds Mr. Lustig's base salary. Mr. Lustig
remains eligible for such bonus for twelve months after termination from the
position of CEO. The Company suspended salary payments to Mr. Lustig as of
August 16, 2002 but is accruing his salary for future payment when the
Company's cash flow improves.

The Company has no other long-term contractual obligations or commercial
commitments.

NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2003 - CONTINUED

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" . SFAS No. 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 was effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet the
criteria for such classification in APB Opinion No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 was also effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.

In December 2002, the 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, this statement 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. The
Company has adopted the disclosure requirements effective December 31, 2002.

NBI, INC.

Item 3. Controls and Procedures
- -------------------------------------------

In order to ensure that the information the Company must disclose in its
filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, the Company has formalized its
disclosure controls and procedures. The Company's principal executive officer
and principal financial officer have reviewed and evaluated the Company's
disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended as of a date within 90
days prior to the filing date of this report (the "Evaluation Date"). Based
on such evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in
bringing to their attention on a timely basis material information relating to
the Company required to be included in the Company's periodic filings under
the Securities Exchange Act of 1934.

Since the Evaluation Date, there have not been any significant changes in the
internal controls of the Company, or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.

NBI, INC.
PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------------

(a) Exhibits

10. Agreement between L.E. Smith Glass Company and The American
Flint Glassworkers' Union dated November 26, 2002.

(b) No reports on Form 8-K were filed during the quarter ended
December 31, 2002 or subsequently.

SIGNATURES

Pursuant to the requirements 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.

NBI, INC.

February 14, 2003 By: /s/ Marjorie A. Cogan
- ----------------- ----------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary

CERTIFICATIONS

CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF NBI, INC.
PURSUANT OF 18 U.S.C. SECTION 1350

I, Jay H. Lustig, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of NBI, Inc.;

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

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

4. NBI, Inc's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for NBI, Inc. and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to NBI, Inc., including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the
quarterly report is being prepared;

b. evaluated the effectiveness of NBI, Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.

5. NBI, Inc.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to NBI Inc.'s auditors and the audit
committee of NBI, Inc.'s board of directors:

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect NBI Inc.'s ability to record,
process, summarize, and report financial data and have identified
for NBI Inc.'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 NBI Inc.'s
internal controls.

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

Date: February 13, 2003 /s/ JAY H. LUSTIG
-----------------------
Jay H. Lustig
Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER OF NBI, INC.
PURSUANT OF 18 U.S.C. SECTION 1350

I, Marjorie A. Cogan, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of NBI, Inc.;

a. designed such disclosure controls and procedures to ensure that
material information relating to NBI, Inc., including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
the quarterly report is being prepared;

b. evaluated the effectiveness of NBI, Inc.'s disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date" ); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.

5. NBI, Inc.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to NBI Inc.'s auditors and the audit
committee of NBI, Inc.'s board of directors:

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect NBI Inc.'s ability
to record, process, summarize, and report financial data and
have identified for NBI Inc.'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 NBI Inc.'s
internal controls.

Date: February 13, 2003 /s/ MARJORIE A. COGAN
----------------- ----------------------------------
Marjorie A. Cogan
Chief Financial Officer, Secretary

CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF NBI, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of NBI, Inc. on Form 10-QSB for the
period ending December 31, 2002 as filed with the Securities and Exchange
Commission on February 14, 2003 (the "Report" ), Jay H. Lustig, as Chief
Executive Officer of NBI, Inc., hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of his knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of NBI, Inc.

Date: February 13, 2003 /s/ JAY H. LUSTIG
------------------- ----------------------------
Jay H. Lustig
Chief Executive Officer

This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

CERTIFICATION OF CHIEF FINANCIAL OFFICER OF NBI, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of NBI, Inc. on Form 10-QSB for the
period ending December 31, 2002 as filed with the Securities and Exchange
Commission on February 14, 2003 (the "Report"), Marjorie A. Cogan, as Chief
Financial Officer of NBI, Inc., hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of her knowledge, that:

1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of NBI, Inc.

Date: February 13, 2003 /s/ MARJORIE A. COGAN
------------------- ------------------------------
Marjorie A. Cogan
Chief Financial Officer