CELLNET DATA SYSTEMS INC, 424A, 1998-05-01

CELLNET DATA SYSTEMS INC
424A, 1998-05-01
TELEGRAPH & OTHER MESSAGE COMMUNICATIONS

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PROSPECTUS (SUBJECT TO COMPLETION)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

ISSUED MAY 1, 1998

[LOGO]

CELLNET FUNDING, LLC
3,000,000 % EXCHANGEABLE PREFERRED SECURITIES
MANDATORILY REDEEMABLE 2010
(LIQUIDATION PREFERENCE $25 PER PREFERRED SECURITY)

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

CELLNET FUNDING, LLC ("FUNDING"), A DELAWARE LIMITED LIABILITY COMPANY AND
SUBSIDIARY OF CELLNET DATA SYSTEMS, INC. ("CELLNET" OR THE
"COMPANY"), A DELAWARE CORPORATION, IS OFFERING 3,000,000
EXCHANGEABLE LIMITED LIABILITY COMPANY
PREFERRED SECURITIES (THE
"PREFERRED SECURITIES").

DIVIDENDS ON THE PREFERRED SECURITIES WILL BE CUMULATIVE FROM THE CLOSING DATE
(AS DEFINED HEREIN) AND ARE PAYABLE QUARTERLY ON EACH FEBRUARY 1, MAY 1, AUGUST
1 AND NOVEMBER 1, COMMENCING AUGUST 1, 1998. DIVIDENDS ON THE PREFERRED
SECURITIES WILL BE PAYABLE IN CASH THROUGH AND INCLUDING AUGUST 1, 2001, AND
THEREAFTER, DIVIDENDS WILL BE PAYABLE, AT FUNDING'S OPTION, (I) IN CASH,
(II) BY DELIVERY OF COMMON STOCK, PAR VALUE $.001 PER SHARE, OF CELLNET
(THE "COMMON STOCK") BASED UPON 90% OF THE AVERAGE MARKET VALUE (AS
DEFINED HEREIN) OF THE COMMON STOCK OR (III) IN ANY COMBINATION OF CASH
AND SUCH SHARES OF COMMON STOCK. FUNDING IS REQUIRED TO REDEEM THE
PREFERRED SECURITIES ON MAY 1, 2010. THE PREFERRED SECURITIES WILL BE
REDEEMABLE, AT THE OPTION OF FUNDING, AT ANY TIME ON OR AFTER MAY 1,
2001 AT THE REDEMPTION PRICES SET FORTH HEREIN. THE PREFERRED
SECURITIES WILL BE EXCHANGEABLE, AT ANY TIME PRIOR TO MAY 1, 2010, AT
THE OPTION OF THE HOLDERS, INTO COMMON STOCK AT AN EXCHANGE PRICE OF
$ PER SHARE, SUBJECT TO ADJUSTMENT, OR AN AGGREGATE OF
SHARES OF COMMON STOCK, REPRESENTING APPROXIMATELY % OF THE
OUTSTANDING COMMON STOCK ON A FULLY DILUTED BASIS AS OF ,
1998. THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "CNDS." ON APRIL 29, 1998, THE LAST REPORTED
SALE PRICE OF THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET WAS $13.125 PER SHARE.

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

AT ANY TIME AFTER THE CLOSING DATE AND ON OR PRIOR TO MAY 1, 2001, THE PREFERRED
SECURITIES WILL AUTOMATICALLY EXCHANGE INTO COMMON STOCK (THE "AUTOMATIC
EXCHANGE"), AT AN EXCHANGE PRICE OF $ PER SHARE IF THE CURRENT
MARKET VALUE (AS DEFINED HEREIN) OF THE COMMON STOCK EQUALS OR
EXCEEDS CERTAIN TRIGGER PERCENTAGES (AS DEFINED HEREIN) OF THE
EXCHANGE PRICE FOR AT LEAST 20 TRADING DAYS IN ANY
CONSECUTIVE 30 DAY TRADING PERIOD. UPON ANY AUTOMATIC
EXCHANGE, FUNDING WILL MAKE A PAYMENT IN CASH WITH
RESPECT TO THE PREFERRED SECURITIES SUBJECT
TO EXCHANGE IN AN AMOUNT EQUAL TO
THE PRO RATA PORTION OF THE
LIQUIDATION PROCEEDS OF ANY
REMAINING TREASURY STRIPS
(AS DEFINED HEREIN)
HELD BY FUNDING.
------------------------

APPLICATION HAS BEEN MADE FOR QUOTATION OF THE PREFERRED SECURITIES ON THE
NASDAQ NATIONAL MARKET.

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

SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------

PRICE $25 PER PREFERRED SECURITY
-------------------

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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) FUNDING(2)
--------------------- ----------------------- -----------------------
<S> <C> <C> <C>
PER PREFERRED SECURITY....................... $ $ $
TOTAL(3)..................................... $ $ $
</TABLE>

- ------------
(1) EACH OF FUNDING AND THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITER
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SEE "THE UNDERWRITER."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $440,000.
(3) FUNDING HAS GRANTED THE UNDERWRITER AN OPTION, EXERCISABLE WITHIN 30
DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 450,000
SHARES OF ADDITIONAL PREFERRED SECURITIES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITER EXERCISES SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO FUNDING WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"THE UNDERWRITER."
------------------------

THE PREFERRED SECURITIES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ACCEPTED BY THE UNDERWRITER NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITER. IT IS
EXPECTED THAT DELIVERY OF THE PREFERRED SECURITIES WILL BE MADE ON OR ABOUT
, 1998, AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y.,
AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------

MORGAN STANLEY DEAN WITTER

, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE PREFERRED SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY PREFERRED SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
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PAGE
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The Registrants................................ 3
Available Information.......................... 3
Information Incorporated by Reference.......... 3
Prospectus Summary............................. 5
Risk Factors................................... 17
Funding........................................ 34
Use of Proceeds................................ 34
Dividend Policy................................ 34
Capitalization................................. 35
Common Stock Price Range....................... 36
Selected Consolidated Financial Data........... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 39

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PAGE
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<S> <C>
Business....................................... 48
Management..................................... 72
Principal Stockholders......................... 75
Description of the Preferred Securities........ 77
Description of CellNet Preferred Stock......... 85
Description of CellNet Capital Stock........... 87
Certain United States Federal Income Tax
Considerations............................... 90
The Underwriter................................ 98
Legal Matters.................................. 99
Experts........................................ 99
Index to Consolidated Financial Statements..... F-1
</TABLE>

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING OF PREFERRED SECURITIES (THE
"OFFERING") MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE
AFFECT THE MARKET PRICE OF THE PREFERRED SECURITIES OR THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR, AND PURCHASE, PREFERRED SECURITIES OR COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "THE UNDERWRITER."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND CERTAIN SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "THE UNDERWRITER."

2
<PAGE>
THE REGISTRANTS

CellNet and Funding have their principal executive offices at 125 Shoreway
Road, San Carlos, California 94070 and their telephone number is (650) 508-6000.

AVAILABLE INFORMATION

CellNet is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act files periodic reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied (at prescribed rates) at the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, 13th Floor, New York, New York 10048. Such
documents filed by CellNet may also be accessed electronically by means of the
Commission's Electronic Data Gathering and Retrieval System (EDGAR) at
http://www.sec.gov. The Common Stock is quoted on the Nasdaq Stock Market
(symbol: CNDS), and such reports, proxy statements and other information
concerning the Company may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington D.C., 20006.

CellNet and Funding have filed with the Commission a registration statement
on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the securities offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at,
and copies thereof may be obtained at prescribed rates from, the public
reference facilities of the Commission set forth above.

No separate financial statements of Funding are included herein. CellNet and
Funding do not believe that such financial statements would be material to
holders of the Preferred Securities because Funding is a newly-created special
purpose entity, has no operating history and no independent operations and is
not engaged in, and does not propose to engage in, any activity other than as
set forth below. See "Funding."

INFORMATION INCORPORATED BY REFERENCE

The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference and made a part of this Prospectus:

1. Annual Report on Form 10-K for the year ended December 31, 1997.

2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

3. The description of the Common Stock set forth in the Company's
Registration Statement on Form 8-A filed on September 23, 1996 pursuant
to Section 12 of the Exchange Act and any amendment or report filed for
the purpose of updating such description.

All documents subsequently filed by the Company with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of
this Prospectus and prior to the termination of the offering of the securities
made hereby, shall be deemed to be incorporated by reference into the
Registration Statement of which this Prospectus is a part and to be a part
hereof from the date of such filing. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed

3
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to be incorporated by reference in this Prospectus modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.

The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon oral or written request of such person,
a copy of any and all information that has been incorporated by reference into
this Prospectus (not including exhibits to the information unless such exhibits
are specifically incorporated by reference into such information). Requests for
information should be addressed to: CellNet Data Systems, Inc., 125 Shoreway
Road, San Carlos, California 94070,
Attention: Investor Relations (telephone number (650) 508-6000, facsimile (650)
592-6858, and email [email protected]).

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

CellNet-TM- is a registered trademark of the Company. This Prospectus also
includes trade names and trademarks of companies other than of the Company.

4
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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES HEREIN TO
"CELLNET" OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS
SUBSIDIARIES AND REFERENCES TO "FUNDING" REFER TO CELLNET FUNDING, LLC, A
DELAWARE LIMITED LIABILITY COMPANY AND A SUBSIDIARY OF CELLNET. THE PREFERRED
SECURITIES OFFERED HEREBY ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE "RISK
FACTORS." CERTAIN INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING BUT NOT LIMITED TO INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AND THE VARIATIONS MAY BE
MATERIAL. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."

THE COMPANY

CellNet has designed, developed and is commercially deploying in scale
innovative wireless data communications networks which provide high-volume,
low-cost, real-time data collection services, capable of monitoring millions of
fixed endpoints. The primary application of the Company's network is the
provision of commercial, industrial and residential network meter reading
("NMR") services to electric, gas and water suppliers. These services position
the Company to benefit from the deregulation of the electric utility industry.
As of March 31, 1998, the Company had approximately 3,365,000 meters under
long-term contracts, of which a total of approximately 956,000 meters were
generating revenues ("in revenue service") for the Company. The CellNet network
uses radio devices fitted to existing utility meters to read and report data
from each meter every few minutes. Through extremely efficient use of radio
frequency spectrum, the CellNet network has substantial additional capacity to
service non-utility applications that require low-cost monitoring of fixed
endpoints, such as home security and remote status monitoring of vending
machines and office equipment.

CellNet believes it has a first-to-market opportunity to offer wireless data
communications services on a broad commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:

- sufficiently low infrastructure and operating costs to permit
cost-effective utility meter reading and other fixed point monitoring
applications;

- highly efficient use of spectrum-the equivalent of approximately a single
voice channel is needed to operate a network;

- specifically designed proprietary software to manage real-time data
collection from millions of endpoints; and

- open systems architecture designed to allow new applications to be added
to the CellNet system.

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determined by its return on assets, to performance-based rate making, in which a
utility's rates and profitability are based upon its cost, efficiency and
service quality.

With deregulation of the electric utility industry underway, established
utilities are under increasing regulatory, consumer and competitive pressures.
The changing regulatory environment means that new power market participants
(such as energy service providers, power marketers, brokers and aggregators,
system operators, power exchanges, and scheduling coordinators) will be seeking
viable strategies to enter a market traditionally dominated by established
utilities. The Company believes its NMR services offer a state-of-the art
solution to the demands created by the increased regulatory and competitive
pressures within the energy service industry. CellNet's proven, efficient,
low-cost, scaleable NMR service enables both established electric and gas
utilities and new power market participants to implement time-of-use pricing
plans, peak demand monitoring, load forecasting activities, real-time responses
to billing inquiries and power outage detection, on-demand meter reads,
customized billing functions, and customer access to consumption, rate and
billing information. CellNet's system allows utilities to respond effectively to
regulatory changes, reduce costs and enhance their operating efficiencies, defer
capital spending and implement customer retention plans and facilitate market
entrance by new power market participants. See "Business--Changes in the
Electric Utility Industry" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."

The Company is actively targeting the largest Metropolitan Statistical Areas
("MSAs"), and consolidated Metropolitan Statistical Areas ("CMSAs"), which
together represent a majority of the approximately 230 million electric, gas and
water meters in the United States, and other areas of high population density,
state-by-state, as deregulation becomes effective. The Company believes that
utilities and power market participants operating in or entering these densely
populated areas will be most affected by increasing competitive and regulatory
pressures. These pressures will likely prompt established utilities to improve
their efficiency and service levels, and the Company believes that its network
and services would facilitate this improvement. However, the utility industry
has generally been characterized by long purchasing cycles and cautious decision
making. Although the uncertainty surrounding proposed regulatory changes in some
states may have caused, and may continue to cause, additional delays in
purchasing decisions by established electric and gas utilities, the Company
believes that actual implementation of utility deregulation will ultimately
accelerate purchasing decisions by established utilities. See "Risk
Factors--Dependence on and Uncertainty of Market Acceptance." The Company is
evaluating new opportunities arising from deregulation. CellNet's open systems
architecture is designed for deployment strategies focused either on established
utilities or new power market participants, or both, without requiring
significant modifications to CellNet's network system. See "Business Strategy."

The Company has existing long-term contracts to provide NMR services to
Kansas City Power & Light Company ("KCPL") for approximately 420,000 meters,
AmerenUE (formerly known as the Union Electric Company) ("UE") for approximately
800,000 meters, Northern States Power Company ("NSP") for approximately
1,000,000 meters, Pacific Gas & Electric Company ("PG&E") for approximately
30,000 meters, Puget Sound Energy, Inc. ("PSE") for approximately 700,000 meters
and Indianapolis Power & Light Company ("IP&L") for approximately 415,000
meters. Of the 3,365,000 meters covered under these contracts, approximately
956,000 meters were in revenue service as of March 31, 1998. Each of these
contracts results from the Company's "saturation deployment" strategy for
providing NMR services to existing utilities. Under this strategy, the Company
builds out a network to cover every meter in a utility's designated service
area. The strategy allows coverage of all of the energy consumers in those
service areas. To implement the strategy, the Company builds out its wide area
network ("WAN") and local area network ("LAN") concurrently. The network begins
generating revenue shortly after meters come on-line, and new meters can be
added incrementally. The Company has ongoing discussions concerning additional
contracts of a similar kind with other utilities in the United States.

The Company began actively targeting new power market participants in
September 1997. To date, the Company has entered into contracts with eight
energy service providers and two energy aggregators,

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including contracts with nonregulated power marketing arms of the nation's large
utilities and energy providers for the provision of NMR services in California,
including Energy Pacific, New West Energy, Duke Solutions and the Electric
Clearinghouse, a subsidiary of NGC Corp. The Company expects to enter into
similar arrangements with additional power market participants both in
California and in other states where deregulated markets open up further
opportunities for the deployment of the Company's networks. Each of these
contracts results from the Company's alternative "broad deployment" strategy,
which is a slight variation of the Company's saturation deployment strategy
outlined above. Under the Company's broad deployment strategy, the Company first
deploys its WAN in service areas where the largest consumers of energy are
located and where energy consumers and other power market participants are most
likely to value the Company's services and/or to concentrate their marketing
efforts. As contracts for the provision of NMR services are obtained, the
Company builds out its LAN on an incremental basis as necessary to service those
customers or for advanced coverage of certain areas. Broad deployment offers
energy service providers who lack the established utilities' designated
geographical customer bases the flexibility to build as they grow or to pursue
particular market niches. It also offers established utilities, which are not
yet prepared to commit resources to a long-term saturation deployment project,
the opportunity to cover a portion of their customers initially and to increase
coverage in their service areas over time, potentially to all of their meters.

By using networks deployed under either the saturation or broad deployment
strategy, the Company is also able to offer NMR information metering services
directly to energy consumers, to the extent that the information provided by
such services is not being made available to them by their own utility or energy
service provider. Use of these networks also allows the Company to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular heating, ventilation and air conditioning ("HVAC") system components,
individual manufacturing processes or pieces of equipment, or individual
departments.

The Company believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications requiring low-cost
monitoring of fixed endpoints. Potential non-utility applications of the
Company's systems include remote status monitoring of home security systems,
vending machines, office equipment, parking meters and other equipment and
remote control of traffic lights. The Company is working with industry leaders
such as Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies,
Inc. to develop such applications. The Company believes that its utility
networks will provide an excellent platform to position the Company as a leading
wholesale provider of wireless data communications services for such non-utility
applications.

The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States and comparable opportunities for non-utility applications.
The Company is pursuing international markets through a joint venture with
Bechtel Enterprises, Inc. ("BEn"). The joint venture, BCN Data Systems L.L.C.
("BCN"), has concentrated its initial efforts on entering the market in the
United Kingdom and is also considering opportunities in Australia and elsewhere.
See "Business Strategy-Pursue International Expansion."

RECENT DEVELOPMENTS

SATURATION DEPLOYMENT. The Company continues to expand its utility customer
base through new arrangements to provide NMR services to utility customers. In
April 1998, the Company entered into a nonbinding memorandum of understanding
with AmerenUE to expand its CellNet network for NMR services by 450,000 meters.
This memorandum of understanding, if finalized, would bring the total number of
meters under contract for AmerenUE to approximately 1,250,000 meters.

In March 1998, the Company reached a preliminary understanding with C3
Communications ("C3"), a non-regulated subsidiary of Central and South West
Corporation, to jointly deploy up to 350,000 meters and provide NMR services in
four states.

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In October 1997, the Company announced that it had reached an agreement with
PSE to deploy 700,000 meters to provide NMR services. The term of this agreement
is for 15 years. This long-term contract commitment from PSE represents a
substantial increase from the 15,000 meter Initial Service Agreement reached
between the Company and PSE in 1996 and demonstrates the success of that initial
project.

BROAD DEPLOYMENT. The Company initiated its broad deployment strategy in
September 1997. To date, the Company has entered into service agreements with
energy service providers and energy aggregators including: Keystone Energy;
Friendly Power Company; Commonwealth Energy Corp.; Duke Solutions; the Electric
Clearinghouse, a subsidiary of NGC Corp; Montana Power Group; New West Energy;
Energy Pacific; The Association of Bay Area Governments, which is an association
that will make collective power purchases for 64 local San Francisco Bay Area
governments; and the School Project for Utility Rate Restriction, a joint power
agency representing 229 Northern California school districts, community colleges
and county offices. These contracts generally have terms of one to five years
and provide that the market participant will use the Company's NMR services for
their customers in the geographic areas where the Company completes a network.
Currently, the Company is building networks in a number of cities in Northern
and Southern California. The contracts do not require that the participant
provide any minimum number of customers and, accordingly, the Company is
dependent on the participants' success in attaining and retaining customers.

STRATEGIC DEVELOPMENTS. In March 1998, the Company received approval from
the major energy utilities as a Meter Data Management Agent ("MDMA") and
approval from the California Public Utilities Commission ("CPUC") as a Meter
Service Provider ("MSP") for California's deregulated power market. CellNet is
the first non-utility company in the U.S. to be authorized by the CPUC to
provide meter services.

Also in March 1998, the Company reached an agreement to provide NMR services
to 71 Circuit City stores in California. Under the terms of the agreement,
CellNet will provide Circuit City with metering data relating to in-store
electricity consumption stated in hourly intervals. Circuit City may access this
data on the Internet through a CellNet-operated website.

In January 1998, the Company announced a strategic partnership with Landis &
Gyr, Inc. ("Landis & Gyr"), a global supplier of advanced metering products,
customer management systems and software for the electric utility industry.
Together, the Company and Landis & Gyr intend to incorporate CellNet's data
communications technology into the recently released Altimus electricity
metering system. Altimus is an innovative solid state, residential electricity
metering system designed for the electric power industry.

FINANCING. On September 24, 1997, the Company received an aggregate of
approximately $332.3 million from the sale of its 14% Senior Discount Notes due
2007 (the "1997 Notes") and warrants to purchase Common Stock. All holders of
the Company's 13% Senior Discount Notes due 2005 (the "1995 Notes") tendered and
exchanged their 1995 Notes for 1997 Notes having an initial accreted value of
$231.0 million. The net proceeds from the 1997 Notes to the Company were
approximately $96.3 million.

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THE PREFERRED SECURITIES

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Issuer....................................... CellNet Funding, LLC is a special purpose
limited liability company recently formed
under the laws of the State of Delaware. All
of its common limited liability company
securities (the "Common Securities") are
owned directly by CellNet. Funding will
conduct no business and have no assets or
liabilities except as described herein. See
"Funding."

Securities................................... 3,000,000 of Funding's % Exchangeable
Limited Liability Company Preferred
Securities Mandatorily Redeemable 2010,
having an aggregate liquidation preference of
$75 million (3,450,000 Preferred Securities
and $86.25 million liquidation preference if
the Underwriter's over-allotment option is
exercised in full).

Mandatory Redemption Date.................... May 1, 2010.

Liquidation Preference....................... $25 per Preferred Security, plus accrued and
unpaid dividends.

Dividends.................................... The Preferred Securities will accrue
dividends at the rate of % per annum and
dividends will be payable quarterly on
February 1, May 1, August 1 and November 1 of
each year (each, a "Dividend Payment Date"),
commencing August 1, 1998 to holders of
record on the corresponding record dates. The
first dividend payment of $ per Preferred
Security will be for the period from the
Closing Date (as defined below) to and
including July 31, 1998 and will be payable
on August 1, 1998. Dividends on the Preferred
Securities will accrue and be cumulative from
the closing date of the Offering (the
"Closing Date").

Mandatory Redemption by Funding.............. Unless earlier redeemed, the Preferred
Securities must be redeemed (the "Mandatory
Redemption"), out of funds held by Funding
legally available therefor, at a redemption
price of 100% of the liquidation preference
thereof plus accrued and unpaid dividends, if
any, to the Mandatory Redemption Date.

Method of Redemption Price and Dividend
Payments................................... Through and including August 1, 2001,
dividends on the Preferred Securities will be
payable in cash. Thereafter, dividends on the
Preferred Securities will be payable, and at
any time any redemption price (including at
the Mandatory Redemption Date) may be paid,
in each case at Funding's option (i) in cash,
(ii) by delivery of Common Stock, valued at
90% of the Average Market Value (as defined
</TABLE>

9
<PAGE>

<TABLE>
<S> <C>
below) of the Common Stock in the case of
dividend payments or payment of the
redemption price pursuant to an Optional
Redemption (as defined herein), respectively,
and 100% of the Average Market Value of the
Common Stock in the case of payment of the
redemption price pursuant to the Mandatory
Redemption or (iii) in any combination of
cash and shares of Common Stock; provided
that any payment must be made in cash to the
extent Funding shall have sufficient cash
legally available to make all or any portion
of such payment with respect to the Preferred
Securities.

"Average Market Value" of the Common Stock
means the average of the Current Market Value
for the ten trading days ending on the second
business day prior to the applicable date of
payment. "Current Market Value" of the Common
Stock means (i) the Volume Weighted Average
Price, as reported on the Nasdaq National
Market or (ii) the average of the high and
low sales prices of the Common Stock, if
reported on any other national securities
exchange.

Exchange Rights of Holders................... The Preferred Securities are exchangeable
with Funding at any time prior to the
Mandatory Redemption Date (unless earlier
redeemed), in whole or in part, at the option
of the holders, into shares of Common Stock
at an initial exchange rate of shares
of Common Stock per $25 liquidation
preference of Preferred Securities
(equivalent to an exchange price of $ per
share of Common Stock), subject to adjustment
as described under "Description of the
Preferred Securities--Exchange
Rights--Exchange Rate Adjustments," or an
aggregate of shares of Common Stock
(based on the exchange rate on the Closing
Date), representing approximately % of
the outstanding Common Stock on a fully
diluted basis as of . The Common
Stock is currently quoted on the Nasdaq
National Market under the symbol "CNDS." On
April 29, 1998, the last reported sale price
for the Common Stock on the Nasdaq National
Market was $13.125 per share. Generally, such
exchange with Funding, in whole or in part,
should not be a taxable event to the holders.
See "Certain United States Federal Income Tax
Considerations." Holders of Preferred
Securities at the close of business on a
dividend record date will be entitled to
receive the dividend payable on such
Preferred Securities on the corresponding
Dividend Payment Date notwithstanding the
exchange of
</TABLE>

10
<PAGE>

<TABLE>
<S> <C>
such Preferred Securities following such
dividend record date but prior to such
Dividend Payment Date. Except as provided in
the immediately preceding sentence, neither
Funding nor CellNet will make, or be required
to make, any payment, allowance or adjustment
for accumulated and unpaid dividends, whether
or not in arrears, on exchanged Preferred
Securities. Following any exchange at the
election of a holder of such holder's
Preferred Securities into Common Stock,
dividends will cease to accrue on such
Preferred Securities and such holder will not
be entitled to participate in the proceeds
from the Treasury Strips (as defined herein)
held by Funding. See "Description of the
Preferred Securities--Exchange Rights."

Automatic Exchange by Funding................ The Preferred Securities will be
automatically exchanged for Common Stock at
any time after the Closing Date and on or
prior to May 1, 2001, at an exchange price of
$ per share in the event that the Current
Market Value of the Common Stock equals or
exceeds the following trigger percentages
(the "Trigger Percentages") of the exchange
price then in effect for at least 20 trading
days in any consecutive 30-day trading period
during the 12 month period ending on May 1 of
the indicated year:
</TABLE>

<TABLE>
<CAPTION>
YEAR TRIGGER PERCENTAGE
--------- ---------------------
<S> <C> <C>
1999 170 %
2000 160
2001 150
</TABLE>

<TABLE>
<S> <C>
In any consecutive 30 day trading period that
includes trading days before and after May 1,
1999 or May 1, 2000, the applicable Trigger
Percentage for each trading day in the
trading period shall be used in order to
determine whether an Exchange Event has
occurred.

Upon any Automatic Exchange, Funding will
make a payment in cash (the "Dividend
Make-Whole Payment") with respect to the
Preferred Securities which are exchanged in
an amount equal to the liquidation proceeds
of any remaining U.S. Treasury strips
("Treasury Strips") held by Funding.
Following any Automatic Exchange, dividends
will cease to accrue on such Preferred
Securities. See "--Use of Proceeds and
Structure." Funding will be obligated to make
the Dividend Make-Whole Payment on all
Preferred Securities automatically exchanged.
The Dividend Make-Whole Payment
</TABLE>

11
<PAGE>

<TABLE>
<S> <C>
must be made in cash. See "Description of the
Preferred Securities--Automatic Exchange."

Optional Redemption by Funding............... At any time on or after May 1, 2001, the
Preferred Securities will be redeemable at
the option of Funding (the "Optional
Redemption"), at a redemption price equal to
the percentage of the liquidation preference
set forth below plus accrued and unpaid
dividends, if any, to the date of redemption
(the "Optional Redemption Date"), if redeemed
in the 12 month period beginning on May 1 of
the indicated year:
</TABLE>

<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
--------- ----------------
<S> <C> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000
</TABLE>

Voting Rights................................ Except as described below or provided by law,
the holders of the Preferred Securities will
not have any voting rights. The Limited
Liability
Company Agreement of Funding, (the "Operating
Agreement") provides that Funding may not
amend the Operating Agreement so as to affect
adversely the specific rights, preferences,
privileges or voting rights of holders of
Preferred Securities, or cause the
dissolution, winding-up or termination of
Funding, without the affirmative vote or
consent of the holders of at least a majority
of the outstanding Preferred Securities,
voting or consenting, as the case may be,
separately as one class. Furthermore, the
Certificate of Designation provides that
CellNet may not, without the approval of the
holders of a majority of the outstanding
shares of Redeemable Preferred Stock of
CellNet (the "CellNet Preferred Stock") which
will be held by Funding, amend the
Certificate of Incorporation of CellNet so as
to have a material adverse effect on the
specific rights, preferences, privileges or
voting rights of the holders of the CellNet
Preferred Stock with respect to the CellNet
Preferred Stock, or cause the dissolution,
winding-up or termination of Funding or
CellNet. Funding will initially be the sole
holder of the CellNet Preferred Stock.
Funding has agreed not to grant such approval

</TABLE>
12

<PAGE>

<TABLE>
<S> <C>
without the consent of the holders of a
majority of the Preferred Securities then
outstanding.

Listing...................................... Application has been made for quotation of
the Preferred Securities on the Nasdaq
National Market. The shares of Common Stock
payable as dividends on the Preferred
Securities, payable in connection with a
redemption of Preferred Securities or
issuable in connection with an Automatic
Exchange will be quoted on the Nasdaq
National Market.

Ranking...................................... The Preferred Securities will be senior to
all classes of common securities of Funding.
The Operating Agreement will not permit
Funding to incur any indebtedness or
liabilities or issue any securities except
common securities to CellNet and the
Preferred Securities. See "Description of the
Preferred Securities--Ranking" and
"Description of CellNet Preferred
Stock--Ranking."

Use of Proceeds and Structure................ On the Closing Date, Funding will purchase,
and place in escrow, Treasury Strips in an
amount anticipated to be sufficient to fund
the cash payment of the first 13 dividends.
It is expected that approximately $15.5
million of Treasury Strips will be purchased,
but the precise amount of Treasury Strips to
be purchased will depend on market rates for
U.S. government securities on the Closing
Date. On the Closing Date, the entire
proceeds of this Offering, less the amount
used to purchase Treasury Strips, will be
used to pay the purchase price of
approximately $63.8 million (approximately
$73.3 million, if the Underwriter's
over-allotment option is exercised in full)
of CellNet Preferred Stock. In the event such
proceeds do not equal approximately $63.8
million (approximately $73.3 million, if the
Underwriter's over-allotment option is
exercised in full), CellNet will provide
Funding with cash in an amount, or distribute
to Funding shares of Common Stock in a number
that, when sold by Funding in the open market
will be, sufficient to eliminate such cash
shortfall. Dividends on the CellNet Preferred
Stock will, at the option of CellNet, be
payable either in cash, shares of Common
Stock or any combination of cash and Common
Stock. Such shares may, at the option of
Funding, be used to pay dividends on the
Preferred Securities or be sold to raise
funds to pay cash dividends on the Preferred
Securities. See "--Method of Redemption Price
and Dividend Payments."
</TABLE>

13
<PAGE>
RISK FACTORS

SEE "RISK FACTORS," IMMEDIATELY FOLLOWING THIS SUMMARY, FOR A DISCUSSION OF
CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONJUNCTION WITH AN INVESTMENT IN THE
PREFERRED SECURITIES, INCLUDING RISKS RELATED TO HISTORICAL AND ANTICIPATED
OPERATING LOSSES, NEGATIVE CASH FLOWS AND SUBSTANTIAL INDEBTEDNESS.

14
<PAGE>

SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. The consolidated statement of operations data for
the years ended December 31, 1997, 1996 and 1995 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements
included herein. The consolidated statement of operations data for the years
ended December 31, 1994 and 1993 are derived from audited consolidated financial
statements not included herein. The consolidated statement of operations data
for the three months ended March 31, 1998 and 1997 and the consolidated balance
sheet data at March 31, 1998 are derived from unaudited consolidated financial
statements that include, in the opinion of management, all adjustments,
consisting of only normal, recurring adjustments, necessary for a fair
presentation of the information set forth therein. The consolidated results of
operations for the three months ended March 31, 1998 or any other period are not
necessarily indicative of future results.

(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 2,269 $ 979 $ 5,842 $ 1,669 $ 2,126 $ 1,651 $ 1,757
Costs and expenses:
Cost of revenues........................ 5,229 3,643 18,907 8,429 4,965 1,109 1,741
Research and development................ 7,024 6,396 27,524 25,394 20,883 9,091 4,979
Marketing and sales..................... 3,051 1,739 10,148 6,021 4,114 3,179 1,408
General and administrative.............. 3,624 4,427 15,670 12,036 6,258 2,353 1,206
Depreciation and amortization........... 4,179 2,465 11,973 6,123 2,295 992 665
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.............. 23,107 18,670 84,222 58,003 38,515 16,724 9,999
--------- --------- --------- --------- --------- --------- ---------
Loss from operations...................... (20,838) (17,691) (78,380) (56,334) (36,389) (15,073) (8,242)
Equity in loss of unconsolidated
affiliate............................... (351) (358) (2,834) -- -- -- --
Other income (expense).................... (9,027) (3,954) (21,252) (16,355) (4,564) 441 (148)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes and extraordinary
loss on early extinguishment of 1995
Senior Notes............................ (30,216) (22,003) (102,466) (72,689) (40,953) (14,632) (8,390)
Provision for income taxes................ -- 1 1 5 3 2 1
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary loss on early
extinguishment of 1995 Senior Notes..... (30,216) (22,004) (102,467) (72,694) (40,956) (14,634) (8,391)
Extraordinary loss on early extinguishment
of 1995 Senior Notes.................... -- -- (11,417) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss.................................. $ (30,216) $ (22,004) $(113,884) $ (72,694) $ (40,956) $ (14,634) $ (8,391)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted earnings per share(1):
Loss per share before extraordinary loss
on early extinguishment of 1995 Senior
Notes................................... $ (0.73) $ (0.59) $ (2.59) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
Extraordinary loss on early extinguishment
of 1995 Senior Notes.................... -- -- (0.29) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per share...... $ (0.73) $ (0.59) $ (2.88) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing net loss per
share................................... 41,139 37,701 39,506 11,963 2,939 1,124 627
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER OPERATING DATA (UNAUDITED):
EBITDA(2)................................. $ (15,255) $ (13,227) $ (61,159) $ (42,743) $ (29,338) $ (13,539) $ (7,493)
Capital expenditures...................... 21,398 13,003 59,106 46,493 17,491 3,769 535
Deficit of earnings to fixed charges(3)... 30,492 22,231 102,679 74,226 41,411 -- --
CASH FLOW DATA:
Used for operating activities............. $ (12,924) $ (12,964) $ (57,095) $ (41,160) $ (25,014) $ (14,638) $ (9,091)
Provided by (used for) investing
activities.............................. (25,933) 4,507 (53,253) (3,665) (110,323) (12,817) (3,424)
Provided by (used for) financing
activities.............................. (149) 75 97,228 121,039 170,852 34,036 16,201
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -------------------------------
1998 1997 1996 1995
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED OTHER DATA (UNAUDITED):
Meters under contract(4)............................................ 3,365,000 3,365,000 2,235,000 1,070,000
Meters in revenue service(4)........................................ 956,000 774,000 363,000 18,000
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments...................................... $ 109,860 $ 166,657
Restricted cash(6)..................................................................... -- 15,513
Total assets........................................................................... 278,759 351,069
Long-term obligations, including current portion....................................... 280,993 280,993
Preferred Securities of Funding offered hereby ($75.0 million liquidation value)....... -- 72,310
Total stockholders' equity (deficit)................................................... (27,640) (27,640)
</TABLE>

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

(1) See Notes to Consolidated Financial Statements for an explanation of the
number of shares used in computing net loss per share.

(2) EBITDA consists of operating loss before interest expense, taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the wireless communications industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated and may
be calculated differently than EBITDA for other companies.

(3) Deficit of earnings to fixed charges is calculated as follows: earnings
(loss before taxes on income, equity in loss of affiliate and interest
expense, including that portion of rental expense the Company believes to be
representative of interest (i.e., one-third of rental expense), and not
including capitalized interest) plus fixed charges (interest expense,
including capitalized interest and that portion of rental expense the
Company believes to be representative of interest (i.e. one-third of rental
expense)).

(4) "Meters under contract" refers to the aggregate number of meters for which
the Company has agreed to provide NMR services under services agreements
with utilities, and "Meters in revenue service" refers to the aggregate
number of meters under contract which have been installed on the Company's
networks and for which the Company is receiving NMR service revenues.

(5) Information with respect to the as adjusted balance sheet of the Company
includes the proceeds received from the issuance of the Preferred Securities
and the shares of CellNet Preferred Stock issued in connection with the
Offering.

(6) Restricted cash includes the portion of the net proceeds from the Offering
to be used to purchase Treasury Strips to secure the first 13 scheduled
dividend payments on the Preferred Securities. Restricted cash is calculated
using market prices quoted at the close of trading on April 28, 1998. See
"Description of the Preferred Securities--Escrow."

16
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE PREFERRED SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS, SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT
IN THE COMPANY. THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH
REGARD TO THE COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK
DEPLOYMENTS AND OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH
NETWORKS AND RELATED FINANCING ACTIVITIES, AND ITS EXPECTED REVENUES, EXPENSES
AND CAPITAL EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AND THE VARIATIONS
MAY BE MATERIAL. THE DISCUSSION SET FORTH BELOW CONTAINS CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.

DEPENDENCE ON AND UNCERTAINTY OF MARKET ACCEPTANCE

The Company's success will be almost entirely dependent on whether
established utilities and other parties, including new power market
participants, sign services contracts with CellNet or enter into other
arrangements which allow CellNet to install NMR networks servicing a substantial
number of meters.

Because automation of utility meter reading and distribution is a relatively
new and evolving market and is likely to be significantly affected by
deregulation, it is difficult to predict the future growth rate and size of this
market. Utilities are testing products from various suppliers for various
applications, and no industry standard has been broadly adopted. The CellNet
system is one possible solution for automated meter reading and distribution.
There can be no assurance that the Company will be successful in achieving the
large-scale adoption of its system. In the event that the utilities or other
parties, including new power market participants, do not adopt the Company's
technology, or do so less rapidly than expected by the Company, the Company's
future results, including its ability to service its indebtedness and achieve
positive cash flow or profitability, will be materially and adversely affected.
In recent competitive bids, potential electric and gas utility customers and new
power market participants have selected competing systems to those offered by
the Company and potential utility customers and new power market participants,
from time to time, may select competing services in the future. See
"--Substantial and Increasing Competition" and "Business--Competition."

Any decision by an energy provider to utilize the Company's services will
involve significant organizational, technological and financial commitments. The
utility industry historically is characterized by long purchasing cycles and
cautious decision making. Utilities typically undergo numerous steps before
making a final purchase decision. These steps, which can take up to several
years to complete, may include the formation of a committee to evaluate the
purchase, the review of different technical options with vendors, performance
and cost justifications, regulatory review and the creation and issuance of
requests for quotes and proposals, as well as the utilities' normal budget
approval process. Although the uncertainty surrounding proposed regulatory
changes in some states may have caused, and may continue to cause, additional
delays in purchasing decisions by established utilities, the Company believes
that implementation of utility deregulation will ultimately accelerate the
utility decision-making process. Purchases of the Company's services are, to a
substantial extent, deferrable in the event that utilities seek to limit capital
expenditures or decide to defer such purchases for other reasons. Only a limited
number of utilities have made a commitment to purchase the Company's services to
date, and there can be no assurance as to when or if the Company will enter into
additional services contracts or that any such contracts would be on terms
favorable to the Company. See "Business."

17
<PAGE>
contracts covering a sufficient number of meters to recoup its costs of
deployment, on terms favorable to the Company, or at all. The Company's ability
to enter into contracts with other parties, including new power market
participants, depends, in part, on the timing and type of deregulation in each
state. The Company also anticipates that under contracts with other parties,
including new power market participants, it would build out its networks, at
least in part, before the capacity was fully committed. See "Business Strategy."
For these reasons, the Company's ability to obtain financing for the capital
expenditures associated with these contracts may be limited. The Company
believes, however, that it will be able to defer a significant portion of the
required capital expenditures by building out its networks incrementally as
needed, and that the new power market participants and other parties would lease
or acquire the endpoints from the Company, reducing the Company's costs. The
Company also anticipates that its contracts with new power market participants
and other parties will be shorter-term than those it has entered into with
established utilities, and the revenues may therefore not fully cover the costs
of network build-out and associated operating costs. The Company intends to
reduce this risk by marketing its services to a wide range of new power market
participants and other parties, but there can be no assurance that the Company
will be successful in such marketing efforts, or that the new power market
participants and other parties will be successful in capturing any significant
share of the energy service market.

UNCERTAINTY OF FUTURE REVENUES; NEED FOR ADDITIONAL SERVICES CONTRACTS AND
FLUCTUATING OPERATING RESULTS

The timing and amount of future revenues will depend almost entirely upon
the Company's ability to obtain new services agreements with established
utilities and other parties including new power market participants and upon the
successful deployment and operation of the Company's wireless data
communications networks. The signing of any new services contracts for
saturation or broad deployments is expected to occur on an irregular basis. The
Company expects that it will generally take two to four years to complete the
installation of each saturation deployment network after a services contract has
been signed. Service revenues from both types of such networks are not expected
to exceed the Company's capital investments and expenses incurred to deploy and
operate such networks for several years. The Company will not begin to receive
recurring revenues under a services contract until portions of the network
become operational, which is expected to occur in saturation deployments no
earlier than six months after the execution of the applicable services contract.
The Company begins to incur capital expenditures for the construction of
networks used in broad deployments and does not begin to receive recurring
revenues until portions of the network become operational. The Company's results
of operations may be adversely affected by delays or difficulties arising in the
network installation process. The cost of network deployments will be highly
variable and depend upon a wide variety of factors, including radio frequency
characteristics, the size of a service territory and density of endpoints within
such territory, cost of site leases, the nature and sophistication of services
being provided, the cost of spectrum acquisition, local labor rates and other
economic factors.

CellNet currently derives almost all of its revenues from long-term services
contracts with a limited number of established utilities. During 1997,
approximately 88% of the Company's revenues were derived from its contracts with
KCPL and UE and during the first three months of 1998, 94% of the Company's
revenues were derived from its contracts with KCPL, UE and NSP. The Company will
not generate sufficient cash flow to service its indebtedness or achieve
profitability unless it enters into additional services contracts covering a
significant number of additional meters. There can be no assurance that the
Company will complete commercial deployments of the CellNet system under current
services contracts successfully or that it will obtain enough additional
services contracts on satisfactory terms for network deployments in a sufficient
number of locations to allow the Company to achieve adequate cash flow to
service its indebtedness or achieve positive cash flow or profitability. The
Company's operating results will fluctuate significantly in the future as a
result of a variety of factors, some of which are outside of the Company's
control, including the rate at which established utilities and new power market
participants enter into new services contracts, general economic conditions,
economic conditions in the utility industry,

18
<PAGE>
the effects of governmental regulations and regulatory changes, capital
expenditures and other costs relating to the expansion of operations, the
introduction of new services by the Company or its competitors, the mix of
services sold, pricing changes and new service introductions by the Company and
its competitors and prices charged by suppliers. In response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions or enter into strategic relationships or
investments that could result in a material adverse effect on the Company's
business, operating results, financial condition and cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

UNCERTAINTY OF ACCEPTANCE OF AND DEPENDENCE ON OTHER APPLICATIONS

The Company's long-term business plan contemplates the generation of a
significant percentage of future revenues from non-utility services. Potential
non-utility applications of the Company's systems include home security, remote
status monitoring of vending machines, office equipment and parking meters and
other equipment and remote control of traffic lights. The Company believes its
future ability to service its indebtedness and to achieve profitability will
depend, in part, upon its success in generating substantial revenues from such
additional services. The Company is working with industry leaders such as
Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies, Inc. to
develop such applications. However, there is no assurance any of these
activities will result in the successful development or commercial introduction
of any such services. The Company currently has no services contracts which
provide for the implementation of such services, and the Company has not yet
completed development or deployed any such services on a commercial scale. In
addition, unless the Company is successful in deploying its wireless networks in
targeted service areas, the Company may not be able to offer any such services
in such areas or may be able to offer these services only on a limited basis.
See "Business-- Business Strategy."

DEPENDENCE ON BUSINESS RELATIONSHIPS TO ACHIEVE MARKET PENETRATION

A key element of the Company's business strategy is the formation of
corporate relationships with leading companies. The Company is currently
investing, and plans to continue to invest, significant resources to develop
these relationships. The Company believes that its success in penetrating
markets for utility and non-utility applications of its network will depend in
large part on its ability to maintain these relationships and to cultivate
additional or alternative relationships. There can be no assurance that the
Company will be able to develop additional corporate relationships with such
companies, that existing relationships will continue or be successful in
achieving their purposes or that such companies will not form competing
arrangements. See "Business--Business Strategy--Form Strategic Relationships."

SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT; SUBSTANTIAL FUTURE CAPITAL
NEEDS

The Company has substantial outstanding indebtedness, including $654.1
million in aggregate principal amount at maturity of the 1997 Notes. The Company
will be required to pay cash interest on the 1997 Notes commencing April 1, 2003
and repay the 1997 Notes on October 1, 2007. CellNet intends to incur
substantial additional indebtedness, primarily in connection with installing
future networks. As a result, CellNet will have substantial debt service
obligations. The Company's capital expenditures will increase significantly if
new services contracts are signed, and the Company expects that its cash flow,
in part due to increased capital expenditures, will be increasingly negative
over the next several years. The ability of the Company to meet its debt service
requirements will depend upon achieving significant and sustained growth in the
Company's cash flow, which will be affected by a number of factors, including
its success in implementing its business strategy, prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the Company's control. The Company's ability to generate such cash flow
is subject to a number of risks and contingencies. Included among these risks
are the possibilities that:

19
<PAGE>
(i) the Company may not obtain sufficient additional services agreements or
complete scheduled installations on a timely basis, (ii) revenues may not be
generated quickly enough to meet the Company's operating costs and debt service
obligations, (iii) the operating and/or capital costs associated with the
installation and maintenance of the network could be higher than projected, (iv)
the Company's wireless systems could experience performance problems, or (v)
adoption of the Company's services within a network could be less widespread
than anticipated. Accordingly, there can be no assurance as to whether or when
the Company's operations will generate positive cash flow or become profitable
or whether the Company or its subsidiaries will at any time have sufficient
resources to meet their debt service obligations. If the Company is unable to
generate sufficient cash flow or obtain alternate liquidity to service its
indebtedness, it will have to take actions such as to reduce or delay planned
capital expenditures, sell assets, restructure or refinance its indebtedness or
seek additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all, or that effecting
any of these strategies would yield sufficient proceeds to make the required
payments on any of the Company's indebtedness. In particular, there is a risk
that the Company would be unable, if needed, to refinance the 1997 Notes prior
to the date cash interest payments become due and payable on the 1997 Notes or
at their maturity date, given uncertainty about prevailing capital market
conditions, the Company's then performance and financial position and the
Company's projected high levels of indebtedness. Such inability to refinance the
1997 Notes could result in cross-defaults under other indebtedness and may limit
the Company's ability to meet its obligations in respect of the CellNet
Preferred Stock and Funding's ability to meet its obligations in respect of the
Preferred Securities.

In addition, the degree to which the Company is leveraged could have
significant consequences, including, but not limited to, the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, research and development, acquisitions, and other
general corporate purposes may be materially limited or impaired, (ii) the
Company's cash flow, if any, cannot be used in the Company's business as a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness, and (iii) the
Company's high degree of leverage may make it more vulnerable to economic
downturns, may limit its ability to withstand competitive pressures and may
reduce its flexibility in responding to changing business and economic
conditions.

The Company will require substantial additional funds for the development,
commercial deployment and expansion of its networks, and for funding operating
losses. As of March 31, 1998, the Company had $109.9 million in cash, cash
equivalents and short-term investments. The Company intends to raise a
substantial amount of additional capital in 1998 (in addition to this Offering)
and expects that it will continue to require substantial amounts of additional
capital in the future. Depending upon the number and timing of any new services
agreements and upon the associated network deployment costs and schedules, the
Company may require additional equity or debt financing earlier than estimated
in order to fund its working capital and other requirements. There can be no
assurance that additional financing will be available when required or, if
available, that it will be on terms satisfactory to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

In the event that the Company is unable to generate sufficient cash flow and
is otherwise unable to obtain funds necessary to meet required payments on its
indebtedness, the Company could be in default under the terms of the agreements
governing its indebtedness. In the event of such default, the holders of such
indebtedness and other liabilities would have certain enforcement rights,
including the right to accelerate such indebtedness and the right to commence an
involuntary bankruptcy proceeding against the Company.

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HISTORY AND CONTINUATION OF OPERATING LOSSES

The Company has incurred substantial and increasing operating losses since
inception. As of March 31, 1998, the Company had an accumulated deficit of
$311.8 million, primarily resulting from expenses incurred in the development of
the Company's wireless data communications system, marketing of the Company's
NMR, distribution automation and other services, the installation of its
wireless data communications networks and the payment of other normal operating
costs.

The Company does not expect significant revenues relative to anticipated
operating costs during 1998 and expects to incur substantial and increasing
operating losses and negative net cash flow after capital expenditures for the
foreseeable future as it expands its research and development and marketing
efforts and installs additional networks. The Company expects that its receipt
of network service revenues will lag the signing of the related services
agreements by a minimum of six months and that it will generally take two to
four years to complete installation of a network after each services agreement
has been signed. The Company's network service revenues from a particular
network are expected to lag significantly behind network installation expenses
until such network is substantially complete. If the Company is able to deploy
additional networks, the losses created by this lag in revenues are expected to
increase until the revenues from the installed networks overtake the costs
associated with the deployment and operation of such additional networks.
Accordingly, the Company does not expect positive cash flow after capital
expenditures from its NMR services operations for several years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SUBSTANTIAL AND INCREASING COMPETITION

The emerging market for utility NMR systems, the deregulation of the
electric utility industry and the potential market for other applications once a
common infrastructure is in place, have led electronics, communications and
utility product companies to begin developing various systems, some of which
currently compete, and others of which may in the future compete, with the
CellNet system. Deregulation will likely cause competition to increase. The
Company believes that its only significant direct competitor in the marketplace
at present is Itron, Inc. ("Itron"), an established manufacturer and seller of
hand-held and drive-by automated meter reading ("AMR") equipment for utilities.
Itron is currently providing to customers its Genesis-TM- system, a radio
network system similar to the Company's system, for meter reading purposes.

There may be many potential alternative solutions to the Company's NMR
services including traditional wireless solutions. Motorola is an example of a
company whose technology might be adapted for NMR and who might become a
competitor of the Company. Mtel has announced that it intends to adapt its
technology to offer residential services similar to NMR some time in 1999 over
its existing paging network, with the development of endpoint radios and network
management capabilities being left to other independent companies. Whisper
Communications (formerly, a part of Diablo Research) now offers its True 2
Way-TM- fixed-based radio frequency ("RF") architecture communications
technology for automated meter reading and other services and has several trials
underway. Metricom, a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, is currently
involved in the AMR market through trials with Whisper Communications.
Schlumberger Industries, Inc. ("Schlumberger") and Greenland are among the
companies that have conducted, or are in the process of conducting, pilot trials
of utility network automation systems. Several companies are offering telephone-
based network automated meter reading services or equipment. Among these are
International Teldata and American Innovations. Established suppliers of
equipment, services and technology to the utility industry such as Asea Brown
Boveri and General Electric could expand their current product and service
offerings so as to compete directly with the Company, although they have not yet
done so. Many of the Company's present and potential future competitors have
substantially greater financial, marketing, technical and manufacturing
resources, name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in

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customer requirements or to devote greater resources to the development,
promotion and sale of their products and services than the Company. While
CellNet believes its technology, including its software, is widely regarded as
competitive at the present time, there can be no assurance that the Company's
competitors will not succeed in developing products, technologies or software
that are better or more cost effective. In addition, current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. In addition, if the Company
achieves significant success it could draw additional competitors into the
market. Traditional providers of wireless services may in the future choose to
enter the Company's markets. Such existing and future competition could
materially adversely affect the pricing for the Company's services and the
Company's ability to sign new services contracts and maintain existing
agreements. Competition for services relating to non-utility applications may be
more intense than competition for NMR services, and additional competitors may
emerge as the Company continues to develop non-utility applications. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors, and any failure to do so would have a material
adverse effect on the Company's business, operating results, financial condition
and cash flow. See "Business--Competition."

TECHNOLOGICAL PERFORMANCE AND BUILD-OUT OF THE SYSTEM; RAPID TECHNOLOGICAL
CHANGE AND UNCERTAINTY

The Company's initial target market is the monitoring, control and
automation of utilities' electric, gas and water meters and distribution
networks. There can be no assurance that unforeseen problems will not develop
with respect to the Company's technology, products or services, or that the
Company will be successful in completing the development and commercial
implementation of its technology on a wider scale. The Company must continue to
expand and upgrade its capabilities in connection with such commercial
implementation, the success of which cannot be assured. There can be no
assurance that the Company will be able to develop successfully a full range of
endpoint devices. The Company must also continue to develop the hardware
enhancements necessary to utilize its system on a commercial basis with a
variety of different electric, gas and water meters. The Company's future
success will be materially adversely affected if it is not successful or is
significantly delayed in continuing technology development and enhancement
programs.

The Company's future success will also depend, in part, on its ability to
enhance its existing hardware, software and wireless communications technology.
The telecommunications industry has been characterized by rapid, significant
technological advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, specialized mobile radio services and
personal communications systems ("PCS") and other commercial mobile radio
services have radically expanded communications capabilities and market
opportunities. Future advances may render the Company's technology obsolete or
less cost effective than competitive systems or erode the Company's market
position. Many companies from diverse industries are seeking solutions for the
transmission of data over traditional communications media, including radio and
paging, as well as more recently developed media such as cellular and PCS-based
networks. Competitors may be capable of offering significant cost savings or
other benefits to the Company's customers, and there can be no assurance that
the Company will maintain competitive services or obtain appropriate new
technologies on a timely basis or on satisfactory terms. The Company's future
performance will also depend significantly on its ability to respond to future
regulatory changes. See "Business--Wireless Communications Industry Overview."

The Company's necessary development efforts will require it to make
continued substantial investments. The Company has encountered product
development delays in the past affecting both software and hardware components
of its system. See "Business--Research and Development."

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ACCESS TO RADIO FREQUENCY ("RF") SPECTRUM; REGULATION BY THE FEDERAL
COMMUNICATIONS COMMISSION ("FCC")

The Company attempts to obtain exclusive usage of licensed bandwidth and/or
secure its own licenses. The Company has focused its spectrum acquisition
strategy generally on the largest MSAs and CMSAs in the United States. As of
March 31, 1998, the Company had acquired a total of 87 spectrum licenses in 50
of the top 60 MSAs/CMSAs. However, sufficient frequency spectrum may not be
available to fully enable the delivery of all or a part of the Company's
wireless data communications services or the Company may be required to find
alternative frequencies. The cost of obtaining such spectrum is currently
difficult to estimate and may involve time delays and/or increased cost to the
Company. The Company could also be unable to obtain frequency in certain areas.
Any of these circumstances could have a material adverse impact on the Company's
future ability to provide its network services and on the Company's business,
operating results, financial condition and cash flow. See "Business--Spectrum
Regulation."

The Company's network equipment uses radio spectrum and, as such, is subject
to regulation by the FCC. The Company's network equipment uses both licensed RF
spectrum allocated for multiple address system ("MAS") operations in the 928/952
MHz band and unlicensed spectrum in the 902-928 MHz band. As the amount of
spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
current rules, subject to a number of limited exceptions, permit third parties
such as CellNet to operate on spectrum licensed to utilities to provide other
services. The Company plans to use these provisions of the FCC's rules to expand
its network system.

The FCC requires that a minimum configuration of an MAS system be in
operation within eighteen months from the initial date of the grant of the
system authorization or risk forfeiture of the license for the MAS frequencies.
The eighteen-month deadline may be extended upon a showing of good cause, but
there is no assurance that the FCC will grant any such extension. The Company is
responding to this requirement by selectively building out transmission capacity
in some areas where it does not yet have utility telecommunications services
contracts and may return licenses to the FCC in certain areas.

No license is needed to operate the Company's equipment utilizing the
902-928 MHz band, although the equipment must be certified by the Company and
the FCC as being compliant with certain FCC restrictions on radio frequency
emissions designed to protect licensed services from objectionable interference.
While the Company believes it has obtained all required certifications for its
products, the FCC could modify the limits imposed on such products or otherwise
impose new authorization requirements, and in either case, such changes could
have a material adverse impact on the Company's business, operating results,
financial condition and cash flow. The FCC recently completed a rulemaking
proceeding designed to better accommodate the cohabitation in the 902-928 MHz
band of existing licensed services with newly authorized and expanded uses of
licensed systems, and existing and newly designed unlicensed devices like those
used by the Company. In this proceeding, the FCC expressly recognized the rights
of such unlicensed services to operate under certain delineated operating
parameters even if the potential for interference to the licensed operations
exists. The Company's systems will operate within those specified parameters.

While the Company intends to offer alternate market services over its
private, internal network, some of those services may include the use of the
Company's network for private carrier service offerings. The Company's offerings
would be structured to comply with FCC rules governing the offering of private
carrier services, and each such service offering would need to be reviewed
relative to these rules. The FCC's rules currently prohibit the use of the MAS
frequencies on which the Company is operating its systems for the provision of
common carrier service offerings. In the event that it is determined that a
particular service offering does not comply with the rules, the Company may be
required to restructure such offering or to utilize other frequencies for the
purpose of providing such service. There can be no

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<PAGE>
assurances that the Company will gain access to such other frequencies. Future
interpretation of regulations by the FCC or changes in the regulation of the
Company's industry by the FCC or other regulatory bodies or legislation by
Congress could have a material adverse effect on the Company's business,
operating results, financial condition and cash flow. See "Business--Spectrum
Regulation."

In February 1997, the FCC published for public comment a Notice of Proposed
Rule Making in WT Docket No. 97-81 regarding the future licensing of frequencies
for use by Multiple Address Systems. The FCC has reached certain tentative
conclusions which, if adopted without any change, would result in (i) the
restriction on future licenses in the 928/952/956 MHz band (in which the Company
now operates its wide area network) for systems exclusively used for private
internal purposes, and the prohibition on future licensing in this band for
systems which provide "subscriber-based" services, (ii) the designation of the
932/941 and 928/959 MHz bands for licensees offering subscriber-based services,
(iii) the use of geographic licensing (using very large licensed service areas)
in lieu of site-by-site licensing for the bands designated for subscriber-based
services, (iv) the use of competitive bidding to award licenses for
subscriber-based services, (v) the grandfathering and protection from
interference of existing licensees, but only to the extent of their current
service areas, (vi) with respect to new geographic service area licensees,
liberalizing the time periods by which construction must be completed, but
imposing more burdensome construction requirements over the term of the license,
and (vii) for incumbent and new licensees, liberalizing some of the technical
and operational restrictions on the use of the licensed channels.

These proposals have engendered substantial public comment from a wide range
of industry sectors currently utilizing the MAS channels, including extensive
comments from the Company. The Company has urged, in particular, that there
should not be any restrictions imposed on the use of the 928/952 MHz bands in
which the Company has developed its network facilities that would unreasonably
limit the Company's ability to provide its current and anticipated utility and
non-utility service offerings. The Company has also urged that competitive
bidding and geographic licensing should not be the primary basis for awarding
licenses in this highly encumbered, heavily utilized band. The Company has also
supported many of the proposed changes that will make the use of the band more
technically efficient, although the Company has also opposed any use of the band
that would change its fundamental use for point-to-multipoint fixed operations,
and in particular, the use of the band for mobile operations. The Company's
positions have substantial support in the record, although the effort to retain
the status quo eligibility for the 928/952 MHz band has been opposed by
representatives of the utility and transportation industries who would prefer to
limit the use of this band solely to private internal networks and to prohibit
any private carrier or subscriber-based service offerings.

In August, 1997, the FCC's authority to utilize competitive bidding as a
licensing mechanism was amended and expanded by Congress in the BUDGET ACT OF
1997. Under this recent enactment, the FCC must use competitive bidding
procedures to choose between any mutually exclusive applications, except where
the radio frequency spectrum is being used for public safety radio services.
Congress included a very broad definition of "public safety radio services," to
include private internal radio services used by state and local governments and
non-governmental entities, including emergency road services provided by
not-for-profit organizations that are used to protect the safety of life,
health, or property and that are not made commercially available to the public.
As a result, licensed systems that protect the safety of life, health, or
property and are not made commercially available to the public are not subject
to licensing by FCC auctions.

The new auction legislation post-dates the Notice of Proposed Rulemaking in
WT Docket 97-81 and will, in the Company's view, require the FCC to review and
revise its proposals in that proceeding relating to the breadth of the auction
authority granted to the FCC, which no longer distinguishes between private
internal systems, and proposals relating to the grant of "subscriber based"
services. The Company is unable to determine how the new auction legislation
will affect the proposals in that proceeding, whether the Company's use of MAS
spectrum will subject its applications to the possibility of auctions or will,
instead, be considered a "public safety" use, or whether the Commission will
otherwise exempt the 928/952 MHZ

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<PAGE>
band in which the Company currently operates from circumstances in which mutual
exclusivity between applicants for the same license, requiring the use of
auctions, is likely to exist. Nor is the Company able to determine when the FCC
will act in WT Docket 97-81, either to issue new proposals consistent with the
new auction legislation or adopt new rules consistent with the positions already
established in the proceeding or a combination thereof.

The Company is also working with a coalition of interested parties,
including representatives of the utility and transportation industries, to
attempt to develop a compromise consensus proposal that would satisfy most of
the interested parties' concerns for presentation to the FCC in this proceeding.
However, the Company is unable to predict whether such a compromise can be
developed, or if it is developed, whether the FCC will view it favorably, and if
not, what form the final rules adopted in this proceeding will take. Given the
current proposal and the variety of comments submitted, it is possible that some
or all of the Company's uses of the MAS channels could be determined to be the
offering of private carrier or subscriber-based services, and that future
licenses for such offerings would be prohibited in the 928/952 MHz band in which
the Company currently operates, requiring the Company to develop equipment
capable of operating in one of the other MAS bands, and further requiring the
Company to obtain future licenses in a competitive bidding process. Although the
Company believes that additional licensed frequency will be generally available
to it as required, the cost associated with acquiring such licensed frequency as
well as the Company's operating costs could increase, perhaps substantially, and
the Company could experience substantial delays in adapting its networks if the
proposed rules were adopted. The adoption of new rules, depending upon the form
in which such rules are adopted, could have a material adverse effect upon the
Company's business, operating results, financial condition and cash flow.

In connection with the foregoing, the FCC has temporarily suspended
acceptance of MAS applications for new licenses, major amendments, or major
modifications for the 928/959 MHz bands and applications to provide
subscriber-based services in the 928/952/956 MHz bands. This temporary
suspension does not affect applications for MAS licenses for private internal
purposes in the 928/952/956 MHz bands or applications for assignment of licenses
or transfer of control. Subject to certain limitations, pending applications at
the time of the suspension will continue to be processed. All of the Company's
pending applications for licenses in the 928/952 MHz band have been or are being
processed in due course. In addition, the Company's applications for the
assignment of licenses held by others have been processed during the processing
suspension. At the request of the Company, the FCC has determined that the
Company's current use of the MAS spectrum constitutes the use as a private,
internal network, and so the Company's applications for new licenses, and for
major modifications to existing licenses, are being processed in due course.
There is no assurance that the Company's future uses of the MAS spectrum will
similarly qualify as a use in a private, internal network, or the the FCC will
not change or expand its freeze on the processing of applications to recognize
the impact of the new auction legislation described above. In either case, the
Company's ability to obtain new licenses could be materially adversely affected,
with similar consequences on the Company's ability to service areas where it has
not yet acquired adequate frequencies.

Finally, when the Company acquires licenses assigned to other applicants, or
utilizes licenses issued in the past, the Company is required to modify its
licenses to reflect more advanced technological parameters now utilized by the
Company and its systems. The Company has developed such amendments with the
approval of the FCC's staff and anticipates timely grant of all required
modifications. There can be no assurance that any particular modification will
be granted timely to the Company's introduction of service on a particular
license, and the failure to obtain the required license modifications could have
a material adverse effect on the Company's ability to serve areas covered by
such unmodified licenses.

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

The Company is pursuing international markets through BCN Data Systems
L.L.C. ("BCN"), its international joint venture with Bechtel Enterprises, Inc.
("BEn"). The Company does not expect to

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<PAGE>
generate any revenues from its international operations during 1998. The Company
has incurred, and anticipates that it will continue to incur, significant and
increasing expenses in connection with the establishment of international
operations. If revenues generated by international activities are not adequate
to offset the expense of establishing and maintaining these activities, the
Company's business, operating results, financial condition and cash flow could
be materially adversely affected. International demand for the Company's
services and systems may not materialize, and where present, is likely to vary
by country, based on such factors as the regulatory environment, electric power
generating capacity and demand, labor costs, costs of spectrum acquisition and
other political and economic conditions. In addition, the Company may confront
significant challenges in developing and implementing localized versions of its
NMR system due to many factors including the differing standards among utilities
on a country by country basis. To date, the Company has extremely limited
experience in developing a localized version of its wireless data communications
system for foreign markets. The Company believes its ability to establish
business alliances in each international market will be critical to its success.
There can be no assurance that the Company will be able to successfully develop,
market and implement its system in international markets or establish successful
business alliances for these markets. In addition, there are certain risks
inherent in doing business internationally, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates and potentially adverse tax consequences, any of
which could adversely impact the Company's potential international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, on its business, operating results, financial condition and cash
flow. See "Business--Business Strategy--Pursue International Expansion."

The Company's strategy of pursuing international markets through BCN may
involve additional partners in local operating project entities in particular
countries. The Company or BCN may not have a majority interest or control of the
board of directors of any such local operating project entity. In any such joint
venture in which the Company or BCN may determine to participate, there is a
risk that the other joint venture partner may at any time have economic,
business or legal interests or goals that are inconsistent with those of the
joint venture or the Company or BCN or that such partner will not impose the
same or similar accounting and financial controls as the Company or BCN. The
risk is also present that a joint venture partner may be unable to meet its
economic or other obligations and that the Company or BCN may be required to
fulfill those obligations. In addition, in any joint venture in which the
Company or BCN does not have a majority interest, the Company or BCN may not
have control over the operations or assets of such joint venture. Furthermore,
the joint venture structure may limit the amount of funds that can be upstreamed
to the Company or BCN. See "Business--Business Strategy--Pursue International
Expansion."

MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL

The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational and financial systems and to
expand and manage its employee base. These demands are expected to require the
addition of new management personnel and the development of additional expertise
by existing management personnel. There can be no assurance that the Company
will be able to effectively manage the expansion of its operations, that its
systems, procedures or controls will be adequate to support the Company's
operations or that Company management will be able to exploit opportunities for
the Company's services. An inability to manage growth, if any, could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow.

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<PAGE>
The success of the Company is substantially dependent on its key management
and technical personnel, the loss of one or more of whom could adversely affect
the Company's business. Substantially all of the Company's employees and
officers are employed on an at-will basis. Presently, the Company does not
maintain a "key man" life insurance policy on any of its executives or
employees. The Company's future success also depends on its continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract or retain highly
qualified technical and managerial personnel in the future. An inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flow. See "Management."

UNCERTAINTY OF PROTECTION OF COPYRIGHTS, PATENTS AND PROPRIETARY RIGHTS

The Company relies on a combination of trade secret protection, copyright,
patent, trademark and confidentiality agreements and licensing arrangements to
establish and protect its proprietary rights. The Company's success will depend
in part on its ability to maintain copyright and patent protection for its
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. While the Company has obtained and applied
for patents, and intends to file applications as appropriate for patents
covering its products and processes, there can be no assurance that additional
patents will be issued or, if issued, that the scope of any patent protection
will be significant, or that any patents issued to the Company or licensed by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.

Since United States patent applications are maintained in secrecy until
patents are issued, and since publication of inventions in the technical or
patent literature tend to lag behind such inventions by several months, CellNet
cannot be certain that it was the first creator of inventions covered by its
issued patents or pending patent applications, that it was the first to file
patent applications for such inventions or that no patent conflict will exist
with other products or processes which could compete with the Company's products
or approach. Despite the Company's efforts to safeguard and maintain these
proprietary rights, there can be no assurance that the Company will be
successful or that the Company's competitors will not independently develop and
patent technologies that are substantially equivalent or superior to the
Company's technologies. Participants in the wireless industry, including
competitors of the Company, typically seek to obtain patents which will provide
as broad a protection as possible for their products and processes. There is a
substantial backlog of patents pending at the United States Patent and Trademark
Office. It is uncertain whether any such third-party patents will require the
Company to alter its products or processes, obtain licenses or cease certain
activities. An adverse outcome with regard to a third-party patent infringement
claim could subject the Company to significant liabilities, require disputed
rights to be licensed or restrict the Company's ability to use such technology.
The Company also relies to a substantial degree upon unpatented trade secrets,
and no assurance can be given that others, including the Company's competitors,
will not independently develop or otherwise acquire substantially equivalent
trade secrets. In addition, whether or not additional patents are issued to the
Company, others may receive patents which contain claims applicable to products
or processes developed by the Company. If any such claims were to be upheld, the
Company would require licenses, and no assurance can be given that licenses
would be available on acceptable terms, if at all. In addition, the Company
could incur substantial costs in defending against suits brought against it by
others for infringement of intellectual property rights or in prosecuting suits
which the Company might bring against other parties to protect its intellectual
property rights. From time to time the Company receives inquiries with respect
to the coverage of its intellectual property rights, and there can be no
assurance that such inquiries will not develop into litigation. See "Business--
Proprietary Rights."

In October 1996, Itron, one of the Company's competitors, filed a complaint
against the Company in the Federal District Court in Minnesota, alleging that
the Company infringes an Itron patent which was

27
<PAGE>
issued in September 1996. Itron is seeking a judgment for damages, attorneys'
fees and injunctive relief. The Company believes, based on information currently
known, that the Company's products do not infringe any valid claim in the Itron
patent, and in the Company's opinion, the ultimate outcome of the lawsuit is not
expected to have a material adverse effect on the Company's business, operating
results, financial condition and cash flow. See "--Litigation," "Business--Legal
Proceedings."

DEPENDENCE ON THIRD-PARTY MANUFACTURERS; EXPOSURE TO COMPONENT SHORTAGES

The Company relies and will continue to rely on outside parties to
manufacture a majority of its network equipment such as radio devices and
printed circuit boards. As the Company signs additional services contracts,
there will be a significant ramp-up in the amount of manufacturing by third
parties in order to enable the Company to meet its contractual commitments.
There can be no assurance that these manufacturers will be able to meet the
Company's manufacturing needs in a satisfactory and timely manner or that the
Company can obtain additional manufacturers when and if needed. Although the
Company believes alternative manufacturers are available, an inability of the
Company to develop alternative suppliers quickly or cost-effectively could
materially impair its ability to manufacture and install systems. The Company's
reliance on third-party manufacturers involves a number of additional risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. Although the Company
believes that these manufacturers would have an economic incentive to perform
such manufacturing for the Company, the quality, amount and timing of resources
to be devoted to these activities is not within the control of the Company, and
there can be no assurance that manufacturing problems will not occur in the
future. A significant price increase, a quality control problem, an interruption
in supply from one or more of such manufacturers or the inability to obtain
additional manufacturers when and if needed could have a material adverse effect
on the Company's business, operating results, financial condition and cash flow.
See "Business--Manufacturing and Operations."

Certain of the Company's subassemblies, components and network equipment are
procured from single sources and others are procured only from a limited number
of sources. In addition, CellNet may be affected by general shortages of certain
components, such as surface mounted integrated circuits and memory chips. There
have been shortages of such materials generally in the marketplace from time to
time in the past. The Company's reliance on such components and on a limited
number of vendors and subcontractors involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and cost. A significant price increase or
interruption in supply from one or more of such suppliers could have a material
adverse effect on the Company's business, operating results, financial condition
and cash flow. Although the Company believes alternative suppliers of
sub-assemblies, components and network equipment are available, the inability of
the Company to develop alternative sources quickly or cost-effectively could
materially impair its ability to manufacture and install systems. Lead times can
be as long as a year for certain components, which may require the Company to
use working capital to purchase inventory significantly in advance of receiving
any revenues. See "Business--Manufacturing and Operations."

A significant number of new electric meters are required to initiate meter
retrofit and replacement in connection with each network deployment and to
replace existing meters in the field which are found to be obsolete, worn out or
otherwise unsuitable for retrofit and redeployment. Any sudden or material
increase in the number of deployments would result in an increase in the number
of new electric meters ordered by electric utilities and new power market
participants over and above those ordered on account of normal growth and
replacement within their service areas. To the extent that electric meter
manufacturers are unable or unwilling to increase production in line with such
increase in demand, temporarily or over a longer term, deployments may be
delayed or postponed, with the result that revenues from such deployments will
be likewise delayed or postponed.

28
<PAGE>
POSSIBLE TERMINATION OF CONTRACTS

The Company expects that a substantial portion of its future revenues will
be provided pursuant to services contracts of various kinds. These contracts
will generally be subject to cancellation or termination in certain
circumstances in the event of a material and continuing failure on CellNet's
part to meet agreed NMR performance standards on a consistent basis over agreed
time periods, subject to certain rights to cure any such failure. Each of the
Company's existing utility services contracts provides for termination of such
contracts by the respective utility without cause in less than ten years,
subject to certain reimbursement provisions. Such contracts also provide that
CellNet will be required to compensate such utilities for the use of its system
for non-utility applications. Future services contracts with utilities may
contain similar provisions. Contracts with new power market participants
generally allow for termination without cause by the new power market
participant on thirty days prior written notice except to the extent they have
already ordered services under the contract. In the event that such a services
contract is terminated, the Company may incur substantial losses. In addition,
the Company anticipates that any contracts with new power market participants
will generally have shorter terms than the Company's existing utility contracts.
The Company's current contracts with new power market participants generally
have terms of one to five years, compared to terms of ten to twenty years with
utilities. A network's service revenues are not expected to exceed the Company's
capital investments to deploy such network for several years. Termination or
cancellation of one or more services contracts would have a material adverse
effect on the Company's business, results of operations, financial condition and
cash flow. See "Business--Current Utility Services Agreements."

SHAREHOLDERS' AGREEMENT

Under the terms of a Shareholders' Agreement among the Company and certain
stockholders of the Company (the "Shareholders' Agreement"), so long as certain
parties to the Shareholders' Agreement continue to hold not less than 700,000
shares of Common Stock (as such number is adjusted for stock splits,
consolidations or other similar events), the Company is obligated to nominate
for election representatives of certain stockholders as directors at each
meeting of the Company's stockholders at which a vote for directors will be
taken. The intent of the Shareholders' Agreement is to give certain stockholders
greater influence over the management of the Company than they would otherwise
have and to provide certain stockholders with, among other things, certain
registration, first refusal, co-sale and other rights.

LITIGATION

In October 1996, Itron, one of the Company's competitors, filed a complaint
against the Company in the Federal District Court in Minnesota alleging that the
Company infringes an Itron patent which was issued in September 1996. Itron is
seeking a judgment for damages, attorneys fees and injunctive relief. The
Company believes, based on its current information, that the Company's products
do not infringe any valid claim in the Itron patent, and in the Company's
opinion, the ultimate outcome of the lawsuit is not expected to have a material
adverse effect on its results of operations or financial condition.

In April 1997, the Company filed a patent infringement suit against Itron in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electric meter reading Encoder Receiver Transmitter
(ERT-Registered Trademark-) device infringes CellNet's U.S. Patent No.
4,783,623. The Company seeks an injunction, damages and other relief. See
"--Uncertainty of Protection of Copyrights Patents and Proprietary Rights."

The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL,
ET AL., No. 398464, filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC., ET AL., No. 398560, was earlier

29
<PAGE>

voluntarily dismissed with prejudice. These complaints, purported class actions
filed on behalf of the Company's stockholders against the Company, certain of
its officers and directors and underwriters of the Company's initial public
offering, sought unspecified damages and rescission for alleged liability under
various provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which the Company issued 5,000,000 shares
of common stock to the public, contained materially misleading statements and/or
omissions in that defendants were obligated to disclose, but failed to disclose,
that a patent conflict with Itron was likely to ensue.

ABSENCE OF PUBLIC MARKET FOR THE PREFERRED SECURITIES; VOLATILITY OF COMMON
STOCK PRICE

The Preferred Securities are a new issue of securities for which there is
currently no active trading market. If the Preferred Securities are traded after
their initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, the market price of the Common Stock and other factors, including
general economic conditions and the financial condition, performance of, and
prospects for the Company. If an active market for the Preferred Securities
fails to develop or be sustained, the trading price of such Preferred Securities
could be materially adversely affected.

The trading price of the Company's Common Stock has been highly volatile
since the Company's initial public offering and has been and is likely to
continue to be subject to wide fluctuations in response to a variety of factors,
including quarterly variations in operating results, the signing of services
contracts, new customers, consolidations in the industry, technological
innovations or new products by the Company or its competitors, developments in
patents or other intellectual property rights, general conditions in the NMR
services industry, revised earnings estimates, comments or recommendations
issued by analysts who follow the Company, its competitors or the NMR services
industry and general economic and market conditions. In addition, it is possible
that in some future period the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock could be materially adversely affected.
Additionally, the stock market in general, and the market for technology stocks
in particular, have experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market prices
of many technology companies for reasons unrelated or disproportionate to the
operating performance of such companies. These broad market fluctuations could
have a significant impact on the market price of the Common Stock and the
Preferred Securities.

NO DIVIDENDS ON COMMON STOCK; DIVIDEND RESTRICTIONS

30
<PAGE>
NO OPERATIONS OF FUNDING

The issuer of the Preferred Securities, Funding, is a special purpose
subsidiary of CellNet which is a newly formed Delaware limited liability company
with no operations or assets other than the agreement to purchase CellNet
Preferred Stock and Treasury Strips with the proceeds of this Offering. Funding
will have no other funds to pay cash dividends. In order to pay subsequent
dividends, Funding will be dependent on CellNet (i) to distribute cash dividends
in respect of the CellNet Preferred Stock (which distribution is restricted by
the terms of the indenture governing the 1997 Notes) (the "Indenture")), (ii)
provide to Funding funds or (iii) issue to Funding Common Stock (which is
required by the terms of the CellNet Preferred Stock). Funding's assets will
consist almost entirely of its interest in the CellNet Preferred Stock and the
Treasury Strips.

NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE

CellNet will guarantee the payment in full to the holders of the Preferred
Securities of (i) accrued and unpaid dividends on the Preferred Securities, if
and only to the extent Funding has funds sufficient and legally available
therefor to make such payment, (ii) the redemption price with respect to the
Preferred Securities redeemed, if and only to the extent Funding has funds
sufficient and legally available therefor to make such payment and (iii) upon a
voluntary termination or involuntary dissolution, winding-up or termination of
Funding (other than in connection with a redemption of all of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment, to the extent Funding has funds sufficient and legally available
therefor to make such payment, and (b) the amount of assets of Funding remaining
available for distribution to holders of the Preferred Securities upon
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.

Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts.

Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee, the
Guarantee is of no practical benefit to holders of the Preferred Securities.

RANKING OF CELLNET PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF CELLNET;
UNCERTAINTY OF REDEMPTION

The CellNet Preferred Stock will be subordinated to all existing and future
indebtedness and other liabilities of CellNet, and will, with respect to
dividend distributions and distributions upon the liquidation, winding-up or
dissolution of CellNet, rank senior to all Common Stock and senior to or pari
passu with all other capital stock of CellNet. There are no terms in the CellNet
Preferred Stock, the Preferred Securities or the Guarantee that limit CellNet's
ability to incur additional indebtedness or issue pari passu preferred stock. As
of March 31, 1998, the Company had approximately $306.4 million of indebtedness
outstanding and no preferred stock outstanding. CellNet has authorized the
issuance of up to 15 million shares of preferred stock. The Indenture permits
CellNet to incur substantial additional indebtedness and issue additional
preferred stock. Any new indebtedness incurred by CellNet, any securities issued
to refinance existing indebtedness and any future issuances of new series of
CellNet preferred stock may prohibit or

31
<PAGE>
restrict the redemption of the CellNet Preferred Stock for cash, thus
effectively prohibiting or restricting Funding's ability to redeem the Preferred
Securities for cash. See "--Substantial Indebtedness" and "Description of
CellNet Preferred Stock."

POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE

A substantial portion of the Company's Common Stock is presently eligible
for immediate sale in the public market subject, in the case of certain shares,
to the limitations of Rules 144, 144(k) or 701 under the Securities Act. In
addition, the holders of a significant number of such shares of Common Stock are
entitled to certain registration rights with respect to such shares and the
number of shares sold in the public market could increase substantially upon
exercise of such registration rights. See "Description of CellNet Capital
Stock--Registration Rights of Certain Holders."

RISK FACTORS RELATED TO CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

PARTNERSHIP STATUS

Funding's ability to pay dividends on Preferred Securities depends, in part,
on the classification and treatment of Funding as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters as to
which Funding has made representations, counsel is of the opinion that, under
current law, Funding will be classified and treated as a partnership for federal
income tax purposes. No ruling from the Internal Revenue Service (the "IRS") as
to such classification or treatment has been or is expected to be requested.
Instead, Funding intends to rely on such opinion of counsel (which is not
binding on the IRS).

If Funding were classified or treated as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on its income
at corporate rates (currently a maximum 35% federal rate), distributions would
generally be taxed again to the holders of Preferred Securities as corporate
distributions, and no income, gains, losses or deductions would flow through to
the holders of Preferred Securities. Because a tax would be imposed upon Funding
as an entity, the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Classification or treatment of
Funding as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would likely
result in a substantial reduction in the value of Preferred Securities. See
"Certain United States Federal Income Tax Considerations--Partnership Status of
Funding."

FUNDING ALLOCATIONS

It is possible that a holder of Preferred Securities may receive allocations
of taxable income without matching cash distributions. Furthermore, a holder who
disposes of Preferred Securities between record dates for dividends may be
required pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the applicable
fiscal period in which such disposition occurs in the holder's calculation of
taxable income (and to add such amount to (or subtract such amount from) the
adjusted tax basis in the holder's Preferred Securities) without receiving the
dividend for the quarter in which such disposition occurs. Furthermore, certain
allocation methods used by Funding may be challenged by the IRS, which may
result in greater tax liability to holders of Preferred Securities during their
period of ownership or upon disposition. See "Certain United States Federal
Income Tax Considerations."

DISPOSITION OF PREFERRED SECURITIES

A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax basis in such
Preferred Securities. Thus, prior Funding distributions in excess of cumulative
net taxable income in respect of Preferred Securities which decreased a holder's
tax

32
<PAGE>
basis in such Preferred Securities will, in effect, become taxable income or
gain if the Preferred Securities are sold at a price greater than the holder's
tax basis in such Preferred Securities, even if the price is less than such
holder's original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.

LIMITED VOTING RIGHTS

Generally, holders of the Preferred Securities do not have any voting
rights. However, the vote of a majority of the Preferred Securities is required
to approve any amendment to the Operating Agreement or any proposed action by
Funding that would (i) have a material adverse effect on the powers, preferences
or special rights of the holders of the Preferred Securities or (ii) cause the
dissolution, winding-up or termination of Funding. The approval of the holders
of a majority of the CellNet Preferred Stock is required to approve any change
to CellNet's charter or any proposed action by CellNet that would (i) have a
material adverse effect on the powers, preferences or special rights of the
holder of the CellNet Preferred Stock or (ii) cause the dissolution, winding-up
or termination of Funding. Funding is expected to be the sole holder of the
CellNet Preferred Stock. Funding has agreed not to grant such approval without
the consent of the holders of a majority of the Preferred Securities then
outstanding.

ANTI-TAKEOVER PROVISIONS

The Board of Directors, without further shareholder approval, can issue
preferred shares with dividend, liquidation, conversion, voting, exchange or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. In the event of issuance, the preferred shares
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change of control of CellNet. In addition, the Company
is, and will continue to be, subject to the anti-takeover provisions of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company. Furthermore, upon a change of
control, the holders of substantially all of the Company's outstanding
indebtedness are entitled, at their option, to be repaid in cash and the holders
of CellNet's preferred stock may, at their option, require CellNet to redeem
their shares for cash. Such provisions may have the effect of delaying or
preventing changes in control or management of the Company. All of these factors
could materially adversely affect the price of the Preferred Securities.

33
<PAGE>
FUNDING

Funding is a special purpose limited liability company formed under the laws
of the State of Delaware. CellNet owns all of the Common Securities of Funding.
Funding exists for the exclusive purposes of (i) issuing the Preferred
Securities, (ii) investing the proceeds of the sale thereof in the CellNet
Preferred Stock and Treasury Strips and (iii) engaging in those other activities
necessary or incidental thereto.

The business and affairs of Funding are conducted by CellNet, in its
capacity as manager (the "Manager"). The duties and obligations of the Manager
are governed by the Operating Agreement. Funding will hold the CellNet Preferred
Stock for the benefit of the holders of the Preferred Securities and has the
power to exercise all rights, powers and privileges under the CellNet Preferred
Stock. CellNet has agreed to pay all fees and expenses related to the Offering
of the Preferred Securities.

USE OF PROCEEDS

The gross proceeds to Funding from the Offering are estimated to be
approximately $75.0 million (approximately $86.3 million if the Underwriter's
over-allotment option is exercised in full).

On the Closing Date, Funding will purchase, and place into escrow, Treasury
Strips in an amount anticipated to be sufficient to fund the cash payments of
the first 13 dividends on the Preferred Securities. It is expected that
approximately $15.5 million of Treasury Strips will be purchased, but the
precise amount of Treasury Strips to be purchased will depend on market rates
for U.S. government securities on the Closing Date. On the Closing Date, the
entire proceeds of this Offering, less the amount used to purchase Treasury
Strips, will be used to pay the purchase price of approximately $63.8 million
(approximately $73.3 million if the Underwriter's over-allotment option is
exercised in full) of CellNet Preferred Stock. In the event such proceeds do not
equal approximately $63.8 million (approximately $73.3 million if the
Underwriter's over-allotment option is exercised in full), CellNet will provide
Funding with cash in an amount, or distribute to Funding shares of Common Stock
in a number that when sold in the open market, will be sufficient to eliminate
such cash shortfall.

The Company expects to use the net proceeds received from Funding's purchase
of CellNet Preferred Stock (i) to fund continuing research and development
activities related to its wireless data communications systems, (ii) to expand
opportunities for the use of its wireless data communications systems through
alternate market applications, (iii) to enhance the performance and lower the
component and operating cost of its wireless data communications systems, (iv)
to continue investing in an international joint venture with BEn for the
deployment of its wireless data communications systems on a worldwide basis, (v)
to fund the adaptation and migration of its technology for use outside the
United States, (vi) to support network deployment for both utility and
non-utility applications, (vii) to expand the Company's business generally, and
(viii) for working capital, general corporate and other purposes permitted by
the Indenture.

DIVIDEND POLICY

Dividends on the Preferred Securities will accrue from the date of the
original issuance of the Preferred Securities and will be payable at the annual
rate of % of the liquidation preference of $25 per Preferred Security.
Dividends on the Preferred Securities will be payable quarterly in arrears on
each February 1, May 1, August 1 and November 1, commencing August 1, 1998.

The Company has not declared or paid any dividends on its Common Stock since
its inception. The Company currently anticipates that it will retain all of its
future earnings, if any, for use in the operation and expansion of its business
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future, and any changes in the Company's dividend policies will be
determined by its Board of Directors. The Company's existing financing
arrangements also restrict the payment of any dividends on its Common Stock. The
Company anticipates that it and its Subsidiaries will incur substantial
additional indebtedness, which is likely to restrict the payment of dividends on
its Common Stock.

34
<PAGE>
CAPITALIZATION

The following table sets forth (i) the actual cash and capitalization of the
Company as of March 31, 1998 and (ii) the as adjusted cash and capitalization of
the Company to reflect the issuance of the Preferred Securities and CellNet
Preferred Stock in connection with this Offering (assuming that the
Underwriter's over-allotment option is not exercised).

<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments.................................... $ 109,860 $ 166,657
----------- --------------
----------- --------------

Restricted cash(2)................................................................. $ -- $ 15,513
----------- --------------
----------- --------------
Long-term obligations:
1997 Notes(3)...................................................................... $ 279,952 $ 279,952
Capital lease obligations, including current portion(4)............................ 1,041 1,041
----------- --------------
Total long-term obligations...................................................... 280,993 280,993
----------- --------------
Preferred Securities of Funding offered hereby ($75.0 million liquidation value)..... -- 72,310
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 15,000,000 shares authorized; no shares
outstanding......................................................................
Common Stock, $.001 par value; 100,000,000 shares authorized and 41,917,026 shares
outstanding...................................................................... 210,302 210,302
Notes receivable from sale of Common Stock......................................... (668) (668)
Warrants........................................................................... 74,546 74,546
Accumulated deficit................................................................ (311,815) (311,815)
Net unrealized loss on short-term investments...................................... (5) (5)
----------- --------------
Total stockholders' equity (deficit)............................................. (27,640) (27,640)
----------- --------------
Total capitalization........................................................... $ 253,353 $ 325,663
----------- --------------
----------- --------------
</TABLE>

- ----------

(1) Information with respect to the as adjusted capitalization of the Company
includes the issuance of the Preferred Securities and CellNet Preferred
Stock in connection with this Offering.

(2) Reflects the portion of the net proceeds from the Offering to be used to
purchase Treasury Strips to secure the first 13 scheduled dividend payments
on the Preferred Securities. Restricted cash is calculated using market
prices quoted at the close of trading on April 28, 1998. See "Description of
the Preferred Securities--Escrow."

(3) See Note 6 of Notes to Consolidated Financial Statements.

(4) See Note 9 of Notes to Consolidated Financial Statements.

35
<PAGE>
COMMON STOCK PRICE RANGE

Since the Company's initial public offering, the Common Stock has been
quoted on the Nasdaq National Market under the symbol "CNDS." The following
table sets forth for the periods indicated the high and low reported last sale
prices for the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1996
Third Quarter (since September 27, 1996).............................. $ 21.375 $ 15.500
Fourth Quarter........................................................ 18.500 11.500

Year Ended December 31, 1997
First Quarter......................................................... 14.875 7.125
Second Quarter........................................................ 12.750 6.750
Third Quarter......................................................... 13.125 10.500
Fourth Quarter........................................................ 12.750 7.375

Year Ended December 31, 1998
First Quarter......................................................... 14.063 11.000
Second Quarter (through April 29)..................................... 14.000 12.063
</TABLE>

The last reported sale price for the Common Stock on the Nasdaq National
Market was $13.125 on April 29, 1998. As of March 31, 1998, there were
approximately 951 stockholders of record of the Common Stock.

36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein. The consolidated statement of
operations data for the years ended December 31, 1997, 1996 and 1995 and the
consolidated balance sheet data at December 31, 1997 and 1996 are derived from,
and are qualified by reference to, the audited Consolidated Financial Statements
included herein. The consolidated statement of operations data for the years
ended December 31, 1994 and 1993 and the consolidated balance sheet data at
December 31, 1995, 1994 and 1993 are derived from audited consolidated financial
statements not included herein. The consolidated statement of operations data
for the three months ended March 31, 1998 and 1997 and the consolidated balance
sheet data at March 31, 1998 are derived from unaudited consolidated financial
statements that include, in the opinion of management, all adjustments,
consisting of only normal, recurring adjustments, necessary for a fair
presentation of the information set forth therein. The consolidated results of
operations for the three months ended March 31, 1998 or any other period are not
necessarily indicative of future results.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 2,269 $ 979 $ 5,842 $ 1,669 $ 2,126 $ 1,651 $ 1,757
Costs and expenses:
Cost of revenues................................. 5,229 3,643 18,907 8,429 4,965 1,109 1,741
Research and development......................... 7,024 6,396 27,524 25,394 20,883 9,091 4,979
Marketing and sales.............................. 3,051 1,739 10,148 6,021 4,114 3,179 1,408
General and administrative....................... 3,624 4,427 15,670 12,036 6,258 2,353 1,206
Depreciation and amortization.................... 4,179 2,465 11,973 6,123 2,295 992 665
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses....................... 23,107 18,670 84,222 58,003 38,515 16,724 9,999
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................... (20,838) (17,691) (78,380) (56,334) (36,389) (15,073) (8,242)
Equity in loss of unconsolidated affiliate......... (351) (358) (2,834) -- -- -- --
Other income (expense)............................. (9,027) (3,954) (21,252) (16,355) (4,564) 441 (148)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes and extraordinary loss on
early extinguishment of 1995 Senior Notes........ (30,216) (22,003) (102,466) (72,689) (40,953) (14,632) (8,390)
Provision for income taxes......................... -- 1 1 5 3 2 1
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary loss on early
extinguishment of 1995 Senior Notes.............. (30,216) (22,004) (102,467) (72,694) (40,956) (14,634) (8,391)
Extraordinary loss on early extinguishment of 1995
Senior Notes..................................... -- -- (11,417) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss........................................... $ (30,216) $ (22,004) $(113,884) $ (72,694) $ (40,956) $ (14,634) $ (8,391)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted earnings per share(1):
Loss per share before extraordinary loss on early
extinguishment of 1995 Senior Notes.............. $ (0.73) $ (0.59) $ (2.59) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
Extraordinary loss on early extinguishment of 1995
Senior Notes..................................... -- -- (0.29) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per share............... $ (0.73) $ (0.59) $ (2.88) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing net loss per share........ 41,139 37,701 39,506 11,963 2,939 1,124 627
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER OPERATING DATA (UNAUDITED):
EBITDA(2).......................................... $ (15,255) $ (13,227) $ (61,159) $ (42,743) $ (29,338) $ (13,539) $ (7,493)
Capital Expenditures............................... 21,398 13,003 59,106 46,493 17,491 3,769 535
Deficit of earnings to fixed charges(3)............ 30,492 22,231 102,679 74,226 41,411 -- --
CASH FLOW DATA:
Used for operating activities...................... $ (12,924) $ (12,964) $ (57,095) $ (41,160) $ (25,014) $ (14,638) $ (9,091)
Provided by (used for) investing activities........ (25,933) 4,507 (53,253) (3,665) (110,323) (12,817) (3,424)
Provided by (used for) financing activities........ (149) 75 97,228 121,039 170,852 34,036 16,201
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
AS OF MARCH
31,
-----------
1998
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 109,860 $ 148,058 $ 178,875 $ 143,797 $ 24,508 $ 8,884
Total assets............................................ 278,759 293,985 259,551 184,306 31,809 11,510
Long-term obligations, including current portion........ 280,993 269,551 207,852 183,348 546 825
Series CC redeemable convertible preferred stock........ -- -- -- 29,486 29,486 --
Total stockholders' equity (deficit).................... (27,640) 2,264 40,245 (38,103) (1,564) 8,011
</TABLE>

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

(1) See Notes to Consolidated Financial Statements for an explanation of the
number of shares used in computing net loss per share.

(3) Deficit of earnings to fixed charges is calculated as follows: earnings
(loss before taxes on income, equity in loss of affiliate and interest
expense including that portion of rental expense the Company believes to be
representative of interest (i.e. one-third of rental expense), and not
including capitalized interest) plus fixed charges (interest expense,
including capitalized interest and that portion of rental expense the
Company believes to be representative of interest (i.e. one-third of rental
expense)).

38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

The Company intends to deploy and operate a series of wireless data
communications networks pursuant to services agreements with utilities and other
parties including new power market participants to earn recurring revenues by
providing NMR services and to use the networks to support a variety of non-
utility applications. The Company employs two basic strategies in the deployment
of its networks-- saturation deployments for providing NMR services to existing
utilities, and broad deployments for providing NMR services to other parties
including new power market participants. Under the Company's saturation
deployment strategy, the Company builds out its WAN and LAN concurrently in
order to cover every meter in a utility's designated service area. The
saturation deployment strategy has proven effective because it allows coverage
of all of the energy consumers in those service areas. Under the Company's broad
deployment strategy, the Company first deploys its WAN in service areas where
the largest consumers of energy are located and where energy consumers and other
power market participants are most likely to value the Company's services and/or
to concentrate their marketing efforts. As contracts for the provision of NMR
services are obtained, the Company builds out its LAN on an incremental basis as
necessary to service those customers or for advanced coverage of certain areas.
Both the LAN and WAN can be further expanded incrementally as additional
business outside the existing coverage areas is obtained. Broad deployment
offers energy service providers who lack the established utilities' designated
geographical customer bases the flexibility to build as they grow or to pursue
particular market niches. It also offers established utilities who are not yet
prepared to commit their resources to a long-term saturation deployment project
the opportunity to cover a portion of their customers initially and to increase
coverage in their service areas over time, potentially to all of their meters.
By using networks deployed under either strategy, the Company is also able (i)
to offer NMR information metering services directly to energy consumers, to the
extent that the information provided by such services is not being made
available to them by their own utility or energy service provider, (ii) to offer
sub-metering NMR services to industrial and commercial customers which desire to
monitor the energy consumption of particular HVAC system components, individual
manufacturing processes or pieces of equipment or individual departments, and
(iii) to offer a range of non-utility wireless data communication services for
such applications as home security, remote status monitoring of vending
machines, office equipment and parking meters, and remote control of traffic
lights.

The Company's business strategy has affected and will continue to affect its
financial condition and results of operations as follows:

COMPOSITION OF REVENUES. The Company derives substantially all of its
revenues from fees earned under services agreements related to its wireless
communications networks. Under the Company's existing services agreements with
utilities, the Company receives monthly NMR service fees based on the number of
endpoint devices that are in revenue service during the applicable month.

UNEVEN REVENUE GROWTH. The timing and amount of the Company's future
revenues will depend upon its ability to obtain additional services agreements
with utilities and other parties, including new power market participants, and
upon the Company's ability to deploy and operate successfully its wireless
communications networks for utility and non-utility applications. New services
agreements are expected to be obtained on an irregular basis, and there may be
prolonged periods during which the Company does not

39
<PAGE>
enter into any additional services agreements or other arrangements. As a
result, the Company expects that its revenues will not grow smoothly over time,
but will increase unevenly as the Company enters into new services agreements
and other commercial relationships, and may decrease sharply in the event that
any of its existing services agreements are terminated or not renewed. See "Risk
Factors--Uncertainty of Future Revenues; Need for Additional Services Contracts
and Fluctuating Operating Results."

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's future revenues will depend
on the number of new services agreements with established utilities and other
parties, including new power market participants, and on the amount of NMR
services to be provided thereunder. The Company's existing saturation contracts
are with established utilities. During 1997, approximately 88% of the Company's
revenues were derived from its contracts with KCPL and UE and during the first
three months of 1998, 94% of the Company's revenues were derived from KCPL, UE
and NSP. The utility industry is historically characterized by long purchasing
cycles and cautious decision making, and purchases of the Company's services
are, to a substantial extent, deferrable in the event that utilities seek to
limit capital expenditures or decide to defer such purchases for other reasons.
Only a limited number of utilities have made a commitment to purchase the
Company's services to date. Although the uncertainty surrounding proposed
regulatory changes in some states may have caused, and may continue to cause,
additional delays in purchasing decisions by established utilities, the Company
believes that implementation of utility deregulation will ultimately accelerate
the utility decision-making process. The Company believes that it will enter
into additional services contracts with other utilities and other parties
including new power market participants; however, if the Company's services do
not gain widespread industry acceptance, its revenues would not increase
significantly after services contracts for existing network systems have been
fully installed.

With the advent of utility industry deregulation, the Company is seeking
opportunities to provide its NMR services to other parties, including new power
market participants. The Company believes it is well-positioned to offer
competitive advantages to established utilities and other parties including new
power market participants. The Company has entered into several contracts with
new power market participants and others for the provision of NMR services.
However, there can be no assurance that the Company will be able to enter into
contracts covering a sufficient number of meters to recoup its costs of
deployment, on terms favorable to the Company, or at all. The Company also
anticipates that, under contracts with new power market participants, it will
build out its networks, at least in part, before the capacity is fully
committed. These contracts do not require that the participants provide any
minimum number of customers and, accordingly, the Company is dependent on the
participant's success in obtaining and retaining customers. See
"Business--Business Strategy." For these reasons, the Company's ability to
obtain financing for the capital expenditures associated with these contracts
may be limited, although the Company also believes that it will be able to defer
a significant portion of the capital expenditures by building out its networks
incrementally as needed, and that the new power market participants would lease
or acquire the endpoints from the Company, reducing the Company's costs. The
Company also anticipates that its contracts with new power market participants
and other parties will be shorter-term than those it has entered into with
established utilities, and may therefore not fully cover the costs of network
build-out and associated operating costs. The Company's current contracts with
new power market participants generally have maximum terms of up to five years,
compared to terms of ten to twenty years with utilities. The Company intends to
reduce this risk by marketing its services to a wide range of new power market
participants and other parties, but there can be no assurance that the Company
will be successful in such marketing efforts, or that the new power market
participants will be successful in capturing any significant share of the energy
service market.

The Company's long-term business plan contemplates the generation of a
significant percentage of future revenues from non-utility services. The Company
believes its future ability to service its indebtedness and to achieve
profitability will be affected by its success in generating substantial revenues
from such additional services. The Company currently has no services contracts
which provide for the implementation of such services, and the Company has not
yet deployed such services on a commercial scale. In addition, unless the
Company is successful in deploying its wireless networks in targeted service
areas, the Company

40
<PAGE>
may not be able to offer any such services in such areas or may be able to offer
these services only on a limited basis.

REVENUES LAG NETWORK DEPLOYMENT. The Company expects to realize network
service revenue under a services agreement with a utility or new power market
participant only when a portion of the network is installed and they have begun
billing their customers based upon the NMR data obtained. The Company expects
that its receipt of network service revenue will lag the signing of the related
services agreements by a minimum of six months and that it will generally take
two to four years to complete installation of a network after each services
agreement has been signed. A network's service revenues are not expected to
exceed the Company's capital investments and expenses incurred to deploy such
network for several years. As of March 31, 1998, the Company had approximately
3,365,000 meters under long-term contracts, of which approximately 956,000
meters were in revenue service. The Company signed agreements with KCPL and UE
in August 1994 and August 1995, respectively, and did not receive its first
revenue under the KCPL and UE services agreements until September 1995 and May
1996, respectively. The Company has completed the installation of its NMR
network for KCPL and had installed approximately 394,000 meters on the network
by March 31, 1998. The Company expects to add an additional 20,000 meters to the
KCPL network in 1998 which would be added to the total number of meters in
revenue service upon acceptance by KCPL for billing purposes. The remaining
6,000 meters under contract with KCPL may be automated or read manually. As of
March 31, 1998, the Company completed the on-line deployment of approximately
615,000 meters to the UE network. The Company began the installation of both the
NSP and Puget networks in August 1996 and began receiving revenue from Puget in
January 1997. The Company has also successfully completed a demonstration
project with PG&E in San Francisco pursuant to which the Company has installed a
network that will cover approximately 30,000 electric and gas meters. PG&E has
acknowledged that the data collection, cost savings, customer service and other
objectives of the demonstration network have been met. In September 1997, the
Company entered into a services contract with IP&L for the installation of its
NMR network that will cover approximately 415,000 meters. Installation of the
initial portion of the IP&L network was completed in November 1997. As
additional segments of the Company's networks are installed and used by its
customers for billing purposes, the Company expects to realize a corresponding
increase in its network service revenues. However, if the Company is able to
deploy successfully an increasing number of networks over the next few years,
the operating losses created by this lag in revenues, the negative cash flow
resulting from such operating losses, and the capital expenditures expected to
be required in connection with the installation of such networks, are expected
to widen for a period of time and will continue until the operating cash flow
from installed networks exceeds the costs of deploying and operating the
additional networks.

IMPACT OF RAPID EXPANSION. The Company will be required to invest
significant amounts of capital in its networks and to incur substantial and
increasing sales and marketing expenses before receiving any return on such
expenditures through network service revenues. The Company has incurred
substantial operating losses since its inception and, as of March 31, 1998, had
an accumulated deficit of $311.8 million. The Company does not expect
significant revenues relative to anticipated operating costs during 1998 and
expects to incur substantial and increasing operating losses and negative net
cash flow after capital expenditures for the foreseeable future as it expands
and installs additional networks. The Company does not expect positive cash flow
after capital expenditures from its NMR services operations for several years.
The Company will require substantial capital to fund operating cash flow
deficits and capital expenditures for the foreseeable future and expects to
finance these requirements through significant additional external financing.
See "Risk Factors--History and Continuation of Operating Losses" and
"--Substantial Leverage and Ability to Service Debt; Substantial Future Capital
Needs."

INTEREST INCOME. The Company has earned substantial amounts of interest
income on short-term investments of the proceeds of its financing activities.
The Company expects to utilize substantially all of its cash, cash equivalents
and short-term investments in deploying its wireless communications networks, in
continuing research and development activities related thereto, in related
selling and marketing activities

41
<PAGE>
and for general and administrative purposes. As such funds are expended,
interest income is expected to decrease.

RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997, AND YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995

REVENUES

Revenues for the three months ended March 31, 1998 and 1997 were $2.3
million and $1.0 million, respectively. The increase in revenues was principally
due to increases in network service revenues. During the three months ended
March 31, 1998, UE, KCPL and NSP accounted for approximately 50%, 34% and 10% of
the Company's revenues, respectively. During the first three months of 1997,
KCPL and UE accounted for 61% and 29% of the Company's revenues, respectively.

Revenues for the three years ended December 31, 1997, 1996 and 1995 were
$5.8 million, $1.7 million and $2.1 million, respectively. Revenues prior to
1996 were attributable primarily to product sales and development and other
contract revenues unrelated to the Company's current focus of providing NMR
services that were largely non-recurring and are expected to continue to
decline. The Company expects to have product sales associated with certain NMR
deployments which sales could be material to the Company's revenues although no
assurance can be given in this regard. During 1997, KCPL and UE accounted for
47% and 41% of the Company's revenues, respectively. During 1996, KCPL and UE
accounted for 69% and 21% of the Company's revenues, respectively. Revenues for
1996 declined $457,000 from 1995, primarily as a result of the transition from
product sales to network service revenues. During 1995, NSP and KCPL accounted
for 64% and 29% of the Company's revenues, respectively. The Company's NMR
service revenues for the years ended December 31, 1997, 1996 and 1995 were $5.1
million, $1.2 million and $35,000, respectively.

The Company generally realizes service revenues under its services
agreements only when its networks or portions thereof are successfully installed
and operating and its clients begin billing their own customers or begin using
the NMR services provided. Revenues are expected to increase as the Company
continues to install its networks, the networks or portions thereof become
operational, and its clients begin billing their own customers or begin using
the NMR services provided. Due primarily to the nature, amount and timing of
revenues received to date, no meaningful period-to-period comparisons can be
made. Revenues received during the three months ended March 31, 1998 and 1997,
respectively, and the years ended December 31, 1997, 1996 and 1995,
respectively, are not reliable indicators of revenues that might be expected in
the future.

COST OF REVENUES

Cost of revenues was $5.2 million and $3.6 million for the three months
ended March 31, 1998 and 1997, respectively. Cost of revenues was $18.9 million,
$8.4 million and $5.0 million for the years ended December 31, 1997, 1996 and
1995, respectively. Cost of revenues primarily consisted of network operation
costs during the periods. The increase in cost of revenues was driven by
increasing costs of providing network services, due primarily to growth in the
number of employees and associated costs necessary for network monitoring
operations at customer sites and at the Company's headquarters, network
deployment management and customer training. Costs of network services also
include the increased installation, applications and RF engineering staffing at
the Company's headquarters to support anticipated additional utility contracts.
Network services do not currently generate a profit as the Company has not yet
achieved a scale of services sufficient to cover network costs. The Company will
incur significant and increasing costs primarily attributable to network
operation and depreciation. Once a network has been fully installed, costs
associated with generating network revenues will consist primarily of
maintaining a monitoring center for such network, network depreciation and
miscellaneous maintenance and operating expenses.

42
<PAGE>
OPERATING EXPENSES

Operating expenses, consisting of research and development, marketing and
sales, general and administrative costs and depreciation and amortization
expenses, were $17.9 million and $15.0 million for the three months ended March
31, 1998 and 1997, respectively. Operating expenses were $65.3 million, $49.6
million and $33.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in operating expenses on a period to period basis is
attributable to the Company's rapid growth and to increasing research and
development and marketing and sales expenditures. The Company expects to
continue to spend a significant portion of its resources on research and
development activities for the foreseeable future. Marketing and sales costs are
expected to increase moderately over current levels as the Company continues its
efforts to sign new services agreements. General and administrative costs are
expected to increase over time in line with the Company's expected growth and
are expected to increase moderately for the next few years in connection with
the planned installation of a new corporate information system which has
commenced in the second quarter of 1998.

RESEARCH AND DEVELOPMENT

Research and development expenses are attributable largely to continuing
system software, firmware and equipment development costs, prototype
manufacturing, testing, personnel costs, consulting fees, and supplies. Research
and development costs are expensed as incurred. The Company's networks include
certain software applications which are integral to their operation. The costs
to develop such software have not been capitalized as the Company believes its
software development is essentially completed when technological feasibility of
the software is established and/or development of the related network hardware
is complete. Research and development expenses were $7.0 million and $6.4
million (net of expenses reimbursable by BCN of $245,000 and $347,000 for
technology migration costs) for the three months ended March 31, 1998 and 1997,
respectively. Research and development expenses were $27.5 million (net of
expenses reimbursable by BCN of $2.8 million for technology migration costs),
$25.4 million and $20.9 million for the years ended December 31, 1997, 1996 and
1995, respectively. Research and development spending increases on a period to
period basis reflect primarily additions to the Company's engineering staff. The
Company expects that research and development expenses will increase moderately
in the near term for additional investments in research and development projects
and in connection with the establishment of international operations.

MARKETING AND SALES

Marketing and sales expenses consist principally of personnel costs,
including commissions paid to sales and marketing personnel, travel,
advertising, trade show and other promotional costs. Marketing and sales
expenses were $3.1 million and $1.7 million during the three months ended March
31, 1998 and 1997, respectively. Marketing and sales expenses were $10.1
million, $6.0 million and $4.1 million for the years ended December 31, 1997,
1996 and 1995, respectively. These expenses have increased on a period to period
basis due to the Company's accelerated efforts to sign new services agreements
and a significantly larger advertising program. The Company expects a moderate
increase in marketing and sales expenses over current levels as the Company
continues its efforts to sign new services agreements.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include compensation paid to general
management and administrative personnel costs, travel, and communications and
other general administrative expenses, including fees for professional services.
General and administrative expenses were $3.6 million and $4.4 million for the
three months ended March 31, 1998 and 1997, respectively. The decrease in these
expenses in 1998 from 1997 resulted from a reduction in expenditures for certain
employee compensation and professional fees. General and administrative expenses
were $15.7 million, $12.0 million and $6.3 million for the years ended December
31, 1997, 1996 and 1995, respectively. The Company expects general and
administrative expenses to increase over time in line with its expected growth.

43
<PAGE>
DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $4.2 million and $2.5 million for
the three months ended March 31, 1998 and 1997, respectively. Depreciation and
amortization expense was $12.0 million, $6.1 million and $2.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Depreciation and
amortization expense is attributable to the Company's networks in progress,
including both equipment manufactured by the Company and systems partially
installed in the field, property and leasehold improvements. Depreciation and
amortization expense has increased as a result of increased additions to
networks in progress, property and leasehold improvements period to period.

EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE

The Company accounts for its investment in BCN, which began operations in
1997, using the equity method. For the three months ended March 31, 1998 and
1997, the Company recognized $351,000 and $358,000 as its share of BCN's losses,
respectively. For the year ended December 31, 1997, the Company recognized $2.8
million as its share of BCN's losses. The Company expects to recognize increased
losses in the future from its share of BCN's losses as BCN expands its
operations.

INTEREST INCOME AND EXPENSE

Prior to June 1995, the Company funded its liquidity needs primarily from
the issuance of equity securities. In June and November 1995, the Company issued
and sold a total of $325.0 million aggregate principal amount at maturity of the
Company's 13% Senior Notes due 2005 (the "1995 Notes") and related warrants (the
"1995 Warrants") for proceeds, net of issuance costs, of $169.9 million. In
October 1996, the Company completed an initial public offering of Common Stock
for aggregate net proceeds of $92.2 million. In connection with the initial
public offering, the Company also received $1.2 million in proceeds from the
exercise of warrants to purchase Common Stock. In addition, in October 1996 the
Company completed certain private placements of Common Stock for net proceeds of
approximately $28.0 million. In September 1997, the Company issued and sold a
total of approximately $654.1 million aggregate principal amount at maturity of
the 1997 Notes and warrants (including the 1997 Notes and warrants issued in
exchange for the 1995 Notes) for proceeds, net of issuance costs, of $96.3
million. In connection with the issuance of the 1997 Notes, $231.0 million of
the issue price for the 1997 Notes and warrants was issued in exchange for all
of the Company's 1995 Notes. The Company has earned interest income on the
invested proceeds from these financings. The Company has also incurred
significant interest expense from the amortization of the original issue
discount on the 1995 Notes and the 1997 Notes. Interest expense will increase
significantly in future periods as a result of increased accretion of a larger
original issue discount balance from the 1997 Notes.

Interest income has been and will continue to be received by the Company
from the short-term investment of proceeds from the issuance of equity and debt
securities pending the use of such proceeds by the Company for capital
expenditures and operating and other expenses. Interest income is expected to be
highly variable over time as proceeds from the issue and sale of additional
equity and debt securities are received and as funds are used by the Company in
its business. Interest income for the three months ended March 31, 1998 and 1997
was $1.9 million and $2.3 million, respectively. Interest income for the three
years ended December 31, 1997, 1996 and 1995 was $8.2 million, $7.4 million and
$4.6 million, respectively.

No interest on the 1997 Notes will accrue or be payable prior to April 1,
2003. Thereafter, until maturity on October 1, 2007, interest will accrue at the
rate of 14% per annum and be payable semi-annually in arrears on each April 1
and October 1. The carrying amount of the 1997 Notes accretes from the date of
issue and the Company's interest expense includes such accretion. Interest
expense was $10.8 million and $6.3 million for the three months ended March 31,
1998 and 1997, respectively. Interest expense was $29.3 million, $23.8 million
and $9.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively.

44
<PAGE>
PROVISION FOR INCOME TAXES

The Company has not provided for or paid federal income taxes due to the
Company's net losses. A nominal provision has been recorded for various state
minimum income and franchise taxes.

As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $206.0 million and $56.0 million available to offset future
federal and state taxable income, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes within any three-year period as
provided in the Tax Reform Act of 1986 and the California Conformity Act of
1987. Such state carryforwards will expire between 1998 and 2012. Such federal
carryforwards will expire between 2001 and 2012. Equity issuances in April 1991
and the initial public offering in 1996 triggered such limitations on loss
carryforwards. As of December 31, 1997, approximately $70.0 million of net
operating losses remain limited to an annual usage of approximately $36.0
million for federal tax purposes. Based upon the Company's history of operating
losses and the expiration dates of the loss carryforwards, the Company has
recorded a valuation allowance to the full extent of its net deferred tax
assets.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT

On September 29, 1997, the Company exchanged $654.1 million aggregate value
at maturity of 1997 Notes and warrants for $100.3 million in new proceeds and
the extinguishment of its $325.0 million aggregate value at maturity of 1995
Notes. The exchange of the 1995 Notes was accounted for as an early
extinguishment of debt, resulting in an extraordinary charge of $11.4 million,
consisting of the unamortized portion of the debt issuance cost of the 1995
Notes of $4.8 million, $3.5 million attributable to consent fees and other costs
related to the extinguishment of the 1995 Notes, and accelerated accretion of
interest on the 1995 Notes of $3.1 million.

IMPACT OF THE YEAR 2000

The Company believes that its wireless data communications network systems
are Year 2000 compliant. In addition, the Company will require its third party
vendors and suppliers to be Year 2000 compliant. Accordingly, the Company
expects that the advent of the millennium will have no adverse effect on its
network operations. Certain of the Company's existing internal corporate
information systems require modification, upgrade or replacement in order to be
Year 2000 compliant. Because these systems are becoming obsolete, the Company
has decided to replace them with a new corporate information system to be
installed commencing in the second quarter of 1998 and expects to complete
installation in advance of the year 2000. The Company expects to finance over
several years most of the costs involved in purchasing and installing the new
corporate information system, which are estimated at approximately $1.5 million
for 1998. The Company incurred $223,000 in costs for this project in the three
months ended March 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires significant amounts of capital for research and
development in connection with the development of its proprietary wireless
communications network and related products and services, for investments in the
installation and testing of such networks and for related sales and marketing
and general and administrative expenses. Historically, the Company has satisfied
its liquidity requirements primarily through external financings, including
private placements of equity and debt securities and interest income derived
from the investment of the proceeds of its financing activities.

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

In the first three months of 1998 and 1997, net cash used in the Company's
operating activities totaled $12.9 million and $13.0 million, respectively. Net
cash used in operating activities resulted primarily from cash used to fund net
operating losses.

45
<PAGE>
In the three months ended March 31, 1998 and 1997, net cash provided by
(used for) investing activities totaled ($25.9) million and $4.5 million,
respectively. The Company's investing activities consisted primarily of
purchases of network components and inventory, the construction and installation
of networks, purchases of property and equipment, and purchases, sales and
maturities of short-term investments. In the first three months of 1997, net
proceeds from the sale and maturation of short-term investments of $20.3 million
were used to fund operating activities.

In the first three months of March 31, 1998 and 1997, net cash provided by
(used for) the Company's financing activities totaled ($149,000) and $75,000,
respectively.

As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments totaling $109.9 million. As of December 31, 1997, the Company had
cash, cash equivalents and short-term investments totaling $148.1 million. The
decline of $38.2 million was due to operating costs and the development and
construction of the Company's wireless communications networks.

YEARS ENDED 1997, 1996 AND 1995

In 1997, 1996 and 1995, net cash used in the Company's operating activities
totaled $57.1 million, $41.2 million and $25.0 million, respectively. Net cash
used in operating activities resulted primarily from cash used to fund net
operating losses.

In 1997, 1996 and 1995, net cash used for investing activities totaled $53.3
million, $3.7 million and $110.3 million, respectively. The Company's investing
activities consisted primarily of purchases of network components and inventory,
the construction and installation of networks, purchases of property and
equipment, and purchases, sales and maturities of short-term investments. In
1997 and 1996, net proceeds from the sale and the maturation of short-term
investments of $17.7 million and $41.1 million, respectively, were used to fund
operating activities.

In 1997, 1996 and 1995, net cash provided by the Company's financing
activities totaled $97.2 million, $121.0 million and $170.9 million,
respectively, including cash provided by the private sale of the Company's
equity securities of $1.2 million in 1995. In June and November 1995, the
Company received an aggregate of $175.8 million of gross proceeds ($169.9
million in net proceeds) from the private sale of the 1995 Notes and related
warrants. During 1996, the Company financed its operations primarily from the
proceeds of the offering of the 1995 Notes and warrants, together with interest
income of $7.4 million. In October 1996, the Company completed its initial
public offering of Common Stock for net proceeds of $92.2 million. In addition,
in October 1996, the Company completed certain private placements of Common
Stock for net proceeds of approximately $28.0 million. On September 24, 1997,
the Company received an aggregate of approximately $332.3 million ($96.3 million
in net proceeds) from the sale of the 1997 Notes and warrants. All holders of
outstanding 1995 Notes tendered and exchanged their 1995 Notes for 1997 Notes
having an initial accreted value of $231.0 million. Warrants to purchase
8,942,517 shares of the Company's Common Stock with an exercise price of $14.30
per share were attached to the 1997 Notes. Aggregate proceeds of $74.5 million
were attributable to these warrants. The 1997 Notes were issued at an initial
accreted value of $257.8 million and will fully accrete to a face value of
$654.1 million.

The 1997 Notes were issued at a substantial discount from their aggregate
principal amount at maturity of $654.1 million. Although interest is not payable
on the 1997 Notes prior to April 1, 2003, the carrying amount of such
indebtedness will increase as the original issue discount is amortized through
maturity on October 1, 2007. Beginning October 1, 2002, the 1997 Notes will bear
interest, payable semi-annually, at a rate of 14% per annum, with payments
commencing April 1, 2003. No principal payments on the 1997 Notes are due prior
to maturity on October 1, 2007. There is a risk that the Company will not be
able to refinance the 1997 Notes prior to the date cash interest payments become
due and payable on such Notes or at their maturity date. The Company's ability
to refinance the 1997 Notes will depend on prevailing capital market conditions,
the Company's performance and financial position and the Company's indebtedness,
which is projected to be high. Any inability by the Company to refinance the
1997 Notes would limit the Company's ability to meet its obligations on such
1997 Notes.

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As of December 31, 1997, the Company had cash, cash equivalents and
short-term investments totaling $148.1 million. As of December 31, 1996, the
Company had cash, cash equivalents and short-term investments totaling $178.9
million. The decline of $30.8 million was due to increased operating costs and
the development and construction of the Company's wireless communications
networks, offset by proceeds from the issuance of the 1997 Notes.

Deployments of the Company's wireless communications networks will require
substantial additional capital. The Company is committed to make approximately
$89.3 million in capital expenditures in 1998 for saturation deployment network
installations of which $13.9 million was expended by March 31, 1998. In
addition, the Company anticipates that it may spend as much as $37.0 million
during 1998 in capital expenditures relating to the installation of its broad
deployment network in California of which $5.2 million was expended by March 31,
1998. The exact amount of such expenditures will depend, in part, upon the
amount of NMR and other services contracted for. The Company may make additional
capital expenditures in connection with the installation of new networks, the
expansion of existing networks and/or an acceleration in anticipated network
installation schedules. In addition, funds will be required for a number of
purposes including, but not limited to, further enhancements to the system
software, firmware, hardware and other equipment to increase the speed, capacity
and functionality of the system, to enhance system productivity over time and to
expand the scope of utility and other network information services that may be
offered on the CellNet system. The Company expects that cash used for the
construction and installation of networks and for the purchase of property and
equipment will increase substantially as and when the Company obtains new
services agreements or enters into other arrangements for the installation of
its networks, and that the Company will require significant amounts of
additional capital from external sources. Sources of additional capital for the
Company and its subsidiaries may include project or conventional bank financing,
including financing provided by utilities to finance the construction of
networks being built out primarily for them, public and private offerings of
debt and equity securities and cash generated from operating activities. The
Company expects that a substantial portion of its future financing will be at
the subsidiary level on a project basis. The Company expects to obtain third
party financing for the construction of wireless networks, based on the
projected cash flow expected to be generated from such projects. The Company
expects that the recurring revenue stream from long-term services contracts and
other arrangements will support the amortization of debt raised for the project
involved, however no assurance can be given that this will occur. The Company
does not anticipate deriving any significant cash from such operations for
several years.

The Company believes that existing cash (including the proceeds of this
Offering), cash equivalents, anticipated interest income, other revenues and
expected sources of project financing of approximately $35 million will be
sufficient to meet its cash requirements for at least the next 12 months. The
Company requires and intends to raise a substantial amount of capital in 1998
(in addition to this Offering) and expects that it will continue to require
substantial amounts of additional capital in the future. The extent of
additional financing will depend on the success of the Company's business. The
Company expects to incur significant operating losses and to generate
increasingly negative net cash flow during the next several years while it
develops and installs its network communications systems. There can be no
assurance that additional financing will be available to the Company or, if
available, that it can be obtained on terms acceptable to the Company and within
the limitations contained in the indenture governing the 1997 Notes or that may
be contained in any additional financing arrangements. The Indenture contains
certain covenants that limit the Company's ability to incur additional
indebtedness. Future financings may be dilutive to existing stockholders.
Failure to obtain such financing could result in the delay or abandonment of
some or all of the Company's development and expansion plans and expenditures,
which could limit the ability of the Company to meet its debt service
requirements and could have a material adverse effect on its business and on the
value of the Common Stock.

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BUSINESS

THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS PROSPECTUS.

GENERAL

CellNet has designed, developed and is commercially deploying in scale
innovative wireless data communications networks which provide high-volume,
low-cost, real-time data collection services, capable of monitoring millions of
fixed endpoints. The primary application of the Company's network is the
provision of commercial, industrial and residential NMR services to electric,
gas and water suppliers. These services position the Company to benefit from the
deregulation of the electric utility industry. As of March 31, 1998, the Company
had approximately 3,365,000 meters under long-term contracts, of which a total
of approximately 956,000 meters were generating revenues ("in revenue service")
for the Company. The CellNet network uses radio devices fitted to existing
utility meters to read and report data from each meter every few minutes.
Through extremely efficient use of radio frequency spectrum, the CellNet network
has substantial additional capacity to service non-utility applications that
require low-cost monitoring of fixed endpoints, such as home security and remote
status monitoring of vending machines and office equipment.

- sufficiently low infrastructure and operating costs to permit
cost-effective utility meter reading and other fixed point monitoring
applications;

- highly efficient use of spectrum-the equivalent of approximately a single
voice channel is needed to operate a network;

- specifically designed proprietary software to manage real-time data
collection from millions of endpoints; and

- open systems architecture designed to allow new applications to be added
to the CellNet system.

The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which a utility's rates
are determined by its return on assets, to performance-based rate making, in
which a utility's rates and profitability are based upon its cost, efficiency
and service quality.

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a market traditionally dominated by established utilities. The Company believes
its NMR services offer a state-of-the art solution to the demands created by the
increased regulatory and competitive pressures within the energy service
industry. CellNet's proven, efficient, low-cost, scaleable NMR service enables
both established electric and gas utilities and new power market participants to
implement time-of-use pricing plans, peak demand monitoring, load forecasting
activities, real-time responses to billing inquiries and power outage detection,
on-demand meter reads, customized billing functions, and customer access to
consumption, rate and billing information. CellNet's system allows utilities to
respond effectively to regulatory changes, reduce costs and enhance their
operating efficiencies, defer capital spending and implement customer retention
plans and facilitates market entrance by new power market participants. See
"--Changes in the Electric Utility Industry" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."

The Company is actively targeting the largest MSAs, and consolidated CMSAs,
which together represent a majority of the approximately 230 million electric,
gas and water meters in the United States, and other areas of high population
density, state-by-state, as deregulation becomes effective. The Company believes
that utilities and power market participants operating in or entering these
densely populated areas will be most affected by increasing competitive and
regulatory pressures. These pressures will likely prompt established utilities
to improve their efficiency and service levels, and the Company believes that
its network and services would facilitate this improvement. However, the utility
industry has generally been characterized by long purchasing cycles and cautious
decision making. Although the uncertainty surrounding proposed regulatory
changes in some states may have caused, and may continue to cause, additional
delays in purchasing decisions by established electric and gas utilities, the
Company believes that actual implementation of utility deregulation will
ultimately accelerate purchasing decisions by established utilities. See "Risk
Factors--Dependence on and Uncertainty of Market Acceptance." The Company is
evaluating new opportunities arising from deregulation. CellNet's open systems
architecture is designed for deployment strategies focused either on established
utilities or new power market participants, or both, without requiring
significant modifications to CellNet's network system. See "Business Strategy."

The Company has existing long-term contracts to provide NMR services to KCPL
for approximately 420,000 meters, UE for approximately 800,000 meters, NSP for
approximately 1,000,000 meters, PG&E for approximately 30,000 meters, PSE for
approximately 700,000 meters and IP&L for approximately 415,000 meters. Of the
3,365,000 meters covered under these contracts, approximately 956,000 meters
were in revenue service as of March 31, 1998. Each of these contracts results
from the Company's "saturation deployment" strategy for providing NMR services
to existing utilities. Under this strategy, the Company builds out a network to
cover every meter in a utility's designated service area. The strategy allows
coverage of all of the energy consumers in those service areas. To implement the
strategy, the Company builds out its WAN and LAN concurrently. The network
begins generating revenue shortly after meters come on-line, and new meters can
be added incrementally. The Company has ongoing discussions concerning
additional contracts of a similar kind with other utilities in the United
States.

The Company began actively targeting new power market participants in
September 1997. To date, the Company has entered into contracts with eight
energy service providers and two energy aggregators including contracts with
nonregulated power marketing arms of the nation's large utilities and energy
providers for the provision of NMR services in California, including Energy
Pacific, New West Energy, Duke Solutions and the Electric Clearinghouse, a
subsidiary of NGC Corp. The Company expects to enter into similar arrangements
with additional power market participants both in California and in other states
where deregulated markets open up further opportunities for the deployment of
the Company's networks. Each of these contracts results from the Company's
alternative "broad deployment" strategy, which is a slight variation of the
Company's saturation deployment strategy outlined above. Under the Company's
broad deployment strategy, the Company first deploys its WAN in service areas
where the largest consumers of energy are located and where energy consumers and
other power market participants are most likely to value the Company's services
and/or to concentrate their marketing efforts. As contracts for

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the provision of NMR services are obtained, the Company builds out its LAN on an
incremental basis as necessary to service those customers or for advanced
coverage of certain areas. Broad deployment offers energy service providers who
lack the established utilities' designated geographical customer bases the
flexibility to build as they grow or to pursue particular market niches. It also
offers established utilities, which are not yet prepared to commit resources to
a long-term saturation deployment project, the opportunity to cover a portion of
their customers initially and to increase coverage in their service areas over
time, potentially to all of their meters.

By using networks deployed under either the saturation or broad deployment
strategy, the Company is also able to offer NMR information metering services
directly to energy consumers, to the extent that the information provided by
such services is not being made available to them by their own utility or energy
service provider. Use of these networks also allows the Company to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular HVAC system components, individual manufacturing processes or pieces
of equipment, or individual departments.

The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States and comparable opportunities for non-utility applications.
The Company is pursuing international markets through a joint venture with BEn.
The joint venture, BCN, has concentrated its initial efforts on entering the
market in the United Kingdom and is also considering opportunities in Australia
and elsewhere. See "Business Strategy-Pursue International Expansion."

RECENT DEVELOPMENTS

SATURATION DEPLOYMENT. The Company continues to expand its utility customer
base through new arrangements to provide NMR services to additional utility
customers. In April 1998, the Company entered into a nonbinding memorandum of
understanding with AmerenUE to expand its CellNet network for NMR services by
450,000 meters. This memorandum of understanding, if finalized, would bring the
total number of meters under contract for AmerenUE to approximately 1,250,000
meters.

In March 1998, the Company reached a preliminary understanding with C3, a
non-regulated subsidiary of Central and South West Corporation, to jointly
deploy up to 350,000 meters and provide NMR services in four states.

In October 1997, the Company announced that it had reached an agreement with
PSE to deploy 700,000 meters to provide NMR services. The term of this agreement
is for 15 years. This long-term contract commitment from PSE represents a
substantial increase from the 15,000 meter Initial Service Agreement reached
between the Company and PSE in 1996 and demonstrates the success of that initial
project.

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Energy; Energy Pacific; The Association of Bay Area Governments, which is an
association that will make collective power purchases for 64 local San Francisco
Bay Area governments; and the School Project for Utility Rate Restriction, a
joint power agency representing 229 Northern California school districts,
community colleges and county offices. These contracts generally have terms of
one to five years and provide that the market participant will use the Company's
NMR services for their customers in the geographic areas where the Company
completes a network. Currently, the Company is building networks in a number of
cities in Northern and Southern California. The contracts do not require that
the participant provide any minimum number of customers and, accordingly, the
Company is dependent on the participants' success in attaining and retaining
customers.

STRATEGIC DEVELOPMENTS. In March 1998, the Company received approval from
the major energy utilities as a MDMA and approval from the CPUC as a MSP for
California's deregulated power market. CellNet is the first non-utility company
in the U.S. to be authorized to provide meter services.

In January 1998, the Company announced a strategic partnership with Landis &
Gyr, a global supplier of advanced metering products, customer management
systems and software for the electric utility industry. Together, the Company
and Landis & Gyr intend to incorporate CellNet's data communications technology
into the recently released Altimus electricity metering system. Altimus is an
innovative solid state, residential eletricity metering system designed for the
electric power industry.

FINANCING. On September 24, 1997, the Company received an aggregate of
approximately $332.3 million from the sale of the 1997 Notes and warrants to
purchase common stock. All holders of the 1995 Notes tendered and exchanged
their 1995 Notes for 1997 Notes having an initial accreted value of $231.0
million. The net proceeds from the 1997 Notes to the Company were approximately
$96.3 million.

CHANGES IN THE ELECTRIC UTILITY INDUSTRY

The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which an electric
utility's rates are determined by its return on assets, to performance-based
rate making, in which an electric utility's rates and profitability are based
upon its cost, efficiency and service quality. The gas utility industry has
already been transformed as a result of competition. Today, commercial and
industrial customers can negotiate to purchase gas directly from producers or
brokers, while utilities are required to provide transportation of such gas to
customers' facilities.

The restructuring of the electric utility industry is underway. In recent
months, several major electric utilities have entered into merger agreements and
other consolidation transactions in connection with this restructuring. The
restructuring has also focused on opening the electric power production
industry, in certain markets, to full competition in the next few years, and
ultimately providing customers access to multiple suppliers. Federal
legislation, such as the National Energy Policy Act of 1992 (the "EP Act"), has
opened utility transmission lines to independent power producers in an effort to
increase competition in the wholesale electric power generation market. As a
result, the construction of cogeneration facilities and independent power
production facilities has been increasing, creating lower cost alternatives for
large

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commercial and industrial customers. The EP Act authorized the Federal Energy
Regulatory Commission ("FERC") to mandate utilities to transport and deliver, or
"wheel" energy for the supply of bulk power to wholesale, but not retail,
customers. In order to facilitate the transition to increased competition in the
wholesale power markets made possible by the EP Act, in April 1996 FERC issued
its final rules that require utilities to (i) establish open access to all
wholesale sellers and buyers, (ii) offer power transmission service comparable
to what they provide themselves, and (iii) take power transmission service under
the same tariffs offered to other buyers and sellers.

[INSERTED IN THIS SECTION OF THE TEXT IS A MAP OF THE UNITED STATES HIGHLIGHTING
WHICH STATES ARE IMPLEMENTING OR IN THE PROCESS OF IMPLEMENTING ENERGY
DEREGULATION. WITH RESPECT TO DEREGULATION, 16 STATES HAVE FINAL LEGISLATION OR
A COMMISSION PLAN IN PLACE, 10 STATES HAVE A DRAFT COMMISSION PLAN OR APPROVED
PILOT, 18 STATES HAVE A FORMAL COMMISSION INVESTIGATION UNDERWAY, AND SIX STATES
HAVE BEGUN INFORMAL COMMISSION STUDIES.]

Under the EP Act, individual states have the sole authority to mandate the
wheeling of electric power to retail customers. As a result, sixteen states
(Arizona, California, Illinois, Maine, Maryland, Massachusetts, Michigan,
Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania,
Rhode Island and Vermont) now have legislation or final commission orders to
mandate retail wheeling and nearly all of the other states are in various stages
of considering the implementation of retail wheeling and unbundling, both at
legislative and regulatory levels. Arizona, California, Maine and New Hampshire
are also requiring utilities to "unbundle," or offer as separate services,
metering, billing and collection, and three more states have announced their
intention to require unbundling. Unbundling implies that a third party, such as
a new market participant, would be free to own the electric meter that measures
usage and attaches to a commercial, industrial or residential customer's
premises. The traditional owner of the meter has been the electric utility which
has also had a monopoly in providing metering, billing, and collection services.
In California, the state which has to date advanced the furthest in the
deregulation process, the California Public Utility Commission (the "CPUC") has
mandated competitive retail wheeling and unbundling effective March 31, 1998 for
large commercial and industrial customers and unbundling for all remaining
customers effective January 1, 1999. Competitive retail wheeling will involve
direct access, or the customer's ability to choose among energy service
providers. The CPUC has also mandated hourly time-of-use metering capability for
customers requiring more than 20 kW of power and customers choosing direct
access.

The changing regulatory environment means that new power market participants
will be entering into a market traditionally dominated by established utilities.
To date, more than 200 parties have registered with the CPUC as Registered
Energy Service Providers to provide electric services in California commencing
March 31, 1998. The established utilities will each be focusing on retaining and
increasing its market share in the wake of competition. Both new power market
participants and established utilities will be striving to optimize their
offerings and to distinguish themselves in the market. CellNet is well
positioned to offer competitive advantages to all new power market participants,
whether established utilities or new power market participants, using its
existing technology. The CellNet network has demonstrated capabilities in
providing cost-efficient, reliable, real-time data to established utilities. The
same capabilities will enable energy service providers to meet regulatory
metering and forecasting requirements, offer superior, competitively-priced
services, collect customer information and diversify by adding additional
applications as available. CellNet's open architecture will lend itself readily
to deployment strategies focused either on established utilities or new power
market participants, or both, without requiring modifications to the network
system.

The Company believes that competition will require recordation of electric
power consumption data more frequently than is presently customary through a
much wider use of daily, hourly and possibly even more frequent meter readings.
In fact, hourly meter reading has already been mandated for certain classes

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of customers in California when deregulation takes effect. Other deregulating
states are likely to follow. The Company believes that the Company's meter
reading technology, or meter reading technology similar to it, will be needed to
satisfy these requirements.

THE CELLNET SOLUTION

CellNet has designed, developed and is now commercially deploying in scale
the first wireless data communications network designed to provide high-volume
real-time status and event monitoring of up to several million endpoints. Since
the primary application of the network is to provide NMR services, the network
has been designed to meet the energy service industry's cost requirements,
information needs and rigorous design specifications. CellNet's network uses
radio transmitters fitted to existing meters to read and report data from each
meter every few minutes. CellNet uses inexpensive radio devices and proprietary
software in its networks, deploys certain network components on utility power
poles or, where necessary, on buildings or other structures, and requires
minimal frequency spectrum to operate its system.

CellNet's system enables energy service providers to better serve their
customers by offering enhanced services such as:

- time-of-use and demand energy rates;

- real-time response to billing inquiries;

- real-time power outage detection, location and notification;

- remote verification of "power on" and outage restoration;

- on-demand meter reads;

- customer-selected billing dates and consolidated, multi-location billing;

- automatic move-in/move-out meter reading;

- distribution automation; and

- access to consumption, rate and billing information via the Internet.

In light of the changing regulatory environment and resulting competition
for customers, many established utilities will be motivated to retain and
increase their market shares, while energy service providers will seek to
capture market share in the post-deregulation retail market. CellNet's system
will allow established utilities and energy service providers to respond
effectively to regulatory changes and enhance their performance in the
competitive markets. CellNet's system will facilitate accomplishment of
established utilities' and energy service providers' strategic objectives as
follows:

PROVIDE RETAIL MARKET INFORMATION. Established utilities and new power
market participants will seek to implement information systems capable of
supporting new functions, including collecting and exchanging data for billing,
load forecasting and retail settlements. One likely result will be a large
increase in the need for the retrieval and management of high volumes of
metering data, including hourly consumption measurement for retail settlement
(prices will be set hourly in regional power pools). Another likely result will
be the need for rapid retrieval of metering data--hourly or daily in contrast to
today's monthly schedule for meter reading--to support forecasting and
settlement.

ENHANCE INFORMATION SYSTEMS. To implement time-of-use pricing and other
customer-oriented pricing plans, real-time power outage detection and other
services that may be required by deregulation or necessary to maintain market
share, utilities and energy service providers will demand extremely accurate and
timely data regarding energy consumption by customers. For example, the CPUC has
required at least hourly meter-reading capacity for each customer requiring more
than 20 kW of power. The manual meter reading process, even as automated to a
limited degree through the use of hand-held and drive-by AMR equipment, does not
meet these criteria. The consumption data collected by AMR is typically
transmitted

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to the utility's information system on a monthly basis. Such periodic meter
readings do not provide the necessary data to implement these regulatory and
competitive initiatives.

RESPOND TO REGULATORY INITIATIVES. If retail wheeling is adopted, consumers
will contract to buy electricity from either utilities or energy service
providers, but all such electricity will be supplied to a designated local
electrical network, which will then distribute power to all local consumers. The
monthly meter reading historically used by traditional utilities may allow
confirmation of aggregate usage, but not of time of use. Time-of-use data is a
critical requirement of retail wheeling, since the cost of power will be
determined by hourly spot prices. By providing real-time data on each consumer's
power usage, CellNet enables utilities to implement retail wheeling without
incurring costs of $150-$200 or more at each service endpoint to install
individual time-of-use meters across their territories.

ACQUIRE AND RETAIN CUSTOMERS. In addition to price-based competition,
utilities and energy service providers will seek to differentiate their services
to the market. The CellNet system's ability to integrate with customer service
systems and platforms will enable the addition of value-added services, enabling
non-price based competition through enhanced product offerings, including new
pricing options, selectable bill dates, outage monitoring, end-use energy
information through the Internet, customized billing plans, remote
move-in/move-out meter reading, multi-location bill consolidation and other
innovations. The information available through the CellNet data collection
services will also allow its users to profile their customers, thus gaining
valuable marketing insights, which will facilitate development of promotions,
service plans and other programs designed to attract and retain customers.

ELIMINATE MANUAL METER READING. Many utilities have already focused on the
inefficiencies of the traditional once-a-month drive-by or walk-by meter reading
process. In addition to the direct expense of monthly meter reading, manual
processes create significant indirect expenses. These expenses include
responding to customer billing service inquiries and complaints, meter reading
errors, missed meter reads, special appointment meter reads to determine and
correct errors, and service calls to discontinue and to initiate service.
Through automation, CellNet's wireless data network helps utilities to reduce
both direct and indirect operating costs associated with meter reading.

OFFER LOWEST-COST NETWORK SYSTEM. The CellNet system offers the
lowest-cost, most frequency-efficient network available, which will enable
utilities, energy service providers to manage their energy trading costs better
and pass savings on to their customers. The CellNet system will provide
time-of-use metering in scale, even to small customers, at costs which the
Company believes to be the lowest available. A new power market participant's
ability to penetrate the energy supply market, and an established utility's
ability to maintain its market share, will depend in part on their ability to
offer competitively-priced services. By allowing CellNet to build and maintain
the wireless network, energy service providers also avoid both the technological
risk and capital outlay of developing and deploying NMR systems.

ENHANCE OPERATING EFFICIENCIES THROUGH AUTOMATION. CellNet's network
enables distribution automation capabilities which include monitoring and
control of power distribution equipment as well as meters. Using the CellNet
network, utilities can manage many aspects of the delivery of electricity,
including the ability to detect power outages, monitor and control circuit
breakers, monitor the load on transformers, control circuits to isolate faults
on feeder power lines, and switch automatically among capacitor banks to produce
constant voltage levels. As a result, problems may be detected earlier and
solved more quickly, operations may become more reliable and service fleets may
be more efficiently deployed and dispatched as outages can be more readily
pinpointed within the utility's service territory. Increased automation and
improved information processing will also aid in detection of energy theft,
which is currently estimated to cost utilities many millions of dollars each
year.

REDUCE PEAK DEMAND COSTS WITH TIME-OF-USE DATA. Established utilities have
historically built plant capacity to meet the anticipated peak demand for energy
on a daily and seasonal basis, requiring an excess capacity margin to respond to
extraordinary demand peaks caused by extreme weather conditions. Power

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plant expansions are costly and investments in such capacity may not be fully
compensated by rate making authorities. Reducing peak demand would allow
utilities to defer or avoid additional plant construction or costly peak power
generation with standby power generating facilities. However, unlike phone
companies, which currently offer time-of-use rates to discourage consumption
during peak periods, energy service providers have generally been unable to
implement time-of-use plans for any but their largest customers due to
inadequate real-time information about customer power usage. CellNet's NMR
services will enable utilities to adopt time-of-use billing plans, which can be
used to motivate consumers to shift discretionary consumption to off-peak
periods.

PROVIDE POST-DEREGULATION MARKET OPPORTUNITIES. With deregulation creating
new market opportunities, new power market participants will aggressively pursue
first-to-market opportunities, particularly in light of the perception that the
highest-value customers will be among the first to respond to the choices made
available by deregulation. CellNet offers an NMR system with demonstrated
capability of providing real-time data collection. As a result, CellNet's system
will enable new power market participants to offer prompt implementation of
state-of-the-art metering-based service rate plans.

For established utilities and new power market participants, CellNet alone
supports each of the basic objectives.

BUSINESS STRATEGY

The Company intends to deploy and operate a series of wireless data
communications networks and to earn recurring revenues by providing NMR services
to utilities and new power market participants and other customers by using the
network to support a variety of non-utility applications. Principal elements of
CellNet's strategy are (i) to focus on power supply markets, (ii) to promote
development of non-utility applications, (iii) to form strategic relationships,
(iv) to pursue international expansion, and (v) to outsource a substantial
portion of its manufacturing and installation activities. The Company is also
focusing increasingly on licensing its technology to leading manufacturers in
key industries, to ensure development of compatible products. See "--Form
Strategic Relationships."

FOCUS ON POWER SUPPLY MARKETS

The Company is initially targeting the largest MSAs, which represent a
majority of the approximately 230 million electric, gas and water meters in the
United States and other areas of high population density, state-by-state, as
deregulation becomes effective. The Company believes that utilities and new
power market participants operating in or entering these densely populated areas
will be the most likely affected by increased consumer, competitive and
regulatory pressures, and as such, will have the greatest need to adopt NMR. The
Company also believes that energy service providers that compete with utilities
in these markets and outside the largest MSAs will have a need to adopt NMR
services. In addition, the Company believes that the largest MSAs offer the
greatest potential markets for non-utility applications.

The Company employs two basic strategies in the deployment of its
networks--saturation deployments for providing NMR services to existing
utilities, and broad deployments for providing NMR services to other parties
including new power market participants. Under the Company's saturation
deployment strategy, the Company builds out its WAN and LAN concurrently in
order to cover every meter in a utility's designated service area. The
saturation deployment strategy has proven effective because it allows coverage
of all of the energy consumers in those service areas.

Under the Company's broad deployment strategy, the Company first deploys its
WAN in service areas where the largest consumers of energy are located and where
energy consumers and other power market participants are most likely to value
the Company's services and/or to concentrate their marketing efforts. As
contracts for the provision of NMR services are obtained, the Company builds out
its LAN on an incremental basis as necessary to service those customers or for
advanced coverage of certain areas. Both the LAN and WAN can be further expanded
incrementally as additional business outside the existing

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coverage areas is obtained. Broad deployment offers energy service providers who
lack the established utilities' designated geographical customer bases the
flexibility to build as they grow or to pursue particular market niches. It also
offers established utilities who are not yet prepared to commit their resources
to a long-term saturation deployment project the opportunity to cover a portion
of their customers initially and to increase coverage in their service areas
over time, potentially to all of their meters.

By using networks deployed under either strategy, the Company is also able
(i) to offer NMR information metering services directly to energy consumers, to
the extent that the information provided by such services is not being made
available to them by their own utility or energy service provider, (ii) to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular HVAC system components, individual manufacturing processes or pieces
of equipment, individual departments, etc., and (iii) to offer a range of
non-utility wireless data communication services for such applications as home
security, remote status monitoring of vending machines, office equipment and
parking meters, and remote control of traffic lights.

PROMOTE DEVELOPMENT OF NON-UTILITY APPLICATIONS

Through the efficient use of spectrum, each CellNet network is designed to
have the capacity, after serving all of a utility's NMR and distribution
automation requirements, to support non-utility services that would benefit from
the availability of a low-cost wireless network. Under broad deployment, the
Company expects to have significantly enhanced opportunities to implement
non-utility applications, because the Company's networks will be available in a
substantially greater number of high population density centers. The Company is
working with leading manufacturers and application developers in order to
promote the development of products and services capable of using the CellNet
networks. Potential applications include the following:

- security services for home security, fire alarm and personal safety
devices;

- remote status monitoring for vending, postage, change and commercial
washing machines, office and factory equipment, and intelligent home
devices, such as remote control thermostats; and

- intelligent transportation monitoring systems for traffic lights, parking
meters and toll booths.

The Company believes that its low monthly network service prices will
substantially increase the likelihood of market acceptance of existing
applications and enable potential new applications.

Wireless home security systems are an example of an existing application
that might achieve greater market penetration if equipment and service costs
were reduced by using a CellNet network. CellNet is working with Interactive
Technologies, Inc. ("ITI"), a leading provider of wireless home security
systems, to develop an affordable security system that would communicate over a
CellNet network. A preliminary field trial is presently being conducted.

Remote monitoring of vending machines would substantially reduce the cost of
servicing those machines. Real Time Data, Inc. ("RTD") has developed a vending
machine monitoring device which tracks product sales and inventory. RTD and the
Company have been working together to integrate RTD's devices with the Company's
networks and have a commercial field trial currently underway.

Energy management and home automation services can be enabled by CellNet's
networks as well. CellNet and Honeywell, Inc. ("Honeywell") have jointly
designed a system consisting of a "thermostat-like" panel which allows consumers
to use electricity more efficiently by programming appliances, such as the
heating, ventilation and air conditioning (HVAC) system and hot water heater.
Devices within the home would communicate with one another over existing
electrical wiring using power line carrier (PLC) technology. CellNet's data
network would provide the connection between the home and a utility to deliver
pricing signals, home management services, and public information, and to send
customer messages and

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device status signals back to the utility. CellNet and Honeywell are undertaking
a pilot program to deploy this system in the second quarter of 1998 at
residences in St. Louis to help refine the system design and further gauge
consumer demand.

FORM STRATEGIC RELATIONSHIPS

The Company is forming strategic relationships with leading companies and
certain utilities to promote the development and joint marketing of
complementary products or services for utility applications and the development
of non-utility applications whose traffic would be carried on CellNet networks.
CellNet is currently working with the following leading companies:

BADGER METER, INC. ("BADGER"). The Company has entered into an agreement
with Badger, a leading marketer and manufacturer of products using flow
measurement and control technology to serve industrial and utility markets
worldwide, providing for incorporation of the Company's patented radio
technology into Badger's water meter reading technology product lines and to
provide technical assistance to Badger to build radio technology compatible with
the Company's NMR systems into future products.

BEn. The Company has entered into a joint venture with BEn to pursue
international opportunities. See "--Pursue International Expansion."

ConnexT, INC. ("ConnexT"). The Company has entered into a joint marketing
agreement with ConnexT, a subsidiary of Puget which provides network-based
application services to utility companies, whereby the parties agree to assist
each other in marketing their respective products and services to both
companies' existing and prospective utility customers.

GENERAL ELECTRIC ("GE"). GE and the Company have entered into a non-binding
memorandum of understanding ("MOU") to jointly market to utilities, on a
non-exclusive basis, automated NMR solutions that incorporate both parties'
products. GE has installed CellNet radio devices on new GE meters on a trial
basis.

HONEYWELL. Honeywell has entered into a non-binding MOU with the Company
relating to the creation of "smart communicating thermostats" that would serve
as the key elements in a home-based energy management system. The parties also
plan to collaborate on identifying other in-home automation products that could
leverage Honeywell's extensive line of environmental control products with
CellNet's wireless technology.

ITI. The Company has entered into an agreement with ITI, a leading provider
of wireless, in-home security systems, to develop moderately-priced security
systems based on ITI's existing security devices and CellNet's wireless
technology.

LANDIS & GYR ("L&G"). The Company and L&G have agreed to a joint project
whereby L&G will incorporate the Company's data communications technology into
its recently released Altimus-TM- electricity metering system, an innovative
solid state residential metering system designed for the electric power
industry.

METRETEK, INC. ("METRETEK")/MARCUM NATURAL GAS SERVICES, INC. The Company
is working with Metretek, a subsidiary of Marcum Natural Gas Services, Inc., to
develop a combination of wireless and telephone-based services for the gas
utility industry. Metretek's telephone-based data collection and management
software is intended to be integrated into the Company's wireless data
communications system, enabling the Company to provide multi-technology NMR
services, allowing gas utilities to reach a larger percentage of their
customers. Additionally, the Company's wireless data communications technology
is intended to be incorporated into Metretek's new and existing products,
enabling data collected from industrial, commercial and residential gas meters,
volume correctors and other Metretek products to be communicated over CellNet's
wireless networks.

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PROCESS SYSTEMS ("PSI"), SIEMENS ENERGY AND AUTOMATION, INC./SIEMENS
MEASUREMENTS LTD. The Company is working with PSI, a Siemens business unit, to
integrate PSI's Energy Analyzer Plus software for collecting data over the
public switched telephone network ("PSTN") from a variety of high-end electric
and gas meters with the CellNet system, so as to enable the Company to offer
multi-technology NMR services. The Company and BCN are also working with Siemens
Measurements in the United Kingdom to license CellNet's radio technology to
communicate over CellNet's networks.

RTD. As described above, RTD, a developer of remote vending machine
monitoring systems, has entered into an agreement with the Company to integrate
its vending machine monitoring system with the Company's wireless network
technology.

SCHLUMBERGER. The Company has entered into an agreement with Schlumberger,
an international, worldwide leader in oil field services, measurement and
systems and telecommunications, to license to Schlumberger the Company's
proprietary radio technology for use in Schlumberger's electric, gas and water
meter product lines.

PURSUE INTERNATIONAL EXPANSION

With several hundred million utility meters located outside of the United
States and with comparable opportunities to use the CellNet system for utility
and non-utility applications, the international market offers significant
additional opportunities for the Company.

The Company and BEn have formed BCN as an international joint venture in
order to take advantage of these opportunities. BCN has the exclusive right to
deploy and operate the Company's wireless data communications system in
countries outside the United States. The Company is generally allocated 50% of
BCN's net income or loss. The Company licenses its technology to BCN and BCN is
authorized to sublicense that technology to individual local operating project
entities in which BCN or other affiliates of the Company and BEn are expected to
invest and generally maintain operating control. The managing board of BCN is
composed of an equal number of representatives from each party and reviews and
approves all major business decisions.

In considering international expansion opportunities for the CellNet System,
BCN intends to target markets characterized by (i) a well-developed utility
infrastructure, (ii) demand for low-cost monitoring, (iii) a progressive
regulatory climate favoring increased efficiency, customer service and
competitive access, and (iv) well-capitalized, established and reliable local
partners.

The Company considers the United Kingdom a particularly attractive market,
with approximately 22 million electric meters and deregulation already in
effect. BCN is currently concentrating its efforts primarily on entering the
market in the United Kingdom, and is also considering opportunities in Australia
and elsewhere.

OUTSOURCE SUBSTANTIAL MANUFACTURING AND INSTALLATION ACTIVITIES

The Company outsources a substantial portion of its manufacturing and
installation activities. As a result, CellNet leverages the size and
capabilities of key suppliers to take advantage of manufacturing economies of
scale, reduce component pricing through bulk purchasing, and have access to
manufacturing capacity and resources to meet highly variable production
requirements. The Company will retain overall network construction
responsibility, but intends to rely on local subcontractors for installation,
primarily those who have demonstrated their capabilities, experience and
reliability and who have good working relationships with CellNet's customers.
The Company believes that outsourcing installation activities will reduce the
start-up time and the Company's investment risk for each project.

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WIRELESS COMMUNICATIONS INDUSTRY OVERVIEW

CellNet operates within the wireless communications industry, which includes
personal communications services ("PCS"), specialized mobile radio ("SMR"),
microwave, cellular (including cellular digital packet data ("CDPD")), paging
and multiple address radio system ("MAS") segments, among others. The two
principal categories of commercial wireless applications are voice and data
transmission. Within those broad categories, service requirements for specific
applications vary substantially in terms of quality, speed, capacity, mobility,
two-way capability, geographical coverage and cost. In general, products which
provide for greater mobility and capacity are more expensive. As a consequence,
the market for wireless services is segmented, matching specific service
requirements with the most suitable wireless technology.

[INSERTED IN THE TEXT AT THIS LOCATION IS A GRAPH PLOTTING NETWORK CAPACITY
VERSUS USER/DEVICE MOBILITY AND MONTHLY ENDPOINT COST]

CellNet's system is designed to utilize small amounts of spectrum and to
provide low-cost, high-volume, real-time monitoring of fixed endpoints. The
Company believes other telecommunications applications or market segments are
not as well suited for use in NMR and similar applications except in limited
cases such as high-use industrial metering, where the increased equipment and
service costs might be justified by high rates of power consumption, or in
certain rural applications, where the cost of installing and operating a fixed
network on a per meter basis might be higher. Competing service applications are
therefore expected to develop largely within the segment of the wireless
communications market in which CellNet now operates.

CellNet's network architecture and the nature of the markets that it serves
differ significantly from traditional cellular companies, thereby resulting in
potential advantages for CellNet in providing NMR services which include:

LOWER AVERAGE MARKET ADOPTION RISK. To date, the Company has constructed
its large scale commercial networks after entering into a long-term relationship
with a utility or other client. In such circumstances, the Company does not need
to finance construction of networks in anticipation of obtaining customers.
Under the Company's broad deployment strategy, the Company may build out its
WANs before the capacity is fully committed, thereby creating the risk that the
network will not be fully utilized, and the Company will not recoup its
investment in the build-out.

LOWER CHURN/PENETRATION RATE. Unlike the customer bases for other wireless,
voice and data service providers where customers can easily switch to a
competitive provider, CellNet's existing subscriber endpoints do not experience
frequent change or "churn". The marketing and administrative costs typically
associated with churn, and the capital risk associated with variable penetration
rates, are thus eliminated. Further, due to inflation escalation clauses in the
Company's existing services agreements, the Company believes that the value of
its revenue per endpoint in real terms will likely be maintained over time.

HIGHER CUSTOMER CREDIT QUALITY. CellNet receives the majority of its
contract service revenue directly from utilities and new power market
participants rather than from individual subscribers. As a result, the Company
experiences less credit risk and generally lower billing expenses than other
wireless communication providers.

MORE EFFICIENT DEPLOYMENT. Cellular and PCS cell sites are frequently
costly and can be difficult to obtain. The modularity of the CellNet system and
the efficient size of its components facilitate inexpensive deployment of
scalable networks. The Company's system components have been designed to fit on
utility power poles or, where necessary, on buildings or other structures. With
an electric utility as its customer, CellNet can negotiate to use utility poles,
transmission towers, and various properties for its deployment. Radio devices,
which represent the bulk of network components, are simply "plugged in" as newly
retrofitted meters to replace an existing meter. The Company's MCCs (as defined
below) typically take two hours to install and its CellMasters (as defined
below) less than a week to install, providing a network

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which can be deployed swiftly and efficiently. The system is also scalable,
thereby allowing coverage regardless of the size of the service area.

MORE EFFICIENT SYSTEM DESIGN. Cellular telephone networks are designed for
peak usage, with a large percentage of the network underutilized for much of the
day. The CellNet network gathers information from its endpoints consistently
around the clock and therefore does not encounter the peak usage problems
typically experienced by cellular phone service providers.

LOWER FREQUENCY COSTS. Cellular, PCS and other two-way wireless systems
typically require a large amount of spectrum which can be very costly to obtain.
Because the Company is able to utilize a small amount of frequency (the
equivalent of approximately a single cellular voice channel) for a wide
metropolitan area, it has not been subject to the substantial frequency costs
associated with wireless communications companies even if any additional
frequency it might require were subject to auction.

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TECHNOLOGY

CellNet's NMR system has been developed specifically to offer real-time,
low-cost, high volume wireless data communications services. Such services
require (i) inexpensive endpoint devices, (ii) the ability to support a wide
range of applications, (iii) reliable, consistent service over a wide area, (iv)
the capacity to handle simultaneous transmission and processing of a large
volume of data, (v) integrated communications and applications support software,
and (vi) efficient use of bandwidth to minimize spectrum acquisition costs.

To meet these cost and data handling requirements, CellNet has designed a
system which uses a two-tiered wireless network hierarchy managed by a central
system control center which collects, concentrates, forwards and manages data
from many fixed endpoints. The elements of this communications hierarchy
include:

- endpoint devices which transmit data relating to the equipment they are
monitoring or controlling, such as utility meters;

- MicroCell Controllers ("MCCs") which manage the endpoint devices in their
local coverage area (as part of a local area network or "LAN") and which
collect and process data transmissions from such endpoint devices;

- CellMasters which gather data from MCCs located in a wide coverage area
(as part of a wide area network or "WAN") and which communicate that data
to a central System Controller; and

- a System Controller which manages the entire network and operates the
application gateways for integration with the client's own data systems.

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[INSERTED IN THE TEXT AT THIS LOCATION IN THE TEXT ARE DEPICTIONS OF THE
NETWORK ARCHITECTURE OF THREE PORTIONS OF THE CELLNET SYSTEM, NAMELY THE
SYSTEM CONTROLLER NETWORK, WIRELESS WIDE AREA NETWORK, AND THE
MICROCELLULAR LOCAL AREA NETWORK]

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ENDPOINT DEVICES. The subscriber unit of the CellNet system is a relatively
inexpensive low-power radio device which is attached to a data source, such as a
utility meter, to collect and transmit information to an MCC and typically
includes a transceiver or transmitter. The Company has developed endpoint
devices for electric utility applications which may be retrofitted to each of
the major types of utility meters presently being used by electric utilities in
the United States. These endpoint devices currently collect customer demand and
load profile data from an electric meter and transmit such information to the
local area MCC once every few minutes. Electric meter endpoints are also able to
transmit "distress signals" indicating meter tampering or power outages. The
Company began introducing its commercial endpoint devices for gas meters in 1996
and completed the development and introduction of additional models in 1997. The
Company is continuing its development of endpoint devices for water meters and
expects to introduce its first models in 1998. The Company is also working with
industry leaders to develop endpoint devices for non-utility applications. See
"--Business Strategy--Form Strategic Alliances."

MICROCELL CONTROLLERS. An MCC is a device which is mounted on a utility
pole or other fixed location in the center of a microcell and which routes data
from all of the endpoints in the microcell to the System Controller via the WAN.
The number of endpoint devices in each microcell depends on a number of factors,
including topography and population density. In addition to functioning as a
router, the MCC is an intelligent node in the distributed control system and has
a powerful microprocessor which enables it to perform data storage, packet
routing and voltage and power outage monitoring for endpoint devices in its
microcell area. Each MCC also has extensive network management capabilities
which permit new endpoint devices to be added automatically without interfering
with the handling of data from existing endpoints. This architecture allows
CellNet to significantly reduce the cost of the endpoint device itself and
increases the potential data throughput of an entire network, as the intelligent
processing is provided at the MCC level. The MCC communicates with the endpoint
devices in its microcell in the 902-928 mHz band, which is an unlicensed portion
of spectrum.

CELLMASTERS. A CellMaster generally communicates with anywhere from 50 to
200 MCCs and RTUs (as defined) over an area typically covering approximately
20-75 square miles (2.5-5-mile radius). The coverage area can vary substantially
depending upon the deployment techniques employed. Each CellMaster incorporates
network management software which manages traffic scheduling, radio frequency
power controls and signal monitoring. CellMasters are built with redundant
hardware, are ruggedly constructed for extreme weather, and can perform
automatic switchovers between system components in case of failure. The WANs
covering specific service areas are composed of a number of CellMaster units. A
CellMaster communicates with the MCCs using a radio link in the 928/952 mHz
band, which is a licensed portion of spectrum.

REMOTE TERMINAL UNITS. Remote Terminal Units ("RTUs") monitor and operate
equipment at specific points in an electric utility's distribution system.
CellNet integrates a two-way radio device into RTU equipment manufactured for a
utility by other parties, which enables remote operation of these RTUs. By
providing a means of remote monitoring and controlling of power distribution
equipment, CellNet's system enables utilities to monitor and control circuit
breakers, monitor the load on transformers, control circuits to isolate faults
on feeder power lines, and switch automatically among capacitor banks to provide
constant voltage levels.

SYSTEM CONTROLLERS. The System Controller provides the link to the client's
corporate data network and serves as the network management platform. The System
Controller consists of a cluster of UNIX-based workstations operating over a
network using standard TCP/IP protocols. Such a configuration is extremely
scaleable as it can be expanded to meet system requirements simply by adding
additional workstations. The System Controller supports a variety of radio-based
and leased line data links to each CellMaster in the network. These links are
redundant for added reliability. The System Controller enables CellNet's on-site
system operator, who manages the network for CellNet's clients, to manage
traffic, monitor performance and configure network devices. At the local systems
operations center, the System

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Controller provides customized gateways to integrate with client data systems.
As non-utility applications are deployed, the Company may integrate additional
server devices to manage such non-utility applications at the System Controller
level.

CellNet's network equipment--MCCs, CellMasters and System Controllers--are
equipped with back-up batteries and continue to operate in the event of a power
outage.

The Company also operates the CellNet Central Operations Room at its San
Carlos, California facilities which monitors performance of all regional System
Controllers and is able to assume operations of the regional networks if the
local System Controller experiences a failure. The Company operates a private
national data network to link these regional sites using third-party carrier
services.

SYSTEM SOFTWARE. CellNet believes that one of its key enabling technologies
is the software which facilitates operation of a large-scale NMR system. While
certain "off-the-shelf" networking approaches work well on a limited scale in a
wireline environment with expensive computers and workstations, the ability to
operate in a wireless environment under extreme conditions at low cost has
required the development of a sophisticated network architecture. CellNet's
network solution is based on distributed computing and messaging technologies
which enable intelligence to be decentralized and ensure efficient use of
spectrum. The CellNet Radio Network Operating System ("R(-)NOS") is a
proprietary system that provides sophisticated network communication services
between the System Controller and the CellMaster units, RTUs, MCCs and endpoint
devices. It is a scaleable system that has been specifically designed to
ultimately handle millions of endpoints in a single regional network. Extensive
real-time diagnostic and network management features manage traffic, monitor
system performance and enable network configuration as data is collected and
delivered to users. The CellNet R(-)NOS is able to maintain fast response times
and system capacity by distributing a significant portion of the network's
computing power at the MCC level.

The R(-)NOS offers the benefits of incrementally adding processing power as
well as supporting remote operations required for redundancy and backup
operations. As such, an entire regional system can be switched quickly from one
System Controller to another in the event of failure. The CellNet R(-)NOS is
also able to segregate network data from multiple non-utility applications and
provide such data to non-utility clients over additional database interfaces.
Each CellNet system is customized with application-specific gateways which
enable the interface between the System Controller and the client's existing
corporate data systems. CellNet has delivered gateways to support the data
requirements for billing automation, electric distribution automation, customer
service call center automation and load management programs. The flexibility
provided by this R(-)NOS architecture will enable the system to offer services
for many new applications unrelated to NMR services such as distribution
automation and non-utility applications. By building on a general network
capability the Company can extend its services to many other utility and
non-utility services without incurring significant costs of redesigning the
underlying communications architecture. Each new application is expected to be
added with only incremental development, which will be focused primarily on
application-specific endpoint devices and system gateways. Furthermore, since
its design is independent of the specific endpoint radio devices, the Company
believes that this architecture can evolve to incorporate future advances in
wireline and wireless communications. The Company has made a substantial
commitment to establishing a strong competitive position, having invested over
325 staff-years in the design, development and testing of its system.

EFFICIENT SPECTRUM UTILIZATION. CellNet's network components utilize both
licensed and unlicensed radio frequency bands. The CellNet WAN operates in the
928/952 mHz frequencies which are licensed by the FCC in 25 or 12.5 kHz channel
bandwidths for full duplex operation and point-multipoint data services. CellNet
has developed a proprietary technology, subject to issued and pending patents,
which permits a narrowband radio system to derive up to 19 subchannels from a
single 25 kHz channel. By reusing subchannels in a manner similar to that used
by cellular phone systems, CellNet believes it can grow a system to cover a
large region and expand capacity incrementally as needed. As a result, CellNet
is

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able to operate its wide area networks in the spectral equivalent of
approximately a single voice channel. CellNet has obtained a total of 87
spectrum licenses in 50 of the top 60 MSAs and CMSAs and believes that it will
be able to obtain additional spectrum as required although it may not be able to
do so at low cost, particularly if such spectrum becomes subject to auction as
has been recently proposed by the FCC.

MANUFACTURING AND OPERATIONS

The Company currently outsources the manufacture and assembly of its high
volume, low cost equipment such as endpoint radio devices and a portion of its
lower volume, more complex equipment, including MCCs. CellNet's supply strategy
is to leverage the size and production capabilities of key suppliers to take
advantage of manufacturing economies of scale, reduce component pricing through
bulk purchasing and obtain access to manufacturing capacity and resources to
meet highly variable production requirements.

CellNet presently focuses its limited internal manufacturing resources on
final assembly and testing of its CellMasters and those MCCs that it does not
outsource. CellNet assembles these network components, then custom configures
and tests such components to meet stringent utility industry field equipment
standards. Samples of all products, whether internally or externally built, are
thermally and electrically stress-tested to measure product quality and
reliability. Test results are used both to monitor production quality and to
provide information to CellNet's development organization for further design
enhancements.

CellNet has developed and is continuing to improve a high-volume, low-cost
process to retrofit electric utility meters with endpoint radio devices. The
Company's proprietary system for retrofit information management analyzes
operating data, generates reports, and provides this information to customers
for inclusion in their databases. The Company installs its endpoint radios on
both new and previously installed electric meters at its retrofit facilities in
San Carlos, California and Kansas City, Missouri. The Company expects that
similar regional retrofit centers will be established as needed to meet the
network installation requirements under new services agreements with energy
service providers, although a retrofit center can support more than one network
deployment. In addition, certain electric meter manufacturers are installing
CellNet meter radios on new meters as a part of their meter manufacturing
process.

The Company's reliance on third-party manufacturers involves a number of
additional risks, including the absence of guaranteed capacity and reduced
control over delivery schedules, quality assurance, production yields and costs.
The Company relies on sole and limited source vendors and subcontractors for
certain subassemblies and components which involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and cost. See "Risk Factors--Dependence on
Third-Party Manufacturers; Exposure to Component Shortages."

CURRENT UTILITY SERVICE AGREEMENTS

KANSAS CITY POWER & LIGHT COMPANY. In August 1994, CellNet entered into a
Utility Services Agreement with KCPL (the "KCPL Services Agreement") for the
provision of NMR and other data communications services over a network to be
built, installed and operated by CellNet. KCPL is paying CellNet for certain
installation costs based upon the number of meters retrofitted and installed and
monthly service fees based on the number of meters and RTUs in service being
used to bill customers. The KCPL Services Agreement presently covers
approximately 420,000 meters within KCPL's service territory. The term of the
KCPL Services Agreement is 20 years.

AMERENUE. In August 1995, CellNet entered into a Utility Services Agreement
with UE (the "UE Services Agreement") for the provision of data communications
services over the Company's network for all electric meters within defined
limits of UE's service area in the city of St. Louis and certain surrounding
counties. UE is paying CellNet for certain installation costs and monthly
service fees based on the number of installed meters and RTUs. The UE Services
Agreement now covers approximately 800,000 electric

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meters within such territory. The terms of the UE Services Agreement is 20 years
with an option on UE's part to extend it for two additional periods of five
years each on substantially similar terms.

NORTHERN STATES POWER COMPANY. In August 1996, CellNet entered into the NSP
Services Agreement with NSP for the provision of data communications services
over a network to be built, installed and operated by CellNet. NSP will pay
CellNet a monthly service fee based on the number of meters and RTUs in service
then being used to bill customers. The NSP Services Agreement covers
approximately 1.0 million gas and electric meters within NSP's service territory
located in the Minneapolis-St. Paul metropolitan area. The term of the NSP
Services Agreement is 15 years, with a five year option to extend, exercisable
by NSP.

PACIFIC GAS & ELECTRIC COMPANY. In October 1996, the Company entered into a
Master Agreement for Automated Meter Reading with PG&E and a Contract Work
Authorization issued thereunder (collectively, the "PG&E Services Agreement")
for the provision of electric and gas meter reading services initially to cover
approximately 100,000 PG&E meters in the San Francisco Bay Area. Upon the
installation of approximately 23,000 meters, PG&E acknowledged that the data
collection, cost savings, customer service and other objectives of the Company's
demonstration network had been met and agreed with the Company to build out the
network to approximately 30,000 meters.

PUGET SOUND ENERGY, INC. In August 1996, CellNet entered into a letter of
intent (the "Puget Letter of Intent") and the Puget Initial Services Agreement
with ConnexT, a subsidiary of Puget for the provision of NMR and other data
services over a network to be operated by CellNet. The Puget Initial Services
Agreement covers approximately 15,000 meters within Puget's service territory.
In October 1997, the Company entered into an agreement with Puget to deploy
700,000 meters and provide NMR service. The term of the agreement is 20 years.

INDIANAPOLIS POWER & LIGHT COMPANY. In September 1997, CellNet entered into
a Utility Services Agreement with IP&L for the provision of data communications
services over a network to be built, installed and operated by CellNet. IP&L
will pay CellNet monthly service fees based on the number of installed meters.
The IP&L Services Agreement covers approximately 415,000 electric meters within
IP&L's service territory located in the Indianapolis metropolitan area.

SYSTEM DEPLOYMENT AND OPERATION

For each of its network deployments, the Company provides full
implementation services to its clients, including system design, site selection,
frequency licensing, equipment installation, software modification, systems
integration and project management.

The modular design of the CellNet system and the efficient size of its
components facilitate inexpensive deployment of scaleable networks. Most of the
system components have been designed to fit on utility power poles or, where
necessary, on buildings or other structures. The majority of the network is
simply "plugged in" as the newly retrofitted meters replace existing meters.
Endpoint radio devices are installed on gas meters without interruption in
service by affixing the device (containing a radio, a long-life battery and new
register dials) at the meter register. The MCCs take typically less than two
hours each to install and the CellMasters less than a week to install, providing
a network which can be deployed swiftly and efficiently. The system is also
scalable because of its cellular design, thereby allowing adequate coverage
regardless of the size of the service area.

Field engineering teams are responsible for the installation and deployment
of all of the Company's networks. Once a services contract has been signed,
CellNet places a local project manager in charge of the installation. The
project manager hires local personnel, coordinates activities with various
departments within the utility, and draws on CellNet's corporate staff to
perform specialized services. CellNet's corporate staff is responsible for RF
network design, system software installation and integration, training of local
systems administration personnel, FCC licensing requirements, and remote systems
monitoring.

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CellNet's local personnel are responsible for RF engineering and site
testing, site selection, routine software administration and maintenance,
selection and training of subcontractors, coordination of meter retrofitting,
materials handling, and office administration. During the two to four-year
installation phase of each project, local personnel for the project employed by
CellNet typically number from twenty to fifty people (for deployments the size
of KCPL and UE), depending on the size and anticipated speed of each deployment.
Meter changeout and system equipment installations are generally carried out by
subcontractors and certain other system deployment tasks may be subcontracted
from time to time as well.

Following system deployment, a system management team of typically ten to
twenty CellNet personnel (for deployments the size of KCPL and UE) will remain
on site for the duration of the contract to handle day-to-day operations and
routine customer requests. This group will be supported by CellNet's
headquarters or regional offices, if any, that will provide 24-hour
troubleshooting support as well as additional technical expertise that can be
quickly dispatched if needed.

The Company also intends to provide substantial customer support, including
on-going field support and critical centralized network support functions
through regional network control centers. Currently, the Company is providing
sophisticated network monitoring from its headquarters in San Carlos,
California.

SALES AND MARKETING

The Company has organized its sales and marketing efforts based on utility
and non-utility network applications. For its utility segment, the Company's
initial target market includes the larger MSAs and CMSAs in the United States
which represent a large majority of the meters in the United States. The Company
is also pursuing selected utilities outside the larger MSAs and CMSAs. The
Company has a sales and marketing organization of 47 persons with a mix of
utility and information technology sales backgrounds, several of whom have
extensive experience in the electric utility industry. Regional sales
professionals are supported by corporate specialists in the areas of metering,
systems integration, and deployment.

The Company intends to concentrate its marketing efforts for non-utility
applications on industry-leading providers of products and services that would
benefit from the Company's low-cost wireless network. The Company is working
with leading manufacturers and applications developers to promote and develop
products and services that utilize the Company's networks. See "--Business
Strategy--Promote Development of Non-Utility Applications." The Company expects
that the manufacturers and developers of such products and services would market
such products and services to end users.

The Company has established a team of market managers for the development of
new business opportunities. This team develops business concepts that are
enabled by CellNet's services, pursues market research to validate these
concepts and identifies potential alliances that will be required to create the
products and services. This team is composed of individuals with backgrounds in
cellular and wireless marketing, product management and consumer products.

CellNet's sales approach addresses utilities and new power market
participants' need to prepare for the future competitive environment by reducing
costs, meeting present and future regulatory requirements and enhancing customer
service.

PROPRIETARY RIGHTS

CellNet relies on a combination of trade secret protection, copyrights,
patents, trademarks and confidentiality and licensing agreements to establish
and protect its proprietary rights.

CellNet's WAN radio system has been developed using advanced digital signal
processing techniques and an RF system architecture that enables CellNet to
create a complete digital cellular system in approximately a single 25 kHz voice
channel. This technology is based on narrowband modulation and compression of
many subchannels into a single channel. Extremely stable frequency control is
required to

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preserve system performance. CellNet's system of frequency control is the
subject of several issued patents claims. In addition, the efficiency of the
frequency protocol utilized by the CellMaster is determined in part by its
ability to recover short burst transmissions from an RTU or MCC. The
CellMaster's burst data recovery process is also the subject of an issued
patents claim.

The spread spectrum radio technology utilized in the CellNet LAN has been
licensed to CellNet by Axonn Corporation and an affiliate of Axonn (together,
"Axonn"). The Axonn spread spectrum technology, which is subject to a number of
patents, is a low-cost radio system which offers the price/performance
relationships that the Company believes are required for a commercially-feasible
telemetry network. Under its licenses from Axonn, CellNet has acquired an
exclusive right to use Axonn spread spectrum technology in the utility
distribution and service market and an exclusive right to provide services for
other applications outside the utility market through the CellNet system
architecture. CellNet's right to provide fire and security applications based
upon Axonn's technology is not exclusive under these licenses. The Axonn
licenses do not expire by their terms until the last to expire of any of the
patent rights underlying such licenses which will occur not earlier than March
21, 2014. Up to that time, as each patent licensed under the Axonn licenses
expires, the technology underlying such patent will become freely available in
the public domain. In an action filed by an affiliate of Axonn against Cargill,
Inc. and other defendants in the U.S. District Court for the Northern District
of California for, among other matters, alleged infringement of certain patents
underlying Axonn's spread spectrum technology, the court on August 8, 1997
granted the Cargill defendants' motion for summary adjudication holding that
such patents were invalid and unenforceable because they had expired for failure
to pay the required amount of maintenance and issue fees. The Axonn affiliate is
appealing the decision. While such patents are included in CellNet's license of
the Axonn spread spectrum technology, the Company does not believe the
expiration of these patents will have a material adverse impact on the Company's
business, operating results, financial condition and cash flow.

CellNet has developed a proprietary, patent-pending approach to transmitting
metering information which allows the LAN to accumulate time of use, demand and
load profile data. CellNet's protocols and data transmission methods are
incorporated in its proprietary firmware. During the development and test
deployments of the CellNet WAN and LAN radio systems, the Company has
accumulated substantial information regarding cellular and microcellular radio
systems. This information is being used to develop modeling and planning tools
which assist CellNet in the deployment and operation of complex RF systems.

The Company's success will depend in part on its ability to maintain
copyright and patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. See
"Risk Factors--Uncertainty of Protection of Copyrights, Patents and Proprietary
Rights."

RESEARCH AND DEVELOPMENT

The Company has steadily increased its research and development efforts over
the past several years and expects to continue to spend a significant portion of
its resources on these activities for the foreseeable future. The Company spent
$27.5 million, $25.4 million, and $20.9 million for research and development in
1997, 1996 and 1995, respectively. The Company spent $7.0 million and $6.4
million for research and development in the period ended March 31, 1998 and
1997, respectively. The Company presently employs more than 129 software and
hardware engineers and other professional staff in these efforts and contracts
with a number of highly-specialized outside consultants for additional services
as required. The focus of the Company's research and development efforts in the
past has been on the continued development of the radio hardware, spread
spectrum radio protocols, intelligent base stations (CellMasters and MCCs),
extensive software code, database capacity and other elements required for a
flexible, high-capacity wireless data communications network capable of
processing data from several million endpoints on a real-time basis at a low
cost. The Company expects that the focus of future research and development will
be to make further enhancements to the system software, firmware, hardware and
other equipment to increase the speed, capacity and functionality of the system,
to lower the cost of system equipment over time and,

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<PAGE>
working with other companies, to expand the scope of utility and non-utility
services that may be offered on the system. The Company's future success will
depend, in part, on the Company's success in these development projects which
will require continued substantial investments. See "Risk Factors--Technological
Performance and Buildout of the System; Rapid Technological Change and
Uncertainty."

As part of the Company's research and development efforts, the Company has
worked closely with current and potential customers in conducting pilot trials
for non-utility applications and jointly developing system specifications and
requirements.

COMPETITION

The emerging market for utility NMR systems, the deregulation of the
electric utility industry and the potential market for other applications
accessible once a common infrastructure is in place, have led electronics,
communications and utility product companies to begin development of various
systems, some of which currently compete, and others of which may in the future
compete, with the CellNet system. Deregulation will likely cause competition to
increase. The Company believes its only significant direct competitor in the
marketplace at the present time is Itron, an established manufacturer and seller
of hand-held and drive-by AMR equipment to utilities. Itron is currently
providing to customers its Genesis-TM- system, a radio network similar to the
Company's, for meter reading purposes.

Motorola is an example of a company whose technology might be adapted for
NMR and who might become a competitor of the Company. Mtel has announced that it
intends to adapt its technology to offer residential services similar to NMR
some time in 1999 over its existing paging network, with the development of
endpoint radios and network management capabilities being left to other
independent companies. Whisper Communications (formerly, a part of Diablo
Research) now offers its True 2 Way-TM- fixed-based RF architecture
communications technology for AMR and other services, and has several trials
underway. Metricom, a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, is currently
involved in the AMR market through trials with Whisper Communications.
Schlumberger and Greenland are among the companies that have conducted, or are
in the process of conducting, pilot trials of utility network automation
systems. Several companies are offering telephone-based network automated meter
reading services or equipment. Among these are International Teldata and
American Innovations. Established suppliers of equipment, services and
technology to the utility industry such as Asea Brown Boveri and General
Electric could expand their current product and service offerings in the
marketplace so as to compete directly with the Company, although they have not
yet done so. Many of the Company's present and potential future competitors have
significantly greater financial, marketing, technical and manufacturing
resources, name recognition and experience than the Company. There may be many
potential alternative solutions to the Company's NMR services. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the
development, promotion and sale of their products and services than the Company.
While CellNet believes its technology is widely regarded as competitive at the
present time, there can be no assurance that the Company's competitors will not
succeed in developing products or technologies that are better or more cost
effective. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing their ability to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. In addition, if the Company achieves
significant success it could draw additional competitors into the market.
Traditional providers of wireless services may in the future choose to enter the
Company's markets. However, such telecommunications applications are not well
suited for use in NMR or similar applications given certain technical challenges
and economic costs such as high embedded spectrum costs. Such existing and
future competition could materially adversely affect the pricing for the
Company's services and the Company's ability to sign services contracts and
maintain existing agreements. Competition for services relating to

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<PAGE>
non-utility applications may be more intense than competition for utility NMR
services, and additional competitors may emerge as the Company continues to
develop non-utility applications. There can be no assurance that the Company
will be able to compete successfully against current and future competitors, and
any failure to do so would have a material adverse effect on the Company's
business, operating results, financial condition and cash flow.

The Company believes the principal competitive factors for NMR services
include price, quality of service, system functionality and capacity for
readings as frequently as every 30 minutes, reliability, and ease of
installation. The Company believes it competes favorably in these areas. In
particular, the Company believes that it has developed the first commercially
deployed, large-scale network-based NMR system capable of simultaneously
collecting, processing, transporting and sharing data from millions of endpoints
on an efficient and timely basis.

SPECTRUM REGULATION

The Company's network equipment uses radio spectrum and as such, is subject
to regulation by the FCC. The Company's network equipment uses both licensed
radio spectrum allocated for MAS operations in the 928/952 MHz band, and
unlicensed spectrum in the 902-928 MHz band. In order to obtain a license to
operate the Company's network equipment in the 928/952 MHz band, license
applicants may need to obtain a waiver of various sections of the FCC's rules.
There can be no assurance that the Company will be able to obtain such waivers
on a timely basis or to obtain them at all. In addition, as the amount of
spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
current rules, subject to a number of limited exceptions, permit third parties
such as CellNet to operate on spectrum licensed to utilities to provide other
services. The Company plans to use these provisions of the FCC's rules to expand
its CellNet system. The FCC has the authority to amend its rules at any time and
such changes could have a material adverse effect on the Company's spectrum
utilization strategy. See "Risk Factors--Access to RF Spectrum; Regulation by
the FCC."

EMPLOYEES

As of March 31, 1998, CellNet had 722 employees, including 129 in product
development, 151 in materials and manufacturing, 47 in sales and marketing, 359
in field service and support, and 36 in administration. None of the Company's
employees is currently represented by a labor union. The Company believes that
its relationship with its employees is good.

PROPERTIES

The Company's administrative, sales and marketing, product development and
production facilities are located in San Carlos, California, where the Company
leases approximately 106,000 square feet in three buildings under lease and
sublease agreements expiring in December 2000. Subsidiaries of the Company lease
approximately 107,000 square feet of additional warehouse, manufacturing and
office space to support field operations in California and various other states
under lease and sublease agreements expiring at various times commencing
November 2001 through September 2015. The Company anticipates that it will be
able to acquire additional space as required for its operations on acceptable
terms.

LITIGATION

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The Company believes, based on its current information, that the Company's
products do not infringe any valid claim in the Itron patent, and in the
Company's opinion, the ultimate outcome of the lawsuit is not expected to have a
material adverse effect on the Company's results of operations or financial
condition.

In April 1997, the Company filed a patent infringement suit against Itron in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electronic meter reading Encoder Receiver Transmitter
(ERT-Registered Trademark-) device infringes CellNet's U.S. Patent No.
4,783,623. The Company seeks an injunction, damages and other relief.

The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL
ET AL. No. 398464 filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC. ET AL. No. 398560 was earlier voluntarily dismissed with
prejudice. These complaints, purported class actions filed on behalf of the
Company's stockholders against the Company, certain of its officers and
directors and underwriters of the Company's initial public offering, sought
unspecified damages and rescission for alleged liability under various
provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which the Company issued 5,000,000 shares
of common stock to the public, contained materially misleading statements and/or
omissions in that defendants were obligated to disclose, but failed to disclose,
that a patent conflict with Itron, Inc. was likely to ensue.

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MANAGEMENT

The executive officers and directors of the Company and their ages as of
March 31, 1998 are as follows.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John M. Seidl........................................ 58 President, Chief Executive Officer and Director

Cree A. Edwards...................................... 40 Vice President, Marketing

Robert A. Hayes...................................... 45 Vice President, Development and Operations

Larsh M. Johnson..................................... 40 Vice President and Chief Technology Officer

Paul G. Manca........................................ 39 Vice President and Chief Financial Officer

Philip H. Mallory.................................... 58 Vice President and General Manager, Services

David L. Perry....................................... 57 Vice President, Secretary and Chief Administrative
Officer

Ben H. Lyon.......................................... 44 Vice President, General Counsel

Paul M. Cook......................................... 73 Director

Neal M. Douglas...................................... 39 Director

E. Linn Draper, Jr................................... 55 Director

William C. Edwards................................... 69 Director

William Hart......................................... 57 Director
</TABLE>

JOHN M. SEIDL became President, Chief Executive Officer and a director of
the Company in September 1994. From December 1992 to September 1994, Mr. Seidl
served as director of St. Mary's Land & Exploration Company, CRSS, Inc., J.B.
Poindexter, Inc. and a privately-held company. From January 1989 through
December 1992, Mr. Seidl served as a director of MAXXAM, Inc., an aluminum,
forest products and real estate concern, and Chairman and Chief Executive
Officer of Kaiser Aluminum Corporation. From September 1990 through December
1992, Mr. Seidl also served as President of MAXXAM, Inc. Previously, Mr. Seidl
was Executive Vice President, from July 1985 to May 1986, and President and
Chief Operating Officer, from May 1986 to January 1989, of Enron Corp., an
energy company. Mr. Seidl currently is a director of St. Mary's Land &
Exploration Company and several privately-held companies and non-profit
organizations. He received a B.S. degree in Engineering from the United States
Military Academy, and M.P.A. and Ph.D. degrees in Political Economy from Harvard
University.

CREE A. EDWARDS is a co-founder of the Company, served as Vice President,
Business Development from January 1994 to January 1997 and has served as Vice
President, Marketing since that time. Mr. Edwards was President of the Company
from October 1984 to February 1990 and Executive Vice President from February
1990 to January 1994. Prior to founding CellNet in 1984, Mr. Edwards was an Area
Sales Manager for Octel Communications Corporation, a voice processing
manufacturer, from September 1984 to September 1985, and a Major Accounts
Manager for the General Electric Information Services Company from March 1983 to
September 1984. He received a B.A. degree in Economics from the University of
California, Davis.

ROBERT A. HAYES joined the Company in January 1993 as Vice President,
Special Assistant to the President. He became Vice President, Software
Development in March 1994 and was named Vice President, Development in January
1995 and Vice President, Development and Operations in April 1997. From February
1991 to December 1992, Mr. Hayes held a number of positions with Everex Systems,
Inc. ("Everex"), a computer hardware manufacturer, including Vice President of
Manufacturing, Vice President of Quality and Service, Manager of the Network
Division and Group Manager of Service. Everex filed

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for Chapter 11 bankruptcy protection in January 1993. Mr. Hayes received B.S.
and M.C.E. degrees in Civil Engineering from Rice University.

LARSH M. JOHNSON is a co-founder of the Company and has served in several
vice presidential positions from October 1984 to December 1994 and, since
January 1995, as Vice President and Chief Technology Officer. While at CellNet
and prior to co-founding the Company in 1984, he was a self-employed product
design consultant from May 1983 to June 1985 and Director of Product Development
at Interactive Communications Corporation, a video systems company, from
February 1984 to June 1985. Mr. Johnson was an Engineering Manager at Digital
Optics Corporation, a company specializing in electro-optical systems, from
March 1981 to April 1983 and an electrical engineer at Systems Control
Corporation, a computer hardware company, from June 1980 to April 1981. He
received his B.S. and M.S. degrees in Mechanical Engineering from Stanford
University.

PAUL G. MANCA joined the Company in May 1995 as Vice President and Chief
Financial Officer. From March 1993 to May 1995, he was the Managing Director and
Group Head of the Communications Group at BZW/Barclays Bank. Mr. Manca joined
BZW/Barclays as Vice President, Merchant Banking Division in February 1987. From
June 1980 to February 1987, Mr. Manca was employed in the corporate finance
group of the Canadian Imperial Bank of Commerce. He received a B.A. degree in
Economics from the University of California, Berkeley and an M.B.A. degree in
Finance from Golden Gate University.

PHILIP H. MALLORY joined the Company in January 1995 as Vice President and
General Manager, Services. From June 1996 until April 1997, he assumed the
additional duties of Vice President, Operations. From June 1992 to January 1995,
Mr. Mallory held various positions at CAE-Link Corporation, a defense
contractor, including Director of Strategic Planning, Director-Product
Management and Director-Department of Defense Marketing. Mr. Mallory served as a
career officer in the United States Army from June 1961 to August 1991,
attaining the rank of Major General prior to his retirement. During his army
career he held a number of posts, including Commanding General of the 2nd
Armored Division, NATO Advisor to the Secretary of Defense, and the Commanding
General of the 7th Army Training Command. Mr. Mallory holds a B.S. degree in
Engineering from the United States Military Academy and an M.S. degree in
Engineering-Applied Science from the University of California, Davis. Mr.
Mallory also attended the Industrial College of the Armed Forces in Washington,
D.C., where he attained the equivalent of a master's degree in Resource
Management.

DAVID L. PERRY joined the Company in November 1994 as Vice President,
General Counsel and Secretary, and was appointed Chief Administrative Officer in
February 1996. In March 1998, he resigned as General Counsel. From January 1992
through November 1994, Mr. Perry was engaged as an attorney in private practice.
From January 1984 through December 1991, Mr. Perry was Vice President and
General Counsel of Kaiser Aluminum Corporation. From August 1969 through
December 1983, Mr. Perry served in a variety of capacities in Kaiser Aluminum's
Law Department. Mr. Perry received a B.A. degree from Amherst College and a J.D.
degree from the Boalt Hall School of Law, University of California, Berkeley.

BEN H. LYON joined the Company as of February 1998 and was elected Vice
President, General Counsel in April 1998. From May 1, 1995 until April 1998, Mr.
Lyon was a senior counsel for Pacific Telesis Legal Group and Pacific Bell
Mobile Services. Prior to May 1995, he served as an attorney and senior counsel
in various positions at Pacific Telesis Legal Group and Pacific Bell. Since 1990
he has periodically served as an adjunct professor at the University of San
Francisco School of Law. Mr. Lyon has a B.A. from the University of California,
Davis and a J.D. from Loyola University School of Law, Los Angeles.

PAUL M. COOK has been a director of the Company continuously since August
1990. Mr. Cook became Chief Executive Officer of the Company in August 1990, and
assumed the additional title of President in 1992. He relinquished the positions
of President and Chief Executive Officer in September 1994. Since June 1995, Mr.
Cook has been the Chief Executive Officer and Chairman of the Board of DIVA
Systems Corp., a company developing video-on-demand products. Until his
retirement in April 1990, Mr. Cook was Chief Executive Officer of Raychem
Corporation, a plastics and insulation manufacturer, which he

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founded in 1957. Since September 1994, Mr. Cook has served as Chairman of the
Board of SRI International, Inc., and as a director of Raychem Corporation.
Currently, Mr. Cook is also a director of Chemfab Corporation. He received a
B.S. degree from the Massachusetts Institute of Technology.

NEAL M. DOUGLAS has been a director of the Company since October 1993. Since
January 1993 he has been a general partner of AT&T Ventures Company, L.P., a
venture capital firm. From May 1989 to January 1993, he was a partner of New
Enterprise Associates, another venture capital firm. Mr. Douglas also serves as
director of two privately-held companies.

E. LINN DRAPER, JR. has been a director of the Company since April 1997.
Since May 1993, he has been Chairman, President and Chief Executive Officer of
American Electric Power Company, Inc. ("AEP") and since March 1992, he has been
the President of AEP. Dr. Draper is also Chairman, President and Chief Executive
Officer of the American Electric Power Service Corporation, the management and
technology arm of the AEP system, President of Ohio Valley Electric Corporation
and its subsidiary, Indiana-Kentucky Electric Corporation and Chairman of the
Edison Electric Institute. From 1987 to 1992, Dr. Draper was Chairman, President
and Chief Executive Officer of Gulf States Utility Company. He is a member of
the National Academy of Engineering and serves as a director of Nuclear Energy
Institute, the Institute of Nuclear Power Operations, and the Greater Columbus
Chamber of Commerce.

WILLIAM C. EDWARDS has been a director of the Company from October 1985 to
April 1986 and has been a director continuously since March 1991. Since October
1968 he has been a general partner of Bryan & Edwards, an investment
partnership. Mr. Edwards also serves as a director of Western Atlas, Inc. and
two privately-held companies.

WILLIAM HART has been a director of the Company since October 1992. He has
been a general partner of Technology Partners West Fund IV, L.P. ("Technology
Partners"), a venture capital firm, since its founding in 1979. Mr. Hart also
serves as a director of Trimble Navigation, Ltd., Silicon Gaming, Inc. and
several privately-held corporations.

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<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of the Company's
Common Stock as of February 16, 1998, as to (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each of the chief executive
officer of the Company and the four other highest compensated executive officers
of the Company and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
NUMBER SHARES PERCENT BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED(1)(2)
- --------------------------------------------- --------------------- --------------------
<S> <C> <C>
William C. Edwards(3) ....................... 3,891,850 9.3%
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025

Alan R. Brudos(4) ........................... 2,742,524 6.5
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025

Odyssey Partners, L.P ....................... 2,724,508 6.5
31 West 52nd Street
New York, NY 10019

Banner Partners(5) .......................... 2,590,780 6.2
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025

John M. Seidl(6)............................. 1,126,350 2.7

Paul M. Cook(7).............................. 1,928,274 4.6

Neal M. Douglas(8)........................... 1,614,526 3.9

William Hart(9).............................. 405,282 1.0

Paul G. Manca(10)............................ 191,100 *

Phillip Mallory(11).......................... 182,500 *

Robert A. Hayes(12).......................... 174,000 *

David L. Perry(13)........................... 158,300 *

E. Linn Draper, Jr.(14)...................... 10,000 *

All directors and executive officers as a 11,578,516 27.3
group (14 persons)(15).......................
</TABLE>

- ----------

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of February 16, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. The persons named in this table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the other footnotes to
this table.

(2) Percentage of beneficial ownership is based on 41,880,068 shares of Common
Stock outstanding as of February 16, 1998.

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<PAGE>
(3) Includes 2,037,492 shares, 553,298 shares, and 313,022 shares of Common
Stock beneficially owned by Banner Partners, Banner Partners/Minaret, and
Carson, a partnership, certain members of Mr. Edwards's family and certain
foundations and trusts of which Mr. Edwards is a trustee, respectively. Mr.
Edwards, a director of the Company, may be deemed to be a beneficial owner
of shares held by such family members, foundations and trusts. Mr. Edwards
and Alan R. Brudos are the general partners of Banner Partners and Banner
Partners/ Minaret and each exercises sole voting and dispositive power over
the shares held by Banner Partners and Banner Partners/Minaret.

(4) Includes 2,037,492 shares, 553,298 shares, and 151,734 shares of Common
Stock beneficially owned by Banner Partners, Banner Partners/Minaret, and a
trust of which Mr. Brudos is the settlor, respectively. Mr. Brudos and
William C. Edwards are the general partners of Banner Partners and Banner
Partners/Minaret and each exercises sole voting and dispositive power over
the shares held by Banner Partners and Banner Partners/ Minaret. Mr. Brudos
exercises shared voting and dispositive power over the shares held by the
trust.

(5) Includes 553,298 shares held by Banner Partners/Minaret which is wholly
owned by Banner Partners.

(6) Includes 250,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Seidl, and 9,100 shares of Common
Stock which are held by Mr. Seidl as a trustee of a trust for a family
member who shares Mr. Seidl's household. Mr. Seidl disclaims all beneficial
ownership of all securities held in trust for such family member. Also
includes 2,800 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 16, 1998 held by Mr. Seidl.

(7) Includes 1,808,274 shares of Common Stock beneficially owned by the Paul
and Marcia Cook Living Trust dated April 21, 1992 and 120,000 shares of
Common Stock beneficially owned by two trusts of which Mr. Cook is trustee.

(8) Includes 1,613,476 shares of Common Stock beneficially owned by AT&T
Ventures Company, L.P. Mr. Douglas, a director of the Company, is a general
partner of AT&T Ventures Company, L.P. and may be deemed to be the
beneficial owner of such shares. Mr. Douglas disclaims beneficial ownership
of the shares except to the extent of his proportionate partnership
interest therein.

(9) Includes 331,862 shares of Common Stock beneficially owned by Technology
Partners West Fund IV, L.P. Mr. Hart, a director of the Company, is a
general partner of Technology Partners West Fund IV, L.P. and may be deemed
to be the beneficial owner of such shares. Mr. Hart disclaims beneficial
ownership of the shares except to the extent of his proportionate
partnership interest therein.

(10) Includes 81,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Manca. Also includes 11,100
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Manca.

(11) Includes 68,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based on
continued performance of services by Mr. Mallory. Also includes 12,000
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Mallory.

(12) Includes 164,000 shares issuable upon the exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Hayes.

(13) Includes 45,750 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Perry. Also includes 22,100
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Perry.

(14) Consists of 10,000 shares issuable upon the exercise of options
exercisable within 60 days of February 16, 1998 held by Mr. Draper.

(15) Includes 635,678 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by the executive officers. Also includes
562,406 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 16, 1998.

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DESCRIPTION OF THE PREFERRED SECURITIES

The following summary of certain material terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Certificate of Formation, the
Operating Agreement and the Written Action of the Manager of CellNet Funding,
LLC (the "Written Action") with respect to the terms of the Preferred
Securities, copies of which are available upon request to CellNet. Capitalized
terms not otherwise defined herein have the meanings assigned to them in the
Operating Agreement of Funding.

GENERAL

Funding is authorized to issue 3,000,000 shares of Preferred Securities
(3,450,000 if the Underwriter's over-allotment option is exercised in full). The
Preferred Securities do not have any subscription or preemptive rights related
thereto. The Bank of New York is transfer agent and registrar (the "Transfer
Agent") for the Preferred Securities.

RANKING

The Preferred Securities, with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of Funding, rank
senior to all classes of Common Securities of Funding. The Operating Agreement
of Funding does not permit Funding to incur any indebtedness or liabilities or
issue any securities except for the issuance of Common Securities to CellNet,
the issuance of the Preferred Securities and the incurrence of certain
obligations pursuant to the terms thereof.

ESCROW

Pursuant to an Escrow Agreement dated as of the Closing Date (the "Escrow
Agreement"), among Funding, CellNet and The Bank of New York, as escrow agent
(the "Escrow Agent"), on the Closing Date, Funding will use a portion of the
proceeds from the Offering to purchase Treasury Strips in an amount anticipated
to be sufficient to fund the cash payment of the first 13 dividends. The
Treasury Strips will be pledged to the Escrow Agent for the benefit of the
holders of the Preferred Securities pursuant to the Escrow Agreement and will be
held by the Escrow Agent in the Escrow Account (as defined below). Pursuant to
the Escrow Agreement, immediately prior to a Dividend Payment Date (through and
including August 1, 2001) the Escrow Agent will release from the Escrow Account
amounts sufficient to pay the dividend then due on the Preferred Securities.

Under the Escrow Agreement, once Funding makes the dividend payments on the
Preferred Securities through and including August 1, 2001 (or, in the event of
an Automatic Exchange, upon the making of the Dividend Make-Whole Payment), all
of the remaining Treasury Strips, if any, will be released from the Escrow
Account. See "Use of Proceeds." "Escrow Account" means the account established
with the Escrow Agent pursuant to the terms of the Escrow Agreement for the
deposit of the Treasury Strips (and earnings thereon and proceeds thereof)
purchased by Funding with a portion of the net proceeds from the sale by Funding
of the Preferred Securities. The summary does not purport to be complete and is
subject in all respects to, and is qualified in its entirety by reference to,
the Escrow Agreement, a copy of which is available from CellNet upon request.

DIVIDENDS

Holders of Preferred Securities will be entitled to receive dividends on the
Preferred Securities at the rate per annum of the liquidation preference of
Preferred Securities set forth on the cover page of this Prospectus, payable
quarterly. All dividends will be cumulative, whether or not earned or declared,
on a daily basis from the Closing Date and will be payable quarterly in arrears
on February 1, May 1, August 1 and November 1 of each year, commencing August 1,
1998 (to holders of record at the close of business on January 15, April 15,
July 15 and October 15 immediately preceding the corresponding Dividend Payment

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Date). The first dividend payment of $ per Preferred Security will be for the
period from the Closing Date to and including July 31, 1998 and will be payable
on August 1, 1998. Through and including August 1, 2001, dividends on the
Preferred Securities will be payable in cash. Thereafter, dividends on the
Preferred Securities will be payable at Funding's option, in (i) cash, (ii)
shares of Common Stock, valued at 90% of the Average Market Value of the Common
Stock or (iii) any combination of cash or Common Stock; provided that any
dividend payment must be made in cash to the extent Funding shall have
sufficient cash legally available to make all or any portion of such dividend
payment with respect to the Preferred Securities. The Indenture restricts
CellNet's ability to distribute cash to Funding. See "Risk Factors--No
Operations of Funding." If any dividend (or portion thereof) payable in cash on
any Dividend Payment Date is not declared or paid in full in cash on such
Dividend Payment Date, the amount of such dividend that is payable and that is
not paid in cash on such date will accumulate at the dividend rate, compounding
quarterly, until declared and paid in full.

Dividends on the Preferred Securities will be paid to the extent that
Funding has funds legally available for the payment of such dividends. Amounts
available to Funding for dividends to the holders of the Preferred Securities
will be limited to shares of Common Stock (or at CellNet's option, cash or any
combination of cash and Common Stock) received by Funding from CellNet as
dividends on the CellNet Preferred Stock (and proceeds from any sales of such
Common Stock by Funding) and the interest on and principal of the Treasury
Strips that are held in the Escrow Account. The terms governing the CellNet
Preferred Stock provide that CellNet shall pay dividends to Funding, payable in
Common Stock (or at CellNet's option, cash or any combination of cash and Common
Stock), in an amount sufficient to allow Funding to pay dividends on the
Preferred Securities in full. Any such Common Stock received by Funding may be
paid as a dividend to the holders of the Preferred Securities or sold in the
open market to generate cash proceeds to pay cash dividends on the Preferred
Securities.

EXCHANGE RIGHTS

GENERAL. The Preferred Securities are exchangeable at any time, in whole or
in part, prior to the Mandatory Redemption Date (unless earlier redeemed or
automatically exchanged for Common Stock), at the option of the holder thereof
and in the manner described below, into shares of Common Stock at an initial
exchange rate of shares of Common Stock for each Preferred Security
(equivalent to an exchange price of $ per share of Common Stock), subject to
adjustment as described under "--Exchange Rights--Exchange Rate Adjustments"
below, or an aggregate of shares of Common Stock (based on the exchange rate
on the Closing Date) representing approximately % of CellNet's outstanding
shares of Common Stock on a fully diluted basis as of , 1998.

A holder of a Preferred Security wishing to exercise its exchange right
shall (i) deliver an exchange notice to the Exchange Agent, (ii) if required,
furnish appropriate endorsements and transfer documents and (iii) if required,
pay all transfer or similar taxes, and the Exchange Agent shall, on behalf of
such holder, exchange such Preferred Securities with Funding for shares of
Common Stock and deliver such shares of Common Stock to such holder. Generally,
such exchange with Funding, in whole or in part, should not be a taxable event
to the holder. CellNet will initially act as Exchange Agent. Holders may obtain
copies of the required form of the exchange notice from the Exchange Agent.

Holders of Preferred Securities at the close of business on a dividend
record date will be entitled to receive the dividends payable on such Preferred
Securities on the corresponding Dividend Payment Date notwithstanding the
exchange of such Preferred Securities following such dividend record date but
prior to such Dividend Payment Date. Except as provided in the immediately
preceding sentence, neither Funding nor CellNet will make, or be required to
make, any payment, allowance or adjustment for accumulated and unpaid dividends,
whether or not in arrears, on exchanged Preferred Securities. Each exchange will
be deemed to have been effected immediately prior to the close of business on
the day on which the related exchange notice was received by the Exchange Agent.
Following any exchange at the election of a holder of such holder's Preferred
Securities into Common Stock, dividends will cease to accrue on such Preferred

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Securities and such holder will not be entitled to participate in the proceeds
from the Treasury Strips held by Funding.

No fractional shares of Common Stock will be issued as a result of exchange,
but in lieu thereof such fractional interest will be paid by Funding in cash
based on the last reported sale price of Common Stock on the date Preferred
Securities are surrendered for exchange. From time to time, Funding will sell
shares of Common Stock in the open market and will use proceeds from such sales
to pay cash on the fractional interests described in the prior sentence.

EXCHANGE RATE ADJUSTMENTS. The exchange rate is subject to adjustment upon
certain events occurring after the Closing Date, including (i) the issuance of
Common Stock as a dividend or distribution on the Common Stock; (ii) certain
subdivisions and combinations of the Common Stock; (iii) the issuance to holders
of Common Stock of certain rights or warrants entitling them to subscribe for or
purchase Common Stock at less than the Average Market Value; (iv) the
distribution to all holders of Common Stock of capital stock (other than Common
Stock) or evidences of indebtedness of CellNet or of assets (other than cash
distributions covered by clause (v) below) or rights or warrants to subscribe
for or purchase any of its securities (excluding rights or warrants to purchase
Common Stock referred to in clause (iii) above); (v) distributions consisting of
cash, excluding any quarterly cash dividend on the Common Stock to the extent
that the aggregate cash dividend per share of Common Stock in any quarter does
not exceed the greater of (x) the amount per share of Common Stock of the next
preceding quarterly dividend on the Common Stock to the extent that such
preceding quarterly dividend did not require an adjustment of the exchange rate
pursuant to this clause (v) (as adjusted to reflect subdivisions or combinations
of the Common Stock), and (y) 3.75 percent of the average of the last reported
sales price of the Common Stock during the ten trading days immediately prior to
the date for declaration of such dividend and excluding any dividend or
distribution in connection with the liquidation, dissolution or winding up of
CellNet; (vi) payment in respect of a tender or exchange offer by CellNet or any
subsidiary of CellNet for the Common Stock to the extent that the cash and value
of any other consideration included in such payment per share of Common Stock
exceeds the Average Market Value per share of Common Stock on the Trading Day
next succeeding the last date on which tenders or exchanges may be made pursuant
to such tender or exchange offer; and (vii) payment in respect of a tender offer
or exchange offer by a person other than CellNet or any subsidiary of CellNet in
which, as of the closing date of the offer, the Board of Directors is not
recommending rejection of the offer. If any adjustment is required to be made as
set forth in clause (v) above as a result of a distribution that is a quarterly
dividend, such adjustment would be based upon the amount by which such
distribution exceeds the amount of the quarterly cash dividend permitted to be
excluded pursuant to such clause (v). If an adjustment is required to be made as
set forth in clause (v) above as a result of a distribution that is not a
quarterly dividend, such adjustment would be based upon the full amount of the
distribution. The adjustment referred to in clause (vii) above will only be
required if the tender offer or exchange offer is for an amount which causes
that person's ownership of Common Stock to exceed 25% of the total shares of
Common Stock outstanding and, if the cash and value of any other consideration
included in such payment per share of Common Stock, exceeds the Average Market
Value per share of Common Stock on the business day next succeeding the last
date on which tenders or exchanges may be made pursuant to such tender or
exchange offer. The adjustment referred to in clause (vii) above will not be
required, however, if, as of the closing of the offer, the offering documents
with respect to such offer disclose a plan or an intention to cause CellNet to
engage in a consolidation or merger of CellNet or a sale of all or substantially
all of CellNet's assets. Notwithstanding the foregoing, no adjustment will be
required as a result of (a) the issuance of shares of Common Stock as a result
of any of the following (i) the grant, exercise or issuance of stock or stock
options under the Company's employee, director or consultant stock plans, (ii)
the exercise of outstanding warrants or conversion or exchange of existing notes
and securities, and (iii) in satisfaction of CellNet's obligations under its
Employee Stock Purchase Plan as amended from time to time or (b) the issuance of
Common Stock as a dividend on or upon exchange of the Preferred Securities.
Common Stock issued in connection with acquisitions of

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<PAGE>
businesses or assets from persons that are not Affiliates of CellNet will be
deemed to have been issued for a price at least equal to Average Market Value.

The Certificate of Designation, Rights and Preferences with respect to the
CellNet Preferred Stock (the "Certificate of Designation") provides that if
CellNet implements a stockholders' rights plan, such rights plan must provide
that upon exchange of the Preferred Securities into Common Stock the holders
will receive, in addition to the Common Stock issuable upon such exchange, such
rights whether or not such rights have separated from the Common Stock at the
time of such exchange. In addition, no adjustment to the exchange rate will
occur as a result of the issuance of the rights if CellNet adopts such plan.

No adjustment in the exchange rate will be required unless such adjustment
would require a change of at least one percent in the exchange rate then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
CellNet reserves the right to make such increase in the exchange rate in
addition to those required in the foregoing provisions as CellNet in its
discretion shall determine to be advisable in order that certain stock-related
distributions hereafter made by CellNet to its stockholders shall not be
taxable. Except as stated above, the exchange rate will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.

In the case of (i) any reclassification of the Common Stock (other than
changes in par value or resulting from a subdivision or combination) or (ii) a
consolidation or merger involving CellNet or a sale or conveyance to another
corporation of the property and assets of CellNet as an entirety or
substantially as an entirety, in each case as a result of which holders of
Common Stock shall be entitled to receive stock, securities or other property or
assets (including cash) with respect to or in exchange for such Common Stock,
the holders of the Preferred Securities then outstanding will be entitled
thereafter to exchange such Preferred Securities into the kind and amount of
shares of stock, other securities or other property, assets or cash which they
would have owned or been entitled to receive upon such reclassification,
consolidation, merger, sale or conveyance had such Preferred Securities been
exchanged immediately prior to such reclassification, consolidation, merger,
sale or conveyance, assuming that a holder of Preferred Securities would not
have exercised any rights of election as to the stock, other securities or other
property, assets or cash receivable in connection therewith.

In the event of a taxable distribution to holders of Common Stock or in
certain other circumstances requiring an adjustment to the exchange rate, the
holders of Preferred Securities may, in certain circumstances, be deemed to have
received a distribution subject to United States income tax as a dividend.

CellNet from time to time may, to the extent permitted by law, increase the
exchange rate (thus increasing the number of shares of Common Stock that would
be issued in exchange for each Preferred Security) by any amount for any period
of at least 20 days, in which case CellNet shall give at least 15 days' notice
of such increase if CellNet's Board of Directors has made a determination that
such increase would be in the best interests of CellNet, which determination
shall be conclusive. CellNet may, at its option, make such increases in the
exchange rate, in addition to those set forth above, as the Board of Directors
deems advisable to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. CellNet does
not intend to reduce the exchange price to an amount below the fair market value
of the Common Stock.

MANDATORY REDEMPTION BY FUNDING

Unless earlier redeemed or exchanged, the Preferred Securities must be
redeemed, out of funds legally available therefor, by Funding at a redemption
price of 100% of the liquidation preference of the Preferred Securities plus
accrued and unpaid dividends, if any, on the Mandatory Redemption Date.

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AUTOMATIC EXCHANGE

The Preferred Securities will be automatically exchanged for Common Stock at
any time after the Closing Date, and on or prior to May 1, 2001, at an exchange
price of $ per share in the event that the Current Market Value of the Common
Stock equals or exceeds the following Trigger Percentages of the exchange price
then in effect for at least 20 trading days in any consecutive 30 trading day
period during the 12 month period ending prior to May 1 of the indicated year
(an "Exchange Event"):

<TABLE>
<CAPTION>
YEAR TRIGGER PERCENTAGES
- --------- -------------------
<S> <C>
1999 170%
2000 160%
2001 150%
</TABLE>

In any consecutive 30 trading day period that includes trading days before
and after May 1, 1999 or May 1, 2000, the applicable Trigger Percentage for each
trading day in the trading period shall be used in order to determine whether an
Exchange Event has occurred.

Upon any Automatic Exchange, Funding will make a Dividend Make-Whole Payment
with respect to the Preferred Securities in an amount equal to any remaining
Treasury Strips held by Funding. Funding will be obligated to make the Dividend
Make-Whole Payment on all Preferred Securities which are automatically
exchanged. The Dividend Make-Whole Payment must be paid in cash. Following any
Automatic Exchange, dividends will cease to accrue on the Preferred Securities.

OPTIONAL REDEMPTION BY FUNDING

The Preferred Securities are also subject to optional redemption by Funding
on any date (the "Optional Redemption Date") on or after May 1, 2001 (the
"Initial Redemption Date"). At any time and from time to time on or after the
Initial Redemption Date and until the Mandatory Redemption Date, Funding will
have the right to redeem, in whole or in part, the Preferred Securities at a
redemption price equal to the percentage of the liquidation preference set forth
below, together with accrued and unpaid dividends, if any, to the Optional
Redemption Date, if redeemed in the 12 month period beginning on May 1 of the
indicated year:

<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------- ----------------
<S> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000
</TABLE>

METHOD OF PAYMENT OF REDEMPTION

The redemption price pursuant to an Optional Redemption or the Mandatory
Redemption will be payable, in each case at Funding's option, in (i) cash, or
(ii) Common Stock, based upon 90% of the Average Market Value of the Common
Stock in the case of the Optional Redemption and 100% of the Average Market
Value of the Common Stock in the case of the Mandatory Redemption or (iii) any
combination of cash and Common Stock; provided that Funding, in its notice of
such redemption, must state whether the redemption price will be paid in cash,
Common Stock or both, and provided that any

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payment must be made in cash to the extent Funding shall have sufficient cash
legally available to make all or any portion of such payment with respect to the
Preferred Securities.

FUNDAMENTAL CHANGE EXCHANGE RATE ADJUSTMENT

If CellNet or Funding makes an announcement of the occurrence of a
Fundamental Change (as defined below) at any time prior to the Mandatory
Redemption Date, there will be an adjustment to the exchange rate of the
Preferred Securities (the "Fundamental Change Exchange Rate") such that such
exchange rate will thereafter equal the liquidation preference of the Preferred
Securities, divided by the Fundamental Change Average Market Price (as defined
below), unless the Fundamental Change Exchange Rate is lower than the then
current exchange rate of the Preferred Securities as calculated in the manner
described in "--Exchange Rights" (in which case there will be no such adjustment
to the exchange rate).

The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all of the outstanding
Common Stock shall be exchanged for, converted into, acquired for or constitute
the right to receive stock, securities, other property or assets (including
cash) of another entity or person (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise). "Fundamental Change Average Market Price" of the
Common Stock means the arithmetic average of the Current Market Value for the
ten trading days ending on the fifth business day prior to the date of the
closing of the Fundamental Change.

LIQUIDATION DISTRIBUTION UPON DISSOLUTION

In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of Funding (each a "Liquidation"), the then holders of
the Preferred Securities will be entitled to receive out of the assets of
Funding (which will include the CellNet Preferred Stock, any interest on and
principal of the Treasury Strips that are held in the Escrow Account, any Common
Stock that Funding received from CellNet as a dividend (or otherwise) and has
not distributed as a dividend on the Preferred Securities or sold in the open
market, and any other assets of Funding), after satisfaction of liabilities to
creditors, if any, distributions in an amount equal to the aggregate of the
stated liquidation preference of $25 of Preferred Security plus accrued and
unpaid dividends thereon to the date of payment (the "Liquidation
Distribution").

If, upon any such Liquidation, the Liquidation Distribution can be paid only
in part because Funding has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable by Funding on the
Preferred Securities shall be paid on a pro rata basis. CellNet will be
obligated to pay dividends, consisting of CellNet Preferred Stock, to Funding so
that it will be able to make the Liquidation Distribution in full.

VOTING RIGHTS

The holders of Preferred Securities have no voting rights, except as
otherwise required by law and except as set forth below. The Operating Agreement
provides that Funding may not amend the Operating Agreement so as to affect
adversely the specific rights, preferences, privileges or voting rights of
holders of Preferred Securities, cause the dissolution, winding-up or
termination of Funding, issue any additional securities or increase the
authorized number of Preferred Securities, without the affirmative vote or
consent of the holders of at least a majority of the outstanding Preferred
Securities, voting or consenting, as the case may be, separately as one class.
Furthermore, the Certificate of Designation provides that CellNet may not,
without the approval of the holders of a majority of the CellNet Preferred
Stock, amend the Certificate of Incorporation of CellNet so as to have a
material adverse effect on the specific rights, preferences, privileges or
voting rights of the holders of the CellNet Preferred Stock with respect to the
CellNet Preferred Stock, or cause the dissolution, winding-up or termination of
Funding. Funding will

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initially be the sole holder of the CellNet Preferred Stock. Funding has agreed
not to grant such approval without the consent of the holders of a majority of
the Preferred Securities then outstanding.

THE GUARANTEE; LACK OF PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE

Set forth below is a summary of information concerning the guarantee of the
Preferred Securities (the "Guarantee") by CellNet for the benefit of the holders
of Preferred Securities. The summary does not purport to be complete and is
subject in all respects to the respective provisions of, and is qualified in its
entirety by reference to, the Guarantee Agreement between CellNet and Funding, a
copy of which is available from CellNet upon request.

GENERAL. Pursuant to and to the extent set forth in the Guarantee, CellNet
has agreed to pay in full to the holders of the Preferred Securities (except to
the extent paid by Funding), as and when due, regardless of any defense, right
of set off or counterclaim which Funding may have or assert, the following
payments (the "Guarantee Payments"), without duplication: (i) any accrued and
unpaid distributions that are required to be paid on the Preferred Securities,
to the extent Funding has sufficient funds legally available therefor, (ii) the
redemption price, with respect to any Preferred Securities called for redemption
by Funding, to the extent Funding has sufficient funds legally available
therefor and (iii) upon a voluntary or involuntary dissolution, winding-up or
termination of Funding, the lesser of (a) the aggregate of the liquidation
preference and all accrued and unpaid dividends on the Preferred Securities to
the date of payment to the extent Funding has sufficient funds legally available
therefor and (b) the amount of assets of Funding remaining for distribution to
holders of Preferred Securities upon the liquidation of Funding. The Guarantee
may also be subject to contractual restrictions under agreements governing
future indebtedness of CellNet.

Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee obligations,
the Guarantee is of no practical benefit to holders of the Preferred Securities.

AMENDMENTS AND ASSIGNMENT. Except with respect to any changes that do not
materially adversely affect the rights of holders of Preferred Securities (in
which case no vote will be required), the Guarantee may be amended only with the
prior approval of the holders of at least a majority in liquidation preference
of all the outstanding Preferred Securities. All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of CellNet and shall inure to the benefit of the
holders of the Preferred Securities then outstanding. Except in connection with
any permitted merger or consolidation of CellNet with or into another entity or
any permitted sale, transfer or lease of CellNet's assets to another entity,
CellNet may not assign its rights or delegate its obligations under the
Guarantee without the prior approval of the holders of at least a majority in
liquidation preference of the Preferred Securities then outstanding.

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TERMINATION OF THE GUARANTEE. The Guarantee will terminate as to each
holder of the Preferred Securities upon (i) full payment of the redemption price
of all Preferred Securities held by such holder (ii) distribution to such holder
of the Preferred Securities of all of such holder's pro rata share of the assets
of Funding, including the CellNet Preferred Stock, any interest on and principal
of the Treasury Strips that are held in the Escrow Account and any Common Stock
that Funding received from CellNet as dividend (or otherwise) and has not
distributed as dividend on the Preferred Securities or sold in the open market
or (iii) the exchange of all of such holder's Preferred Securities into Common
Stock.

STATUS OF THE GUARANTEE; SUBORDINATION. The Guarantee constitutes an
unsecured obligation of CellNet and ranks subordinate and junior to all existing
and future other liabilities and obligations (including subordinated debt not
expressly subordinated to the Guarantee and general unsecured obligations such
as trade payables) of CellNet and senior to the Common Stock.

MERGER, CONSOLIDATION OR SALE OF ASSETS OF FUNDING

Funding may not consolidate with, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any entity, except as described below. Funding
may, in order to avoid federal income tax or Investment Company Act of 1940 (the
"1940 Act") considerations adverse to CellNet or Funding or the holders of the
Preferred Securities, without the consent of the holders of the Preferred
Securities, consolidate with, merge with or into, or be replaced by a limited
partnership or trust organized as such under the laws of any state of the United
States of America, provided that (i) such successor entity either (x) expressly
assumes all of the obligations of Funding under the Preferred Securities or (y)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank, with respect to participation in the profits
or assets of the successor entity, at least as high as the Preferred Securities
rank with respect to payment of dividends and distribution of assets upon the
liquidation, dissolution or winding-up of Funding, (ii) CellNet expressly
acknowledges such successor entity as the holder of the CellNet Preferred Stock
and its obligations under the Guarantee with respect to the Successor
Securities, (iii) such merger, consolidation or replacement does not cause the
Preferred Securities (or any Successor Securities) to be delisted by any
national securities exchange or other organization on which the Preferred
Securities are then listed, (iv) such merger, consolidation or replacement does
not cause the Preferred Securities (or any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation or replacement does not adversely affect the powers,
preferences and other special rights of the holders of the Preferred Securities
(or any Successor Securities) in any material respect (other than with respect
to any dilution of the holders' interest in the new entity), and (vi) prior to
such merger, consolidation or replacement, CellNet has received an opinion of
nationally recognized independent counsel to Funding experienced in such matters
to the effect that (x) such successor entity will be treated as a partnership or
as a trust, as appropriate, for federal income tax purposes, (y) following such
merger, consolidation or replacement, CellNet and such successor entity will be
in compliance with the 1940 Act without registering thereunder as an investment
company and (z) such merger, consolidation or replacement will not adversely
affect the limited liability of the holders of the Preferred Securities or
Successor Securities.

MISCELLANEOUS

The manager of Funding is authorized and directed to conduct its affairs and
to operate in such a way that Funding will not be deemed to be an "investment
company" required to be registered under the 1940 Act or taxed as a corporation
for federal income tax purposes. In this connection, the manager of Funding is
authorized to take any action not inconsistent with applicable law or the
Operating Agreement that does not adversely affect the interests of the holders
of the Preferred Securities and that the manager of Funding determines in its
discretion to be necessary or desirable for such purposes.

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DESCRIPTION OF CELLNET PREFERRED STOCK

Set forth below is a description of the specific terms of the CellNet
Preferred Stock in which Funding will invest part of the proceeds from the
Offering. See "Use of Proceeds." The following summary of certain material terms
and provisions does not purport to be complete and is subject to, and qualified
in its entirety by reference to the Certificate of Designation. The CellNet
Preferred Stock will be issued pursuant to the Certificate of Designation.

GENERAL. CellNet is authorized to issue 15,000,000 shares of preferred
stock, $.001 par value per share. On the date of this Prospectus, no shares of
preferred stock are outstanding. The board of directors of CellNet has
authorized the issuance of up to 8,625 shares of a series of exchangeable
preferred stock (the "CellNet Preferred Stock"). The CellNet Preferred Stock
will be fully paid and nonassessable, and the holders thereof will not have any
subscription or preemptive rights related thereto. The CellNet Preferred Stock
will be issued in denominations of $10,000 liquidation preference and any
integral multiple thereof.

RANKING. The CellNet Preferred Stock will rank, with respect to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of CellNet, (i) senior to all classes of Common Stock of CellNet and to each
other class of capital stock or series of preferred stock established after the
date of this Prospectus by CellNet's board of directors, the terms of which do
not expressly provide that it ranks senior to or on a parity with the CellNet
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of CellNet (collectively referred to
with the common stock of CellNet as "CellNet Junior Securities"); (ii) on a
parity with any class of capital stock or series of preferred stock issued by
CellNet established after the date of this Prospectus by CellNet's board of
directors, the terms of which expressly provide that such class or series will
rank on a parity with the CellNet Preferred Stock as to dividend distributions
and distributions upon the liquidation, winding-up and dissolution of CellNet
(collectively referred to as "CellNet Parity Securities") and (iii) junior to
each class of capital stock or series of preferred stock issued by CellNet
established after the date of this Prospectus by CellNet's board of directors,
the terms of which expressly provide that such class or series will rank senior
to the CellNet Preferred Stock as to dividend distributions and distributions
upon liquidation, winding-up and dissolution of CellNet (collectively referred
to as "CellNet Senior Securities"). The CellNet Preferred Stock will be subject
to the issuance of series of CellNet Junior Securities, CellNet Parity
Securities and CellNet Senior Securities, and the issuance of any new class of
CellNet Junior Securities and/or CellNet Parity Securities pursuant to any
stockholder rights plan adopted by the Company shall not require the approval of
the holders of the CellNet Preferred Stock. CellNet, however, may not issue any
new class of CellNet Senior Securities without the approval of the holders of at
least a majority of the shares of the CellNet Preferred Stock then outstanding,
voting or consenting, as the case may be, separately as one class.

DIVIDENDS. Dividends on the CellNet Preferred Stock will be payable
quarterly until August 1, 2001, in additional shares of CellNet Preferred Stock.
After August 1, 2001, through May 1, 2010, the dividends will be payable in
shares of Common Stock (or, at CellNet's option in cash, or any combination of
cash and Common Stock) such that the number of shares of Common Stock (plus any
cash) paid as dividends will (i) enable Funding to transfer such shares to the
holders of the Preferred Securities in payment of dividends on the Preferred
Securities or (ii) be sufficient, when sold in the open market by Funding for
Funding to make its dividend payments on the Preferred Securities on the
relevant Dividend Payment Date. However, the Indenture restricts the payment of
cash dividends by CellNet, and future agreements may provide for restrictions on
the payment of cash dividends. CellNet does not expect to pay cash dividends on
the CellNet Preferred Stock and in any event could not pay cash dividends unless
it has funds legally available therefor.

VOTING RIGHTS. The holders of shares of CellNet Preferred Stock will have
no voting rights, except as otherwise required by law and except as set forth
below. The Certificate of Designation governing the CellNet Preferred Stock
provides that CellNet may not, without the approval of the holders of a majority

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of the CellNet Preferred Stock, amend such Certificate of Designation or the
Certificate of Incorporation of CellNet so as to have a material adverse effect
on the specific rights, preferences, privileges or voting rights of holders of
shares of the CellNet Preferred Stock, or cause the dissolution, winding-up or
termination of Funding. The Certificate of Designation also provides that
CellNet may not amend the provision which obligates CellNet, in the event it
elects not to redeem the CellNet Preferred Stock on the Final Dividend Date (as
defined), to make an investment in Funding sufficient to enable Funding to
redeem all of the Preferred Securities on the Mandatory Redemption Date at 100%
of the aggregate liquidation preference of the Preferred Securities, plus any
accrued and unpaid dividends thereon, without the consent of each holder of
Preferred Securities affected thereby. Funding is expected to be the sole holder
of the CellNet Preferred Stock. Funding will not grant such approval without the
consent of the holders of a majority of the shares of the Preferred Securities
then outstanding.

EXCHANGE OF THE CELLNET PREFERRED STOCK. The CellNet Preferred Stock will
be exchangeable into Common Stock at the option of Funding (upon request by a
holder of the Preferred Securities to exchange Preferred Securities for Common
Stock) at any time prior to the business day immediately preceding the date of
repayment of such CellNet Preferred Stock based on the exchange rate of the
Preferred Securities as described under "Description of the Preferred
Securities--Exchange Rights."

LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of CellNet, holders of CellNet Preferred Stock will be
entitled to be paid, out of the assets of CellNet available for distribution,
$10,000 per share of CellNet Preferred Stock, plus an amount in cash equal to
accumulated and unpaid dividends thereon to the date fixed for liquidation,
dissolution or winding-up (including an amount equal to a prorated dividend for
the period from the last dividend payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on any
CellNet Junior Securities, including, without limitation, Common Stock. If, upon
any voluntary or involuntary liquidation, dissolution or winding-up of CellNet,
the amounts payable with respect to the CellNet Preferred Stock and all other
CellNet Parity Securities are not paid in full, the holders of the CellNet
Preferred Stock and the CellNet Parity Securities will share equally and ratably
in any distribution of assets of CellNet with respect to the CellNet Preferred
Stock and CellNet Parity Securities, in proportion to the full liquidation
preference and accumulated and unpaid dividends to which each is entitled. After
payment of the full amount of the liquidation preferences and accumulated and
unpaid dividends to which they are entitled, the holders of shares of CellNet
Preferred Stock will not be entitled to any further participation in any
distribution of assets of CellNet.

OPTIONAL REDEMPTION ON FINAL DIVIDEND DATE. CellNet may, at its option,
redeem the CellNet Preferred Stock on the date which is two business days prior
to May 1, 2010 (the "Final Dividend Date") at 100% of its liquidation
preference, plus any accrued and unpaid dividends thereon. If CellNet elects not
to so redeem the CellNet Preferred Stock, then CellNet will be required to make
an investment in Funding sufficient to enable Funding to redeem the Preferred
Securities at 100% of the aggregate liquidation preference of the Preferred
Securities, plus any accrued and unpaid dividends thereon, two business days
prior to May 1, 2010. The Certificate of Designation will provide that CellNet's
obligation to make this investment in the event it elects not to redeem the
CellNet Preferred Stock on the Final Dividend Date shall inure to the benefit of
the holders of Preferred Securities and that such holders will be able to
enforce such obligation directly as third-party beneficiaries. CellNet may at
its option make such redemption or investment in cash or Common Stock, or any
combination of cash and Common Stock. Any Common Stock shall be valued at 100%
of the Average Market Value of such Common Stock for the purposes of such
redemption or payment.

BOOK-ENTRY AND SETTLEMENT

If distributed to holders of the Preferred Securities in connection with a
dissolution, winding-up or liquidation of Funding, the CellNet Preferred Stock
will be issued in a form corresponding to the form of the Preferred Securities.

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DESCRIPTION OF CELLNET CAPITAL STOCK

THE AUTHORIZED CAPITAL STOCK OF THE COMPANY CONSISTS OF 100,000,000 SHARES
OF COMMON STOCK AND 15,000,000 SHARES OF PREFERRED STOCK. THE FOLLOWING SUMMARY
OF CERTAIN PROVISIONS OF THE TERMS OF THE COMPANY'S COMMON AND PREFERRED STOCK
DOES NOT PURPORT TO BE COMPLETE AND ITS SUBJECT TO, AND QUALIFIED BY, THE
PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION.

COMMON STOCK

As of March 31, 1998, there were 41,917,026 shares of Common Stock
outstanding which were held of record by 951 stockholders.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, except that, in the election of
directors, the holders are entitled to cumulative voting. Under the terms of the
Shareholders' Agreement, so long as certain parties to the Shareholders'
Agreement continue to hold not less than 700,000 shares of Common Stock (as such
number is adjusted for stock splits, consolidations or other similar events),
the Company is obligated to nominate for election certain stockholders as
directors at each meeting of the Company's stockholders at which a vote for
directors will be taken, so long as each stockholder holds a minimum number of
shares of Common Stock. The intent of the Shareholders' Agreement is to give
certain stockholders greater influence over the management of the Company than
they would otherwise have and to provide certain stockholders with, among other
things, certain registration, first refusal, co-sale and other rights. See
"Management."

Subject to preferences that may be applicable to any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no pre-emptive
or conversion or other subscription rights. See "--Rights of First Refusal" and
"--Other Rights." There are no redemption or sinking fund provisions applicable
to the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable.

PREFERRED STOCK

The Company is authorized to issue 15,000,000 shares of undesignated
Preferred Stock, none of which is outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue the undesignated
Preferred Stock in one or more series, to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and the
voting and other rights of the holders of Common Stock. With the exception of
the CellNet Preferred Stock to be issued to Funding, the Company currently has
no plans to issue any additional Preferred Stock. See "Description of CellNet
Preferred Stock."

WARRANTS

As of March 31, 1998, the Company had outstanding warrants to purchase an
aggregate of 8,992,517 shares of Common Stock. Such outstanding warrants consist
of (i) warrants to purchase 50,000 shares of Common Stock at an exercise price
of $2.00 per share, which warrants will expire on February 24, 1999 and (ii)
warrants to purchase 8,942,517 shares of Common Stock at an exercise price of
$14.30 per share, which

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were granted in connection with the issuance and sale of the 1997 Notes (the
"1997 Warrants"). The 1997 Warrants are exercisable commencing on September 29,
1998 and expire on October 1, 2007.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 9,567,140 shares of Common Stock and their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act pursuant to the Shareholders' Agreement. Under the
Shareholders' Agreement, if the Company proposes to register any of its
securities under the Securities Act, the holders are entitled to notice of such
proposed registration and the opportunity to include their shares therein,
subject to certain conditions and limitations including the right of the
underwriters of an offering to limit the number of shares included in such
registration to 25% of the total number of shares to be registered in certain
circumstances. The holders may also require that the Company file up to two
registration statements under the Securities Act with respect to underwritten
public offerings of their shares at any time. Furthermore, the holders may
require the Company to register their shares on Form S-3 if such form is
available to the Company. In addition, holders who purchased Series CC Preferred
Stock are entitled to initiate two separate demand registrations with respect to
an underwritten public offering of the shares of Common Stock issued upon
conversion of the Series CC Preferred Stock, subject to certain other conditions
and limitations. Other holders may participate in such registration, provided
that in the event of an underwriters' cutback, the number of shares that may be
included in such registration would be subject to certain allocations. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. All registration rights will terminate as to any holder upon
the later to occur of (i) one year after the Company's initial public offering
or (ii) such time as such holder may sell all or part of his or her shares under
Rule 144 of the Securities Act in any three month period. Prior to the
consummation of this Offering the Company will obtain waivers from holders of
the foregoing registration rights as to the exercise of such rights in
conjunction with this Offering.

Under the terms of a Warrant Registration Rights Agreement dated September
29, 1997 (the "1997 Warrant Registration Rights Agreement"), the Company is
required to use its best efforts to cause to be declared effective under the
Securities Act, by no later than September 29, 1998, a shelf registration
statement relating to the 1997 Warrants. The Company is required to use
reasonable efforts to maintain the effectiveness of such shelf registration
statement until such time as all 1997 Warrants have been exercised and the 1997
Warrants have been resold. The Company is obligated to pay all expenses
associated with such registration.

The Company has also agreed to register up to one-half of the 1,579,404
shares of Common Stock purchased by NSP, UE and BEn in private placements upon
request at any time.

RIGHTS OF FIRST REFUSAL

Under the Shareholders' Agreement, certain holders who purchased Series CC
Preferred Stock have a right of first refusal to purchase, at the same price and
on the same general terms, a pro rata portion of equity securities that the
Company proposes to issue in certain transactions, including equity securities
proposed to be issued to any public or private utility or an affiliate of such
utility, and have a right of first refusal to purchase a pro rata portion of any
equity securities that any Subsidiary of the Company proposes to issue to any
public or private utility or an affiliate of such utility if the Subsidiary's
business is unrelated to the market area of such utility or if such securities
are convertible into equity securities of the Company. Such pro rata portion is
based on the ratio of the number of shares of Common Stock held by such holder
to the total number of shares of Common Stock then outstanding, including shares
of Common Stock issuable upon the exercise of "in the money" options and
warrants, at the time of issuance of such equity securities. This right of first
refusal terminates three years after the closing date of the Company's initial
public offering.

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OTHER RIGHTS

Under the Shareholders' Agreement, holders who purchased Series CC Preferred
Stock have the right to co-invest on similar terms and conditions in any foreign
investments, partnerships, or joint ventures involving the Company which include
financing from purely financial (as compared to strategic) investors. The
co-investment rights terminate three years after the closing date of the
Company's initial public offering.

Under the Shareholders' Agreement, in the event that any holder of shares of
the Company's equity securities who is a party to such agreement intends to
transfer (other than to an affiliate) any such shares to a buyer who owns or
will acquire as a result of the sale voting stock equal to 20% or more of the
Company's outstanding equity securities, the parties to the Shareholders'
Agreement will have the right to sell a pro rata portion of their shares to the
buyer in such transaction. In the event that any holder of shares of the
Company's equity securities who is a party to the Shareholders' Agreement
intends to acquire (other than from an affiliate) additional voting stock, and
such holder owns or will acquire as a result of such purchase 20% or more of the
Company's voting stock, the parties to the Shareholders' Agreement also have the
right to sell to such purchasing holder a pro rata portion of the voting stock
proposed to be acquired in such transaction. This co-sale right terminates three
years after the closing date of the Company's initial public offering.

In addition, NSP has a right to participate in future public offerings of
newly issued shares of Common Stock by the Company. NSP will be entitled to
purchase a pro rata portion of the shares that the Company proposes to offer to
the public based on the ratio of the number of shares originally purchased by
NSP in the private placement and owned on the date of such public offering to
the total number of shares of Common Stock then outstanding before giving effect
to such public offering. However, NSP may not exercise such participation rights
to the extent that NSP's percentage ownership of the Common Stock after such new
offering would exceed the percentage ownership of NSP as of the closing date of
the Company's initial public offering (after giving effect to the release to NSP
of any shares previously subject to escrow). NSP's participation shall be on the
same terms and conditions as the public investors in such public offering. NSP's
participation right terminates two years after the effective date of the
Company's initial public offering. The Company intends to obtain a waiver from
NSP of its participation right with respect to this Offering.

CERTAIN PROVISIONS OF DELAWARE LAW

The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held by
stockholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is The Bank of New
York.

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes certain material anticipated United States
federal income tax considerations arising from the purchase, ownership and
disposition of the Preferred Securities. Except where noted, it deals only with
Preferred Securities held as capital assets by United States Holders who
purchased such securities upon original issuance and does not address a holder's
particular circumstances (such as liability for alternative minimum tax) or
special situations, such as those of dealers in securities or currencies,
financial institutions, life insurance companies, foreign corporations, persons
who are not citizens or residents of the United States or persons who hold
Preferred Securities as a part of a hedging or conversion transaction or a
straddle, constructive sale or other risk reduction transaction. In addition,
the following discussion does not address the tax consequences of the laws of
any state, locality or foreign jurisdiction. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations, rulings and judicial decisions thereunder as of
the date hereof, and such authorities may be repealed, revoked, modified, or
interpreted so as to result in federal income tax consequences different from
those discussed below. In addition, the discussion below includes (and is based
on) certain matters as to which CellNet has made determinations which it
believes are accurate. Nevertheless, some of the tax consequences are uncertain.
ALL PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES.

As used herein, a "United States Holder" means a beneficial owner of
Preferred Securities that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, or a trust the administration of which is subject to the primary
supervision of a court within the United States and for which one or more United
States persons have the authority to control all substantial decisions. A
foreign individual may, subject to certain exceptions, be deemed to be a
resident (as opposed to a non-resident alien) of the United States by virtue of
being present in the United States on at least 31 days in the calendar year and
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year).

A non-United States Holder may be subject to certain significant tax
consequences not applicable to United States Holders, including certain
withholding requirements, which are not discussed herein. Thus, all prospective
purchasers that would be non-United States Holders should consult their own tax
advisors regarding the tax consequences to them of the purchase, ownership and
disposition of the Preferred Securities.

PARTNERSHIP STATUS OF FUNDING

An entity that is classified and treated as a partnership for federal income
tax purposes is not a taxable entity and incurs no federal income tax liability.
Instead, each partner is required to take into account its allocable share of
items of income, gain, loss and deduction of the partnership in computing the
partner's federal income tax liability, regardless of whether cash distributions
are made. Distributions by a partnership to a partner are generally not taxable
unless the amount of any cash distributed is in excess of the partner's adjusted
tax basis in its partnership interest.

No ruling has been or will be sought from the IRS as to the status of
Funding as a partnership for federal income tax purposes. Instead, Funding has
relied on the opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, that it will be classified and treated as a partnership for United
States federal income tax purposes. Such opinion is based upon the Code, the
regulations thereunder, published revenue rulings and court decisions and upon,
among other things, Funding's representations that (i) it will

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not earn income other than from the CellNet Preferred Stock and from the
Treasury Strips and (ii) it will not elect to be treated as a corporation. This
opinion is not binding on the IRS.

TAX CONSEQUENCES TO UNITED STATES HOLDERS

FLOW-THROUGH OF TAXABLE INCOME

No federal income tax will be paid by Funding. Instead, each Preferred
Securityholder will be required to report on its income tax return its allocable
share of the income, gains, losses and deductions of Funding without regard to
whether corresponding cash distributions are received by such Preferred
Securityholder. Consequently, a Preferred Securityholder may be allocated income
from Funding even if such Preferred Securityholder has not received a cash
distribution. Each Preferred Securityholder will be required to include in
income its allocable share of income, gains, losses and deduction of Funding for
the taxable year of Funding ending with or within the taxable year of the
Preferred Securityholder. The taxable income of Funding will generally be
dividend income from, and capital gains recognized with respect to, the CellNet
Preferred Stock and interest income on, and capital gain recognized with respect
to, the Treasury Strips.

The Preferred Securityholders will first be allocated income and gain of
Funding in an amount so that all cumulative allocations of taxable income and
gain equals all cumulative dividend distributions to the Preferred
Securityholders. Any remaining taxable income and gain generally will then be
allocated to CellNet (except for deemed dividends resulting from the optional
redemption or because of the adjustment in the exchange rate, which dividends
will generally be allocated to the Preferred Securityholders). These allocation
provisions are designed to reconcile tax allocations to economic allocations.
However, these allocations may not in all circumstances comply with the
technical requirements set forth in the Treasury regulations. Consequently, no
assurance can be given that the IRS will not challenge these allocations. If
these allocations are successfully challenged by the IRS, the amount of taxable
income or loss allocated to Preferred Securityholders for federal income tax
purposes may be increased and/or reduced or the character of such income may be
modified.

Funding does not presently intend to make an election under Section 754 of
the Code. As a result, a purchaser of Preferred Securities will not be permitted
to adjust its allocable share of taxable income and gain from Funding to reflect
any difference between its purchase price for the Preferred Securities and
Funding's underlying tax basis for its assets.

TREATMENT OF DISTRIBUTIONS BY FUNDING

Distributions by Funding to a Preferred Securityholder generally will not be
taxable to the Preferred Securityholder for federal income tax purposes to the
extent of such Preferred Securityholder's tax basis in its Preferred Securities
immediately before the distribution. Cash distributions in excess of a Preferred
Securityholder's tax basis in its Preferred Securities generally will be
considered to be gain from the sale or exchange of the Preferred Securities,
taxable in accordance with the rules described under "--Disposition of Preferred
Securities" below. To the extent Funding distributes Common Stock other than in
liquidation of such Preferred Securities, the Preferred Securityholder will
recognize no gain or loss and will have a tax basis in such stock equal to the
lesser of (i) tax basis of such stock in the hands of Funding or (ii) such
Preferred Securityholder's tax basis in its Preferred Securities reduced by the
amount of any cash distributed in the non-liquidating distribution. If the
Common Stock distribution is in liquidation of such Preferred Securities, the
Preferred Securityholder will recognize no gain or loss and will have a tax
basis in the Common Stock received equal to its tax basis in its Preferred
Securities reduced by the amount of any cash distributed in liquidation of its
Preferred Securities.

TAX BASIS OF PREFERRED SECURITIES

A Preferred Securityholder's initial tax basis for its Preferred Securities
will be the amount it paid for the Preferred Securities. That basis generally
will be increased by its share of Funding's income and

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generally will be decreased (but not below zero) by distributions from Funding
and by the Preferred Securityholder's share of Funding's losses, if any.
Non-liquidating distributions of Common Stock by Funding will reduce the
Preferred Securityholder's tax basis in the Preferred Securities (but not below
zero) by the amount of Funding's tax basis in such distributed stock. In
addition, pursuant to Section 1059 of the Code, a Preferred Securityholder's tax
basis in its Preferred Securities may be reduced by its share of any
"extraordinary" dividends received by Funding. See "--Dividends on the CellNet
Preferred Stock" below.

INTEREST ON TREASURY STRIPS

Funding will purchase interest portions of stripped United States Treasury
Obligations which are treated as bonds that were originally issued at a discount
("original issue discount"). Original issue discount represents interest for
federal income tax purposes and can generally be defined as the difference
between the price at which a bond was issued and its stated redemption price at
maturity. For purposes of the preceding sentence, stripped obligations, such as
the Treasury Strips, which consist of a right to receive interest, will be
treated by Funding as originally issued on their purchase date at an issue price
equal to their respective purchase prices thereof. Original issue discount on
stripped Treasury Obligations (which were issued or treated as issued on or
after July 2, 1982) is deemed earned based on a compounded, constant yield to
maturity over the life of such obligation, taking into account the compounding
of accrued interest at least annually, resulting in an increasing amount of
original issue discount includible in income each year. If the stripped Treasury
Obligation has a maturity of one year or less, the original issue discount may,
in certain circumstances, be treated as interest income upon maturity or
disposition rather than over the term of the obligation. Each Preferred
Securityholder is required to include in income its allocable share of original
issue discount which accrues each year.

DIVIDENDS ON THE CELLNET PREFERRED STOCK

Distributions of cash or of additional CellNet Preferred Stock or Common
Stock on the CellNet Preferred Stock will generally be treated as dividends to
Funding (and, in turn, to the Preferred Securityholders) to the extent of
CellNet's current and accumulated earnings and profits as determined under
United States federal income tax principles. The amount of CellNet's earnings
and profits at any time will depend upon the future actions and financial
performance of CellNet. The amount of a distribution of additional CellNet
Preferred Stock or Common Stock will equal the fair market value of the
additional CellNet Preferred Stock or Common Stock distribution on the date of
the distribution.

CellNet believes that it does not presently have any current or accumulated
earnings and profits. Consequently, unless CellNet generates earnings and
profits in the future, distributions with respect to the CellNet Preferred Stock
will exceed CellNet's current and accumulated earnings and profits. Such
distributions will be treated as a nontaxable return of capital and will be
applied against and reduce (by the then fair market value of the distributed
CellNet Preferred Stock or Common Stock) the tax basis of the CellNet Preferred
Stock in the hands of Funding with respect to which such distributions are made
(but not below zero), thus increasing the amount of any gain or reducing any
loss which would otherwise be realized by Funding upon a redemption or other
disposition of such CellNet Preferred Stock. The amount of any such distribution
which exceeds the tax basis of the CellNet Preferred Stock in the hands of
Funding will be treated as capital gain to Funding (and, in turn, to the
Preferred Securityholders) and should be either long-term or short-term capital
gain depending on Funding's holding period in the CellNet Preferred Stock. The
CellNet Preferred Stock or Common Stock received by Funding as a dividend will
have a tax basis to Funding equal to its fair market value on the date of
distribution.

Under Section 243 of the Code, corporate Preferred Securityholders generally
will be able to deduct 70% of the amount of their pro-rata share of any
distributions received by Funding that constitute dividends. There are, however,
many exceptions and restrictions relating to the availability of such
dividends-received deduction. Section 246A of the Code reduces the
dividends-received deduction allowed

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to a corporate stockholder that has incurred indebtedness "directly
attributable" to its investment in portfolio stock. Section 246(c) of the Code
requires that, in order to be eligible for the dividends-received deduction, a
corporate stockholder must generally hold the share of stock for a 46-day
minimum holding period during the 90-day period beginning on the date which is
45 days before the date on which such share becomes ex-dividend with respect to
such dividend, or, in certain circumstances, for a 91-day minimum holding period
during the 180-day period beginning on the date which is 90 days before the date
on which such shares become ex-dividend with respect to such dividend. A
taxpayer's holding period for these purposes is suspended during any period in
which a stockholder has certain options or contractual obligations with respect
to substantially identical stock or holds one or more other positions with
respect to substantially identical stock that diminishes the risk of loss from
holding the stock. The IRS may take the position that these restrictions
relating to the availability of the dividends-received deduction apply to a
Preferred Securityholder who indirectly owns the CellNet Preferred Stock held by
Funding by applying these restrictions based on the Preferred Securityholder's
holding period in the Preferred Securities (rather than upon Funding's holding
period in the CellNet Preferred Stock).

Under Section 1059 of the Code, a corporate stockholder is required to
reduce its tax basis (but not below zero) in stock by the nontaxed portion
(including by reason of the dividends received deduction) of any "extraordinary
dividend" if such stock has not been held for more than two years before the
earliest of the date such dividend is declared, announced or agreed to. A
distribution on the CellNet Preferred Stock generally would be an extraordinary
dividend if it (i) equals or exceeds 5% of the corporate stockholder's adjusted
tax basis in the CellNet Preferred Stock, treating all dividends having
ex-dividend dates within an 85-day period as one dividend or (ii) exceeds 20% of
the corporate stockholder's adjusted tax basis in such stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. In
determining whether a dividend paid on preferred stock is an extraordinary
dividend, a corporate stockholder may elect to substitute the fair market value
of the preferred stock for such stockholder's tax basis for purposes of applying
these tests, provided that such fair market value is established to the
satisfaction of the Secretary of Treasury as of the day before the ex-dividend
date. An extraordinary dividend also currently includes any amount treated as a
dividend in the case of a redemption that is either non-pro-rata as to all
stockholders or in partial liquidation of CellNet, regardless of the
stockholder's holding period and regardless of the size of the dividend. Section
1059, if applicable, is applied to Funding by treating each Preferred
Securityholder as the owner of its share of the CellNet Preferred Stock held by
Funding and thereby having Funding adjust its tax basis in the CellNet Preferred
Stock and having each Preferred Securityholder make a corresponding adjustment
to its tax basis in the Preferred Securities. If any part of the nontaxed
portion of an extraordinary dividend is not applied to reduce the corporate
Preferred Securityholder's tax basis as a result of the limitation on reducing
such basis below zero, such part will be treated as gain for the taxable year in
which the extraordinary dividend is received.

Special rules exist with respect to extraordinary dividends for "qualified
preferred dividends." A qualified preferred dividend is any fixed dividend
payable with respect to any share of stock which (i) provides for fixed
preferred dividends payable not less frequently than annually and (ii) is not in
arrears as to dividends at the time the holder acquires such stock. A qualified
preferred dividend does not include any dividend payable with respect to any
share of stock if the actual rate of return on such stock exceeds 15%. Section
1059 does not apply to qualified preferred dividends if the corporate
stockholder holds such stock for more than five years. If the stockholder
disposes of such stock before it has been held for more than five years, the
amount subject to extraordinary dividend treatment with respect to qualified
preferred dividends is limited to the qualified preferred dividends paid with
respect to such stock during the period the taxpayer held such stock, over the
qualified preferred dividends which would have been paid during such period on
the basis of the stated rate of return. Actual or stated rates of return are the
actual or stated dividends expressed as a percentage of the lesser of (1) the
stockholder's tax basis in such stock or (2) the liquidation preference of such
stock. CORPORATE PREFERRED SECURITYHOLDERS ARE

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URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICATION OF
SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES.

A corporate Preferred Securityholder's liability for alternative minimum tax
may be affected by the portion of the dividends received which such corporate
Preferred Securityholder deducts in computing taxable income. This results from
the fact that corporate stockholders are required to increase alternative
minimum taxable income by 75% of the excess of current earnings and profits
(with certain adjustments) over alternative minimum taxable income (determined
without regard to earnings and profits adjustments or the alternative tax net
operating loss deduction).

REDEMPTION PREMIUM

Under Section 305(c) of the Code and the applicable Treasury regulations
thereunder, if the redemption price of CellNet Preferred Stock exceeds its issue
price, the difference ("redemption premium") may be taxable as a constructive
distribution of additional CellNet Preferred Stock to Funding (treated as a
dividend to the extent of CellNet's current and accumulated earnings and profits
and otherwise subject to the treatment described above for distributions) over a
certain period. Because the CellNet Preferred Stock provides for an optional
right of redemption by CellNet at a price in excess of the issue price, Funding
could be required to recognize such redemption premium under a constant interest
rate method if, based on all of the facts and circumstances, the optional
redemption is more likely than not to occur. If stock may be redeemed at more
than one time, the time and price at which such redemption is most likely to
occur must be determined based on all of the facts and circumstances. However,
the Treasury regulations provide that such redemption premium is not taxable as
a constructive distribution if it is solely in the nature of a penalty for
premature redemption. A redemption premium is solely in the nature of a penalty
for premature redemption if it is paid as a result of changes in economic or
market conditions over which neither the issuer nor the holder has control.
Regardless of whether the optional redemption is more likely than not to occur
or whether the redemption premium is solely in the nature of a penalty for
premature redemption, constructive dividend treatment will not result if the
redemption premium does not exceed a de minimis amount. Treatment of the CellNet
Preferred Stock under Section 305 is unclear. Nevertheless, CellNet intends to
take the position that the existence of CellNet's optional redemption right will
not result in a constructive distribution to Funding. If the IRS were to assert
successfully that a constructive distribution occurred, any resulting income
would be allocated to the Preferred Securityholders without the receipt of any
cash related thereto.

ADJUSTMENT OF EXCHANGE RATE

Treasury regulations promulgated under Section 305 of the Code would treat
Funding as having received a constructive distribution from CellNet in the event
the exchange ratio for the CellNet Preferred Stock is adjusted if (i) as a
result of such adjustment, the proportionate interest (measured by the quantum
of Common Stock into which the CellNet Preferred Stock is exchangeable) of
Funding in the assets or earnings and profits of CellNet is increased, and (ii)
the adjustment is not made pursuant to a bona fide and reasonable antidilution
formula. An adjustment in the exchange rate would not be considered made
pursuant to such a formula if the adjustment is made to compensate for certain
taxable distributions with respect to the Common Stock. Thus, under certain
circumstances, an adjustment in the exchange rate of the CellNet Preferred Stock
may result in a deemed distribution (which would constitute dividend income to
Funding to the extent of the current or accumulated earnings and profits of
CellNet). Funding (and, in turn, the Preferred Securityholders) may be required
to include such deemed dividend income in gross income but would not receive any
cash related thereto.

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<PAGE>
REDEMPTION OF CELLNET PREFERRED STOCK

A redemption of the CellNet Preferred Stock, in whole or in part, for cash
will be a taxable transaction on which Funding (and, in turn, the Preferred
Securityholders) will generally recognize capital gain or loss equal to the
difference between the cash received and its adjusted tax basis in the redeemed
stock (except to the extent of amounts received on the exchange that are
attributable to declared dividends, which will be treated in the same manner as
distributions described above or to the extent the redemption were considered
essentially equivalent to a dividend under Section 302(b)(1) of the Code). Such
gain or loss will be long-term if Funding's holding period in the CellNet
Preferred Stock exceeds one year. To the extent that CellNet redeems the CellNet
Preferred Stock, in whole or in part, utilizing Common Stock plus cash, Funding
(and, in turn, the Preferred Securityholders) should recognize gain equal to the
lesser of (i) the gain that would have been recognized if only cash had been
utilized in the redemption (as described above) and (ii) the amount of cash
actually utilized in such redemption. If only Common Stock is utilized by
CellNet in the redemption, no gain or loss should be recognized by Funding.
Funding should have a tax basis in the Common Stock received equal to its tax
basis in the CellNet Preferred Stock redeemed increased by any gain recognized
as a result of any cash given in the redemption and decreased by the amount of
cash received. The holding period in the CellNet Preferred Stock should be
tacked to the Common Stock received. The tax effect of the resulting redemption
of the Preferred Securities is discussed below under "--Disposition of Preferred
Securities."

To the extent that the Preferred Securities convert into Common Stock
pursuant to the Automatic Exchange, or a holder of Preferred Securities
exercises its exchange right, CellNet will redeem CellNet Preferred Stock from
Funding and, in certain circumstances, exchange Common Stock for a portion of
the Treasury Strips held by Funding. The tax consequences associated with the
redemption of CellNet Preferred Stock for Common Stock are described above. The
tax consequences associated with a liquidating distribution by Funding of Common
Stock to a Preferred Securityholder are described above. See "--Treatment of
Distributions by Funding." The exchange by Funding of Treasury Strips for Common
Stock should constitute a taxable purchase of such shares by Funding. Funding
and, in turn, the Preferred Securityholders should recognize gain on such
purchase to the extent that the fair market value of the Treasury Strips exceeds
the tax basis allocable to that portion of the Treasury Strips being exchanged
and should recognize loss to the extent the tax basis allocable to that portion
of the Treasury Strips exceeds the fair market value of the Treasury Strips
being exchanged. In addition, the Common Stock acquired through the exchange of
Treasury Strips should have a tax basis equal to its fair market value on the
date of such exchange.

DISPOSITION OF PREFERRED SECURITIES

Gain or loss generally will be recognized on a sale of Preferred Securities,
including a redemption for cash (but not including an exchange with Funding of
Preferred Securities for Common Stock), equal to the difference between the
amount realized and the Preferred Securityholder's adjusted tax basis for the
Preferred Securities sold. The Preferred Securityholder's adjusted tax basis in
its Preferred Securities will be adjusted prior to the sale to reflect such
holder's pro-rata share of Funding's income, gains, losses or deductions that
flowed through prior to such disposition (including gain or loss resulting from
a redemption of the CellNet Preferred Stock). Gain or loss recognized by a
Preferred Securityholder on the sale or exchange of Preferred Securities held
for more than one year will generally be taxable as long-term capital gain or
loss. Generally, the maximum effective United States federal corporate income
tax rate for all types of income, including dividends (after the application of
the dividends-received deduction), interest income and capital gains, is 35%.
The maximum effective United States federal individual income tax rate
applicable (i) to interest and dividend income is 39.6% and (ii) to gains
resulting from the sale of capital assets held for longer than one year but less
than 18 months is 28%. The maximum effective United States federal individual
income tax rate on long-term capital gains will decrease to 20% if the Preferred
Securities are held for more than 18 months.

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<PAGE>

Although not free from doubt, a Preferred Securityholder should not
recognize gain or loss upon the exchange with Funding of Preferred Securities
for Common Stock (whether pursuant to an exchange initiated by the holder or
following redemption by CellNet of the CellNet Preferred Stock) except to the
extent the holder receives cash or to the extent of a gain or loss realized by
Funding on its resulting exchange of its Treasury Strips for Common Stock. A
Preferred Securityholder should only recognize gain upon the receipt of cash to
the extent such cash received exceeds the Preferred Securityholder's tax basis
in its Preferred Securities. See "--Treatment of Distributions by Funding." A
Preferred Securityholder's tax basis in the Common Stock received upon exchange
would be equal to such holder's tax basis in the Preferred Securities delivered
for exchange reduced by any cash which is received upon such exchange. Inasmuch
as a Preferred Securityholder who exchanges its Preferred Securities prior to a
redemption remains entitled to receive a Dividend Make-Whole Payment (to the
extent of a subsequent Automatic Exchange by Funding on or before May 1, 2001),
it is unclear how such holder should allocate its tax basis in the Preferred
Security exchanged to the Common Stock received. Funding intends to take the
position that the contingent right to receive Dividend Make-Whole Payments does
not affect the calculation of its tax basis in the Common Stock (as described
above). Consequently, based on this position, to the extent that such exchanging
holder subsequently receives a Dividend Make-Whole Payment, such payment should
result in capital gain of an equal amount. A Preferred Securityholder's holding
period in the Common Stock received upon exchange should include the Preferred
Securityholder's holding period in the Preferred Securities delivered.

Preferred Securityholders should be aware that the IRS might challenge the
tax-free nature of an exchange of Preferred Securities for Common Stock. For
example, the IRS might argue that, for tax purposes, Funding's exchange of
CellNet Preferred Stock into Common Stock (and Funding's subsequent distribution
of such stock to a holder) should be treated as an exchange by the Preferred
Securityholder of its Preferred Securities against CellNet directly for Common
Stock. If this argument or another similar argument were asserted and sustained,
the conversion of the Preferred Securities by a Preferred Securityholder for
Common Stock would be a taxable transaction in which a Preferred Securityholder
would recognize capital gain or loss.

PREFERRED SECURITYHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES TO THEM OF AN EXCHANGE OF A PREFERRED SECURITY
FOR COMMON STOCK.

ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES

In general, Funding's taxable income and losses will be determined annually,
and Funding currently intends to prorate such income on a monthly basis and
apportion it among the holders of the Preferred Securities in proportion to the
number of Preferred Securities owned by each of them as of the first business
day of such month. As a result, a holder of Preferred Securities may be
allocated income, gain, loss and deduction accrued after the date of transfer.

The use of this method is not expressly sanctioned under existing Treasury
regulations. If the IRS successfully asserts that this method is not allowed
under the Treasury regulations (or only applies to transfers of less than all of
the holder's interest), taxable income or losses of Funding might be reallocated
among the holders of the Preferred Securities (including transferors and
transferees). As a result of an adverse IRS determination, or otherwise, Funding
may, in its sole discretion, adopt an allocation method different from that
described above.

A holder who owns Preferred Securities during a quarter and who disposes of
such Preferred Securities prior to the record date set for a distribution with
respect to such quarter may be allocated items of income, gain, loss and
deduction attributable to such quarter even though such holder will not be
entitled to receive that distribution.

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INFORMATION TO SECURITYHOLDERS AND AUDIT REQUIREMENTS

Funding will furnish each Preferred Securityholder with an information
statement each year setting forth such Preferred Securityholder's allocable
share of income for the prior calendar year. Funding is required to furnish this
statement as soon as practicable following the end of the year, but in any event
prior to March 31.

Any person who holds Preferred Securities as a nominee for another person is
required to furnish to Funding (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) information as to whether
the beneficial owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing or (iii) a tax-exempt entity; (c) the
amount and description of Preferred Securities held, acquired or transferred for
the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Preferred Securities they acquire, hold or transfer for their own accounts. A
penalty of $50.00 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for the failure to report such information to Funding. The
nominee is required to supply the beneficial owners of the Preferred Securities
with the information furnished to Funding.

CellNet, as the tax matters partner for Funding, will be responsible for
representing the Preferred Securityholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years since the later of the
filing or the last date for filing of the partnership information return. Any
adverse determination following an audit of the return of Funding by the
appropriate tax authorities could result in an adjustment of the returns of the
Preferred Securityholders, and, under certain circumstances, a Preferred
Securityholder may be precluded from separately litigating a proposed adjustment
to the items of Funding. An adjustment could also result in an audit of a
Preferred Securityholder's return and adjustments of items not related to the
income and losses of Funding.

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THE UNDERWRITER

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), Morgan Stanley &
Co. Incorporated (the "Underwriter") has agreed to purchase, and Funding has
agreed to sell to it, all of the Preferred Securities.

The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Preferred Securities offered hereby is
subject to the approval of certain legal matters by its counsel and to certain
other conditions. The Underwriter is obligated to take and pay for all of the
Preferred Securities offered hereby if any are taken.

The Underwriter initially proposes to offer part of the Preferred Securities
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per Preferred Security under the public offering price. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per Preferred Security to certain dealers. After the initial offering of
the Preferred Securities, the offering price and other selling terms may from
time to time be varied by the Underwriter.

Pursuant to the Underwriting Agreement, Funding has granted to the
Underwriter an option to purchase up to 450,000 additional Preferred Securities
at the Price to Public set forth on the cover page hereof, less underwriting
discounts and commissions. The Underwriter may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
Offering of the Preferred Securities. To the extent such option is exercised,
the Underwriter will become obligated, subject to certain conditions, to
purchase such additional Preferred Securities.

The Company and its directors and executive officers have each agreed that,
without the prior written consent of the Underwriter, they will not, during the
period ending 90 days after the date of this Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer, lend or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to any transactions relating to securities acquired in open market
transactions after the completion of this Offering.

In order to facilitate this Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Preferred Securities. Specifically, the Underwriter may overallot in connection
with this Offering, creating a short position in the Preferred Securities for
its own account. In addition, to cover over-allotments or to stabilize the price
of the Preferred Securities, the Underwriter may bid for, and purchase,
Preferred Securities in the open market. Finally, the Underwriter may reclaim
selling concessions allowed to a dealer for distributing the Preferred
Securities in this Offering, if the Underwriter purchases previously distributed
Preferred Securities in transactions to cover short positions, in stabilizing
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Preferred Securities above independent market levels. The
Underwriter is not required to engage in these activities, and may end any of
these activities at any time.

The Underwriter and dealers may engage in passive market making transactions
in the Common Stock in accordance with Rule 103 of Regulation M promulgated by
the Securities and Exchange Commission. In general, a passive market maker may
not bid for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker

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must identify passive market making bids as such on the Nasdaq electronic
inter-dealer reporting system. Passive market making may stabilize or maintain
the market price of the Common Stock above independent market levels. The
Underwriter and dealers are not required to engage in passive market making and
may end passive market making activities at any time.

Application has been made for quotation of the Preferred Securities on the
Nasdaq National Market. The Common Stock is quoted on the Nasdaq National Market
under the symbol "CNDS." The shares of Common Stock payable as dividends on the
Preferred Securities, payable in connection with a redemption of the Preferred
Securities or issuable in connection with an Automatic Exchange will be quoted
on the Nasdaq National Market.

The Company, Funding and the Underwriter have agreed to indemnify each other
against certain liabilities under the Securities Act.

From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to the Company for which it
has received customary compensation.

LEGAL MATTERS

The validity of the Preferred Securities, the CellNet Preferred Stock, the
Guarantee and the Common Stock offered hereby and certain tax matters will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain members of such firm hold in the
aggregate 5,700 shares of Common Stock. Certain legal matters will be passed
upon for the Underwriters by Shearman & Sterling, New York, New York.

EXPERTS

The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.

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CELLNET DATA SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-3

Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995................. F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1996 and
1995..................................................................................................... F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................. F-6

Notes to Consolidated Financial Statements................................................................. F-7

Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997 (Unaudited)... F-21

Condensed Consolidated Statement of Operations for the three months ended March 31, 1998 and 1997
(Unaudited).............................................................................................. F-22

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
(Unaudited).............................................................................................. F-23

Notes to Condensed Consolidated Financial Statements....................................................... F-24
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

CellNet Data Systems, Inc.:

We have audited the accompanying consolidated balance sheets of CellNet Data
Systems, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CellNet Data Systems, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.

/S/ DELOITTE & TOUCHE LLP

San Jose, California
February 2, 1998

F-2
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $111,112 $124,232
Short-term investments.............................................. 36,946 54,643
Accounts receivable--trade.......................................... 1,519 850
Accounts receivable--other.......................................... 5,123 1,264
Prepaid expenses and other.......................................... 2,060 1,124
-------- --------
Total current assets.............................................. 156,760 182,113
-------- --------
Network components and inventory...................................... 24,225 11,211
Networks in progress--net............................................. 92,308 48,426
Property--net......................................................... 16,061 12,236
Debt issuance costs and other--net.................................... 4,631 5,565
-------- --------
Total assets.......................................................... $293,985 $259,551
-------- --------
-------- --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 11,706 $ 8,133
Accrued compensation and related benefits........................... 2,189 2,371
Accrued liabilities................................................. 2,655 950
Current portion of capital lease obligations........................ 466 308
-------- --------
Total current liabilities......................................... 17,016 11,762
-------- --------
Senior notes--1997, 14% and 1996, 13%................................. 268,673 207,178
Deferred revenue...................................................... 5,620 --
Capital lease obligations--net........................................ 412 366
Commitments and contingencies (Notes 9 and 10)........................
Stockholders' equity:
Preferred stock--$.001 par value; 15,000,000 shares authorized; no
shares outstanding................................................ -- --
Common stock--$.001 par value; 100,000,000 shares authorized; shares
outstanding: 1997, 41,845,475; 1996, 38,537,517................... 209,996 205,793
Notes receivable from sale of common stock.......................... (676) (814)
Warrants............................................................ 74,546 2,984
Accumulated deficit................................................. (281,599) (167,715)
Net unrealized loss on short-term investments....................... (3) (3)
-------- --------
Total stockholders' equity........................................ 2,264 40,245
-------- --------
Total liabilities and stockholders' equity............................ $293,985 $259,551
-------- --------
-------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Network service revenues............................................ $ 5,060 $ 1,210 $ 35
Product revenues.................................................... 493 368 1,663
Other revenues...................................................... 289 91 428
-------- -------- --------
Total revenues.................................................... 5,842 1,669 2,126
-------- -------- --------
Costs and expenses:
Cost of network operations.......................................... 18,322 8,100 3,671
Cost of product and other revenues.................................. 585 329 1,294
Research and development............................................ 27,524 25,394 20,883
Marketing and sales................................................. 10,148 6,021 4,114
General and administrative.......................................... 15,670 12,036 6,258
Depreciation and amortization....................................... 11,973 6,123 2,295
-------- -------- --------
Total costs and expenses.......................................... 84,222 58,003 38,515
-------- -------- --------
Loss from operations.................................................. (78,380) (56,334) (36,389)
Equity in loss of unconsolidated affiliate............................ (2,834) -- --
Other income (expense):
Interest income..................................................... 8,190 7,372 4,590
Interest expense, net of capitalized interest....................... (29,334) (23,823) (9,320)
Other--net.......................................................... (108) 96 166
-------- -------- --------
Total other income (expense).......................................... (21,252) (16,355) (4,564)
-------- -------- --------
Loss before income taxes and extraordinary loss on early
extinguishment of 1995 Senior Notes................................. (102,466) (72,689) (40,953)
Provision for income taxes............................................ 1 5 3
-------- -------- --------
Loss before extraordinary loss on early extinguishment of 1995 Senior
Notes............................................................... (102,467) (72,694) (40,956)
Extraordinary loss on early extinguishment of 1995 Senior Notes....... (11,417) -- --
-------- -------- --------
Net loss.............................................................. $(113,884) $(72,694) $(40,956)
-------- -------- --------
-------- -------- --------
Basic and diluted earnings per share:
Loss per share before extraordinary loss on early extinguishment of
1995 Senior Notes................................................... $ (2.59) $ (6.08) $ (13.93)
Extraordinary loss on early extinguishment of 1995 Senior Notes....... (0.29) -- --
-------- -------- --------
Net loss per share.................................................... $ (2.88) $ (6.08) $ (13.93)
-------- -------- --------
-------- -------- --------
Shares used in computing net loss per share........................... 39,506 11,963 2,939
-------- -------- --------
-------- -------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NOTES
RECEIVA- NET UNREAL-
CONVERTIBLE PRE- BLE FROM IZED GAIN
FERRED STOCK COMMON STOCK SALE OF (LOSS) ON
--------------------- -------------------- COMMON ACCUMULATED SHORT-TERM
SHARES AMOUNT SHARES AMOUNT STOCK WARRANTS DEFICIT INVESTMENTS TOTAL
----------- -------- ---------- -------- --------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1995.... 9,008,518 $ 25,990 2,716,166 $ 26,790 $(284) $ 10 $ (54,065) $ (5) $ (1,564)
Sale of Series DD preferred
stock (net of issuance
costs of $31).............. 128,157 1,205 -- -- -- -- -- -- 1,205
Common stock issued under
stock plans................ -- -- 2,318,096 818 (628) -- -- -- 190
Common stock warrants issued
in connection with 1995
Senior Notes............... -- -- -- -- -- 2,974 -- -- 2,974
Collection of notes
receivable................. -- -- -- -- 46 -- -- -- 46
Net unrealized gain on short-
term investments........... -- -- -- -- -- -- -- 2 2
Net loss..................... -- -- -- -- -- -- (40,956) -- (40,956)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1995....................... 9,136,675 27,195 5,034,262 27,608 (866) 2,984 (95,021) (3) (38,103)
Sale of common stock in
public offering (net of
issuance costs of
$7,841).................... -- -- 5,000,000 92,159 -- -- -- -- 92,159
Exercise of Series BB
warrants................... 1,410,600 1,179 -- -- -- -- -- -- 1,179
Conversion of Series CC
redeemable preferred stock
upon public offering....... -- -- 6,431,536 29,486 -- -- -- -- 29,486
Conversion of Series AA, BB,
and DD preferred stock upon
public offering............ (10,547,275) (28,374) 19,683,950 28,374 -- -- -- -- --
Common stock issued under
stock plans................ -- -- 866,775 186 -- -- -- -- 186
Sale of common stock in pri-
vate placements............ -- -- 1,579,404 28,000 -- -- -- -- 28,000
Repurchase of common stock... -- -- (58,410) (20) -- -- -- -- (20)
Collection of notes
receivable................. -- -- -- -- 52 -- -- -- 52
Net loss..................... -- -- -- -- -- -- (72,694) -- (72,694)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1996....................... -- -- 38,537,517 205,793 (814) 2,984 (167,715) (3) 40,245
Exercise of common stock war-
rants issued in connection
with 1995 Senior Notes..... -- -- 2,599,986 2,987 -- (2,974) -- -- 13
Expiration of common stock
warrants................... -- -- -- 9 -- (9) -- -- --
Common stock issued under
stock plans................ -- -- 707,972 1,207 -- -- -- -- 1,207
Common stock warrants issued
in connection with 1997
Senior Notes............... -- -- -- -- -- 74,545 -- -- 74,545
Collection of notes
receivable................. -- -- -- -- 138 -- -- -- 138
Net loss..................... -- -- -- -- -- -- (113,884) -- (113,884)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1997....................... -- $ -- 41,845,475 $209,996 $(676) $74,546 $(281,599) $ (3) $ 2,264
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(113,884) $ (72,694) $(40,956)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization..................................... 11,973 6,123 2,295
Accretion on senior notes......................................... 28,631 23,113 9,207
Write-off of remaining 1995 Senior Note debt issuance costs....... 4,791 -- --
Accelerated accretion on 1995 Senior Notes........................ 3,127 -- --
1997 Senior Notes issued as non-cash consent fees................. 912 -- --
Amortization of debt issuance costs............................... 566 600 256
Loss (gain) on disposition of property............................ 59 (1) 57
Equity in loss of unconsolidated affiliate........................ 2,834 -- --
Changes in:
Accounts receivable--trade...................................... (669) 310 (457)
Accounts receivable--other...................................... (3,859) (306) (958)
Prepaid expenses and other...................................... (936) (184) (692)
Accounts payable................................................ 3,573 892 5,191
Accrued compensation and related benefits....................... (182) 1,018 951
Accrued liabilities and deferred revenue........................ 5,969 (31) 92
--------- --------- --------
Net cash used for operating activities........................ (57,095) (41,160) (25,014)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory.................................... (13,014) 453 (9,518)
Purchase of property................................................ (10,668) (9,012) (6,222)
Proceeds from sale of property...................................... 20 11 --
Networks in progress................................................ (45,391) (35,944) (10,811)
Investment in unconsolidated affiliate.............................. (1,478) -- --
Purchase of short-term investments.................................. (43,139) (329,674) (285,802)
Proceeds from sales and maturities of short-term investments........ 60,836 370,810 202,030
Other assets........................................................ (419) (309) --
--------- --------- --------
Net cash used for investing activities........................ (53,253) (3,665) (110,323)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Senior Notes and warrants............................... 100,324 -- 175,837
Debt issuance costs for Senior Notes................................ (4,004) (210) (5,902)
Repayment of capital lease obligations.............................. (450) (307) (524)
Proceeds from sale of preferred stock and warrants.................. -- 1,179 1,205
Proceeds from sale of common stock, net of repurchases.............. 1,220 120,325 190
Collection of note receivable from sale of common stock............. 138 52 46
--------- --------- --------
Net cash provided by financing activities..................... 97,228 121,039 170,852
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (13,120) 76,214 35,515
CASH AND CASH EQUIVALENTS, Beginning of year.......................... 124,232 48,018 12,503
--------- --------- --------
CASH AND CASH EQUIVALENTS, End of year................................ $ 111,112 $ 124,232 $ 48,018
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases........................ $ 654 $ 161 $ 798
Sale of common stock for notes receivable........................... $ -- $ -- $ 628
Conversion of preferred stock into common stock..................... $ -- $ 57,860 $ --
Capitalized interest on networks in progress........................ $ 3,047 $ 1,537 $ 458
Exchange of 1995 Senior Notes for 1997 Senior Notes................. $ 231,039 $ -- $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................. $ 113 $ 110 $ 113
Cash paid for income taxes.......................................... $ 1 $ 5 $ 3
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS. Since 1993, CellNet Data Systems, Inc. and
subsidiaries (the Company) has focused all of its resources and efforts on the
development and deployment of its CellNet wireless data communication system to
provide automated network meter reading and other services to the utility
industry and to providers of non-utility services. The Company's primary
activities since 1993 have included research and development, prototype product
development, field testing, commercial network installation, provision of
wireless data communication services, and raising the financing required to
support the development and deployment of its CellNet wireless data
communication system. In August 1996, the Company was reincorporated in the
State of Delaware.

The Company provides its services to utility companies, energy service
providers and other customers pursuant to contract. The contracts vary in
length, generally, from 5 to 20 years. Utilities have up to two 5-year renewal
options in certain instances on substantially similar terms. Utilities also have
the option in certain instances to terminate their contracts early at various
times during the initial term, commencing as early as the seventh contract year
under the longer term contracts, upon payment of specified amounts which are
intended to allow the Company to recover its then unamortized network endpoint
costs based upon agreed prices for such equipment. No assurance can be given
that any such renewal and/or early termination options will or will not be
exercised.

The Company completed the installation of a network to provide network meter
reading and other services to Kansas City Power & Light Company in 1996,
installed additional meters on the network in 1997 and expects to install
additional meters on the network in 1998. The Company has also installed a
network for Pacific Gas & Electric Company and is in the process of
substantially expanding a network installed for Puget Sound Energy, Inc. The
Company is currently installing networks for Union Electric Company and for
Northern States Power Company and has entered into a services agreement with
Indianapolis Power & Light Company for the installation of a network in its
service area. The Company is also beginning to install a network in California
to serve the needs of various energy service providers in that market.

The Company does not expect to receive revenues sufficient to meet
anticipated operating costs and expenses during 1998. Management plans to
significantly increase operations through the installation of additional
networks for other utility companies and other nonutility clients and intends to
fund these operations through additional debt and equity financing.

CONSOLIDATION. The accompanying consolidated financial statements include
the accounts of CellNet Data Systems, Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions are eliminated in
consolidation.

FINANCIAL STATEMENT ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period. Such estimates
include the level of inventory reserves for obsolete, slow moving or nonsalable
network components and inventory, evaluation of network assets for impairment,
accrued liabilities and a valuation allowance against net deferred tax assets.
Actual results could differ from those estimates.

F-7
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS. Cash equivalents are highly liquid debt instruments
acquired with an original maturity of three months or less. The recorded
carrying amounts of the Company's cash equivalents approximate their fair market
value.

SHORT-TERM INVESTMENTS. Short-term investments represent debt and equity
securities which are stated at fair value. All short-term investments are
classified as available-for-sale. Any temporary difference between an
investment's amortized cost and its market value is recorded as a separate
component of stockholders' equity until such gains or losses are realized. Gains
or losses on the sale of securities are computed using the specific
identification method.

STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to credit risk consist principally of cash and cash
equivalents, short-term investments and accounts receivable. The Company sells
its products and services and installs its networks primarily to utility
companies in the United States. To reduce credit risk related to accounts
receivable, the Company periodically evaluates its customers' financial
condition. Collateral is generally not required. Two customers accounted for 57%
and 31% of trade accounts receivable at December 31, 1997 and for 47% and 41% of
revenues for the year then ended. The same two customers accounted for 33% and
22% of trade accounts receivable at December 31, 1996 and for 69% and 21% of
revenues for the year then ended. Two customers accounted for 64% and 29% of
revenues for the year ended December 31, 1995. Concentration of credit risk is
expected to decrease as the Company deploys additional networks and provides its
services to an increasing number of customers.

The Company invests in a variety of financial instruments such as commercial
paper, debt securities of the U.S. government, foreign debt securities and
preferred stock. The Company, by policy, limits the amount of credit exposure
with any one financial instrument or commercial issuer. All such instruments are
rated by Standard & Poor's as A- or higher. The Company also places its
investments for safekeeping with high-credit-quality financial institutions.

NETWORK COMPONENTS AND INVENTORY. Network components and inventory are
stated at the lower of cost (first-in, first-out method) or market. At December
31, 1997, network components and inventories consist primarily of purchased and
in-process materials to be included in the Company's installed networks. Once
the assembly process is complete, the inventory item is transferred to a
particular network location.

NETWORKS IN PROGRESS, NET. Networks in progress, which are stated at cost,
include both equipment assembled at the Company and systems partially installed
at customer sites. Interest is capitalized using the Company's cost of debt
until the point in the installation at which each network begins generating
revenue. (Accordingly, $3,047,000, $1,537,000 and $458,000 of interest was
capitalized during 1997, 1996 and 1995, respectively.) Depreciation is computed
on a straight-line basis over the shorter of the estimated useful lives of the
network assets or the contract's life from initial revenue generation until
contract termination. Depreciation commences when the network begins generating
significant revenue, typically when network installation is approximately 50%
complete. At December 31, 1997 and 1996, accumulated depreciation was $6,212,000
and $1,657,000, respectively.

F-8
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires the Company
to review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Implementation did not have a material impact on the Company's
financial statements.

PROPERTY. Property and leasehold improvements are stated at cost.
Depreciation and amortization are computed on a straight-line basis over
estimated useful lives of three to five years or the capital lease term, if
shorter.

INVESTMENT IN UNCONSOLIDATED AFFILIATE. The investment is accounted for
using the equity method. Equity in loss of unconsolidated affiliate is based
upon the Company's beneficial interest.

DEBT ISSUANCE COSTS. Debt issuance costs associated with the senior notes
(see Note 6) are capitalized and amortized using the effective interest method
over the lives of the related debt.

RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the Financial
Accounting Standards Board adopted Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this statement will not impact
the Company's consolidated financial position, results of operations or cash
flows. The Company will adopt this statement in fiscal 1998.

REVENUE RECOGNITION. Network service revenue, associated with installed
networks, is recognized in the period of service. Product revenue is recognized
upon product shipment.

The Company and a utility customer have entered into a joint marketing and
licensing agreement for the purpose of jointly developing and marketing utility
automation and utility management services utilizing the Company's wireless data
communications network deployed in the customer's service area. The Company has
received a license fee of $6,000,000 for the use of certain of the Company's
network interface technology and has agreed to pay the customer certain
marketing service and incentive fees based upon network revenues and upon
revenues received from the sale of the services being developed and marketed.
The customer has the right to terminate the agreement at any time prior to
January 1, 2000 and to require the Company to refund the license fee less the
amount of any marketing service and incentive fees previously paid. The amount
of the license fee is recorded as deferred revenue and is being recognized over
the term of the agreement.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The recorded carrying amounts of the
Company's financial instruments, namely cash and cash equivalents and short-term
investments, approximate their fair value. The estimated fair value of the
Company's 1997 Senior Notes was approximately $223,350,000 at December 31, 1997.
The estimated fair value of the Company's 1995 Senior Notes was approximately
$224,250,000 at December 31, 1996. The fair values of cash equivalents and
short-term investments are based on quoted market prices, and the estimated fair
value of the Senior Notes is based on information provided by the initial
purchaser of the original notes.

F-9
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE. During the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER
SHARE and, retroactively, restated the 1996 and 1995 earnings per share (EPS)
for the change. SFAS 128 requires a dual presentation of basic and diluted EPS.
Basic EPS for all periods presented is computed by dividing net loss by the
weighted average of common shares outstanding (excluding shares subject to
repurchase -- see Note 7). Diluted EPS for all periods presented was computed
the same as basic EPS since all other potential dilutive securities are excluded
as they are anti-dilutive.

RECLASSIFICATIONS. Certain reclassifications have been made to the 1996 and
1995 amounts to conform to the 1997 presentation.

2. SHORT-TERM INVESTMENTS

The fair value and the amortized cost of short-term investments at December
31, 1997 and 1996 are presented below. Fair values are based on quoted market
prices obtained from the Company's broker. All of the Company's short-term
investments are classified as available-for-sale, since the Company intends to
sell them as needed for operations. The tables present the unrealized holding
gains and losses related to each category of investment security (in thousands).

<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.................... $ 7,298 $ (4) $ -- $ 7,294
Auction-rate preferred stock............... 27,700 -- -- 27,700
Corporate debt securities.................. 113,016 -- 1 113,017
----------- ----- ----- -----------
Total...................................... 148,014 (4) 1 148,011
Less amounts included in cash and
equivalents.............................. (111,065) -- -- (111,065)
----------- ----- ----- -----------
$ 36,949 $ (4) $ 1 $ 36,946
----------- ----- ----- -----------
----------- ----- ----- -----------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.................... $ 2,002 $ -- $ -- $ 2,002
Auction-rate preferred stock............... 33,550 -- -- 33,550
Corporate debt securities.................. 141,107 (4) 1 141,104
----------- ----- ----- -----------
Total...................................... 176,659 (4) 1 176,656
Less amounts included in cash and
equivalents.............................. (122,013) -- -- (122,013)
----------- ----- ----- -----------
$ 54,646 $ (4) $ 1 $ 54,643
----------- ----- ----- -----------
----------- ----- ----- -----------
</TABLE>

F-10
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

2. SHORT-TERM INVESTMENTS (CONTINUED)
The final maturity periods of short-term investments at December 31, 1997
are as follows (in thousands):

<TABLE>
<CAPTION>
MARKET VALUE OF MATURITIES
----------------------------------------------
FIVE TO GREATER
WITHIN TEN THAN
ONE YEAR YEARS 10 YEARS TOTAL
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.............. $ 7,294 $ -- $ -- $ 7,294
Auction-rate preferred stock......... -- 12,700 15,000 27,700
Corporate debt securities............ 113,017 -- 113,017
----------- --------- --------- -----------
Total................................ 120,311 12,700 15,000 148,011
Less amounts included in cash and
cash equivalents................... (111,065) -- -- (111,065)
----------- --------- --------- -----------
$ 9,246 $ 12,700 $ 15,000 $ 36,946
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>

All short-term investments with final maturities exceeding one year have
provisions requiring their repurchase at par at the option of the holder and for
adjustment to market rates of interest on at least an annual basis. The Company
treats such investments as having a maturity of one year or less for purposes of
compliance with investment limitations provided in its Senior Note Indenture
(see Note 6).

3. INVESTMENT IN UNCONSOLIDATED AFFILIATE

In 1996, the Company entered into a joint venture with Bechtel Enterprises,
Inc. to deploy the Company's technology outside the United States. The Company
participates in a joint venture, BCN Data Systems L.L.C. (BCN), and generally is
allocated 50% of BCN's net income or loss. The investment in BCN is accounted
for using the equity method. For the year ended December 31, 1997, the Company
recognized $2,834,000 as its share of BCN's losses. In 1997, the Company made
capital contributions of $1,478,000, and the Company's share of BCN's losses in
excess of such capital contributions is recorded in accrued liabilities (see
Note 5).

Under a license and consulting services agreement completed in 1997, BCN has
agreed to reimburse the Company for certain costs incurred by the Company in
adapting the Company's technology for use by BCN outside the United States. In
1997, the Company recorded $2,755,000 as an offset to research and development
expenses for such reimbursable costs, and at December 31, 1997, the Company had
a receivable from BCN for the same amount, which is included in accounts
receivable--other. In addition, the Company sold its operating subsidiary, DAC
(UK) Limited, at cost to BCN.

F-11
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

4. PROPERTY

Property consists of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Office furniture and equipment......................................... $ 14,944 $ 9,129
Manufacturing equipment and tools...................................... 11,338 8,065
Engineering equipment.................................................. 4,969 2,942
Vehicles............................................................... 231 204
---------- ---------
Total.................................................................. 31,482 20,340
Accumulated depreciation and amortization.............................. (15,421) (8,104)
---------- ---------
Total.................................................................. $ 16,061 $ 12,236
---------- ---------
---------- ---------
</TABLE>

5. ACCRUED LIABILITIES

Accrued liabilities consist of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Loss in excess of investment in unconsolidated affiliate (see Note
3)................................................................... $ 1,356 $ --
Deferred revenue....................................................... 620 150
Professional services.................................................. 332 276
Accrued contractual obligations........................................ 195 277
Other.................................................................. 152 247
---------- ---------
Total.................................................................. $ 2,655 $ 950
---------- ---------
---------- ---------
</TABLE>

6. SENIOR NOTES

1995 NOTES. In 1995, the Company received $175,837,000 in gross proceeds
from the issuance and private placement of $325,000,000 aggregate principal
amount at maturity of its 13% Senior Notes due June 15, 2005 and related
warrants to purchase 2,600,000 shares of common stock at $0.005 per share (the
Notes and 1995 Warrants). Aggregate proceeds of $2,974,000 were attributed to
the 1995 Warrants. The unregistered Notes were subsequently exchanged for an
equal number of Series B 13% Senior Notes with identical terms (the 1995 Notes)
registered under the Securities Act of 1933, as amended (the Securities Act).

1997 NOTES. On September 29, 1997, the Company raised $100,324,000 in gross
proceeds from the sale and issuance of 14% Senior Notes due 2007 (the 1997
Notes). All holders of outstanding 1995 Notes tendered and exchanged their 1995
Notes for 1997 Notes having an initial accreted value of $231,039,000. All
outstanding 1995 Warrants were exercised prior to expiration in 1997. Warrants
to purchase 8,942,517 shares of the Company's Common Stock (the 1997 Warrants)
with an exercise price of $14.30 per share were attached to the 1997 Notes.
Aggregate proceeds of $74,545,000 were attributed to the 1997 Warrants. The 1997
Notes were issued at an initial accreted value of $257,730,000 and will fully
accrete to a face

F-12
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. SENIOR NOTES (CONTINUED)
value of $654,133,000 on October 1, 2002. From and after October 1, 2002, the
1997 Notes will begin to accrue interest payable in cash at an annual rate of
14% payable each April 1 and October 1, commencing April 1, 2003.

The 1997 Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2002 at specified redemption prices for
the relevant year of redemption, plus accrued and unpaid interest to the date of
redemption. In addition, the Company may redeem in cash at its option at any
time prior to October 1, 2000 up to 25% of the aggregate principal amount of the
1997 Notes at 114% of the accreted value thereof on the date of redemption plus
accrued and unpaid interest, if any, from the proceeds of a public equity
offering (as defined) provided that after any such redemption at least
$490,599,750 aggregate principal amount at maturity of the 1997 Notes remains
outstanding. There are no sinking fund requirements. In the event of a change of
control (as defined), each holder of the 1997 Notes has the option to require
the Company to repurchase such holder's 1997 Notes at 101% of the accreted value
thereof on the date of repurchase (if prior to October 1, 2002) or 101% of the
aggregate principal face amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date (if on or after October 1, 2002).

The 1997 Notes rank senior in right of payment to all existing and future
subordinated indebtedness of the Company and PARI PASSU with all existing and
future senior indebtedness of the Company. The Indenture pursuant to which the
1997 Notes were issued contains certain covenants that, among other things,
limit the ability of the Company to make dividend payments, make investments
(including investments in affiliates), repurchase outstanding shares of stock,
prepay other debt obligations, incur additional indebtedness, effect asset
dispositions, engage in sale and leaseback transactions, consolidate, merge or
sell all or substantially all of the Company's assets, or engage in transactions
with affiliates, or effect certain transactions by its restricted subsidiaries
(as defined). The Company was in compliance with the financial covenants of the
Indenture at December 31, 1997.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. On September 29, 1997,
the Company exchanged $654,133,000 aggregate value at maturity 1997 Notes and
1997 Warrants for $100,324,000 of new proceeds and the extinguishment of its
$325,000,000 aggregate value at maturity of the 1995 Notes. The exchange of the
1995 Notes was accounted for as an early extinguishment of debt, resulting in an
extraordinary charge of $11,417,000, consisting of the unamortized portion of
the debt issuance cost of the 1995 Notes of $4,791,000, $3,499,000 attributable
to consent fees and other costs related to the extinguishment of the 1995 Notes
and accelerated accretion of interest on the 1995 Notes of $3,127,000.

In December 1997, the Company exchanged the unregistered 1997 Notes for an
equal number of Series B 14% Senior Discount Notes with identical terms (the New
1997 Notes) registered under the Securities Act. Costs associated with the
Company's registration of the New 1997 Notes under the Securities Act have been
capitalized as part of debt issue costs.

7. STOCKHOLDERS' EQUITY

All shares and per-share amounts have been adjusted to reflect a two-for-one
split effected in 1996.

F-13
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

7. STOCKHOLDERS' EQUITY (CONTINUED)

CONVERTIBLE PREFERRED STOCK. In conjunction with the initial public
offering of the Company's common stock, all outstanding shares of convertible
preferred stock were converted into common stock upon the closing of the
offering.

COMMON STOCK. At December 31, 1997, the Company had reserved shares of
common stock for issuance as follows:

<TABLE>
<S> <C>
Issuance under employee stock purchase plan..................... 1,036,899
Issuance upon exercise of common stock warrants................. 8,992,517
Issuance under stock option plans............................... 3,594,986
---------
Total........................................................... 13,624,402
---------
---------
</TABLE>

RESTRICTED STOCK. Certain officers, employees and consultants exercised
stock options with cash or full recourse notes. The related shares of common
stock continue to vest in accordance with the terms of the stock option. The
related notes bear interest at rates ranging from 6.04% to 7.92% and are due in
1999 through 2000. At December 31, 1997, 768,028 outstanding shares of such
stock were subject to repurchase.

1996 EMPLOYEE STOCK PURCHASE PLAN. In 1996, the Company adopted an Employee
Stock Purchase Plan (the Plan). A total of 1,200,000 shares of common stock are
reserved for issuance under the Plan. Under the Plan, the Company withholds a
specified percentage of each salary payment to participating employees over
certain offering periods. Unless the Board of Directors determines otherwise,
each offering period runs for six months, from November 1 to April 30 and from
May 1 to October 31, except that the first offering period commenced on
September 26, 1996 and ended on April 30, 1997. The price at which common stock
may be purchased under the Plan is equal to 85% of the fair market value of the
common stock on the first or last day of the applicable offering period,
whichever is lower. In 1997, 163,101 shares were issued under the Plan at a
weighted average price of $6.38 per share. At December 31, 1997, 1,036,899
shares remain available for issuance under the Plan.

WARRANTS. At December 31, 1997, the following warrants to purchase common
stock were outstanding:

Warrants to purchase 50,000 shares of common stock at $2.00 per share. The
warrants expire on February 24, 1999, or, with written notice from the Company,
two days prior to (a) the merger of the Company with or into a corporation as a
result of which the stockholders of the Company hold less than 50% of the equity
securities of the surviving corporation or its parent (unless the securities
received are freely tradable and listed on a national securities exchange or on
the NASDAQ National Market System), (b) the sale, conveyance or disposition of
all or substantially all of the assets of the Company or (c) the liquidation,
dissolution or winding up of the Company.

Warrants to purchase 8,942,517 shares of common stock at $14.30 per share
were granted in connection with the issuance and sale in 1997 of the Company's
14% Senior Notes (see Note 6). The warrants are exercisable commencing on
September 29, 1998 and expire on October 1, 2007.

STOCK OPTION PLANS. The Company has stock option plans (the Plans) under
which shares are reserved for issuance to officers, directors, employees and
consultants. Under the Plans, both incentive and

F-14
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

7. STOCKHOLDERS' EQUITY (CONTINUED)
nonstatutory stock options to purchase common stock may be granted or restricted
common stock may be sold at prices not less than the fair market value of the
common stock at the date of grant. The fair market value and terms of exercise
are determined by the Board of Directors. Options outstanding at December 31,
1997 generally become exercisable over five years, commencing six months from
the date of the individual's employment or the date of grant and expire ten
years from the date of grant. At December 31, 1997, there were 187,742 shares
available for future grant under the Plans.

A summary of stock option activity under the Plans on a combined basis is as
follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balances, January 1, 1995.................................. 5,240,628 $ 0.574
Granted (weighted average fair value $0.129 per share)..... 514,600 1.182
Exercised.................................................. (2,318,096) 0.706
Cancelled.................................................. (163,498) 0.784
----------- ------
Balances, December 31, 1995................................ 3,273,634 0.565
Granted (weighted average fair value $1.486 per share)..... 889,910 3.827
Exercised.................................................. (866,775) 0.214
Cancelled.................................................. (109,679) 0.683
----------- ------
Balances, December 31, 1996................................ 3,187,090 1.278
Granted (weighted average fair value $6.060 per share)..... 942,600 11.052
Exercised.................................................. (544,871) 0.307
Cancelled.................................................. (177,575) 4.865
----------- ------
Balances, December 31, 1997................................ 3,407,244 $ 3.948
----------- ------
----------- ------
</TABLE>

Additional information regarding options outstanding as of December 31, 1997
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 - $ 0.50..... 1,703,799 6.27 $ 0.324 1,119,234 $ 0.281
$ 1.00 - $ 2.00..... 638,135 8.15 $ 1.895 205,705 $ 1.886
$ 3.00 - $10.00..... 226,250 9.36 $ 7.661 29,693 $ 5.571
$11.50 - $11.50..... 673,810 9.60 $ 11.500 3,170 $11.500
$12.81 - $13.63..... 165,250 8.91 $ 13.355 35,805 $13.400
----------- ----------- ----------- ----------- --------
$0.05 - $13.63...... 3,407,244 7.61 $ 3.948 1,393,607 $ 0.993
----------- ----------- ----------- ----------- --------
----------- ----------- ----------- ----------- --------
</TABLE>

F-15
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

7. STOCKHOLDERS' EQUITY (CONTINUED)
ADDITIONAL STOCK PLAN INFORMATION. The Company accounts for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.

Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED Compensation (SFAS 123), requires the disclosure of pro forma net
loss and loss per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and estimated term. These
calculations were made using the minimum value method prior to the Company's
initial public offering and the Black-Scholes option pricing model with the
following weighted average assumptions for stock option grants: expected life,
12 months following vesting in 1997 and 21.3 months following vesting in 1996
and 1995; stock volatility, 71% in 1997 and 60% in 1996, subsequent to the
Company's initial public offering; risk free interest rates, 5.5% in 1997, and
6.0% in 1996 and 1995; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur.

The weighted average fair value of purchase rights under the 1996 Employee
Stock Purchase Plan was $3.67 and $7.45 in 1997 and 1996, respectively. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions in 1997 and 1996, respectively:
expected term, six months after grant; stock volatility, 71% in 1997 and 60% in
1996, subsequent to the Company's initial public offering; risk free interest
rates, 5.5% in 1997 and 6.0% in 1996; and no dividends during the expected term.

If the computed fair values of the 1997, 1996 and 1995 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $115,946,000 ($2.93 per share) in 1997, $73,314,000 ($6.13 per
share) in 1996 and $40,986,000 ($13.95 per share) in 1995. However, the impact
of outstanding nonvested stock options granted prior to 1995 has been excluded
from the pro forma calculation; accordingly, the 1997, 1996 and 1995 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.

EARNINGS PER SHARE. The computation of basic EPS excludes 768,028 shares of
common stock subject to repurchase at December 31, 1997. Options and warrants to
purchase 3,407,244 and 8,992,517 shares of common stock at a weighted average
exercise price of $3.948 and $14.23 per share, respectively, and 768,028 shares
of common stock subject to repurchase were outstanding at December 31, 1997 but
were not included in the computation of diluted EPS as the Company has a net
loss for all periods presented and, therefore, they are anti-dilutive.

8. INCOME TAXES

No federal income taxes were provided in 1997, 1996 or 1995 due to the
Company's net losses. The provisions for income taxes for these periods
represent various state minimum income and franchise taxes.

F-16
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate to income before income taxes and
extraordinary item as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Taxes computed at federal statutory rate............ $ (35,863) $ (25,441) $ (14,334)
State income taxes, net of federal effect........... (1,578) (2,544) (1,843)
Research tax credits................................ (349) 3,760 (399)
Disqualified yield on debt issued................... 2,006 -- --
Change in valuation allowance....................... 35,714 23,349 18,120
Other............................................... 71 881 (1,541)
---------- ---------- ----------
Total provision..................................... $ 1 $ 5 $ 3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The tax effects of temporary differences that give rise to deferred taxes
were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss and credit carryforwards.................... $ 78,280 $ 48,778
Senior note original issue discount................................ 21,754 13,263
Research and development expenses capitalized for tax purposes..... 657 1,138
Expenses not currently deductible for tax purposes................. 3,300 724
----------- ----------
Total deferred tax assets............................................ 103,991 63,903
Valuation allowance on deferred tax assets........................... (103,991) (63,903)
----------- ----------
Net deferred income taxes............................................ $ -- $ --
----------- ----------
----------- ----------
</TABLE>

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $206,000,000 and $56,000,000 available to offset future federal
and state taxable income, respectively. Such federal carryforwards expire in
2001 through 2012. Such state carryforwards expire in 1998 through 2012. The
extent to which the loss carryforwards can be used to offset future taxable
income may be limited, depending on the extent of ownership changes within any
three-year period as provided in the Tax Reform Act of 1986 and the California
Conformity Act of 1987. Equity issuances in April 1991 and the initial public
offering in 1996 triggered such limitations on loss carryforwards. As of
December 31, 1997, approximately $70,000,000 of net operating losses remain
limited to an annual usage of approximately $36,000,000 for federal income tax
purposes.

Research and development tax credit carryforwards of approximately
$2,900,000 and $1,700,000 are also available to offset future federal and
California income taxes payable, respectively.

A valuation allowance has been recorded against tax assets for which
realization is uncertain. Based upon the Company's history of operating losses
and the expiration dates of the loss carryforwards, the Company has recorded a
valuation allowance to the full extent of its net deferred tax assets.

F-17
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

9. COMMITMENTS AND LEASES

At December 31, 1997 and 1996, equipment with a net book value of $1,027,000
and $878,000 (net of accumulated amortization of $1,180,000 and $708,000,
respectively), has been leased under capital leases.

The Company leases its principal manufacturing and office facilities under
noncancelable operating lease and sublease agreements expiring as to portions of
the space at various times commencing February 1998 through November 2007.

Future minimum annual rental payments under capital and operating leases are
as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER
31,
----------------------
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.................................................................. $ 455 $ 2,205
1999.................................................................. 294 1,875
2000.................................................................. 192 1,803
2001.................................................................. 76 622
2002.................................................................. 14 550
Thereafter............................................................ -- 3,316
--------- -----------
Total minimum lease payments.......................................... 1,031 $ 10,371
-----------
-----------
Amount representing interest.......................................... (153)
---------
Present value of minimum lease payments............................... 878
Current portion....................................................... 466
---------
Long-term lease obligations........................................... $ 412
---------
---------
</TABLE>

Facilities rent expense was $2,146,000, $1,301,000 and $901,000 for 1997,
1996 and 1995, respectively.

10. LITIGATION

The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The Company
is party to two such suits of this nature. Although the ultimate outcome of
these matters is not presently determinable, management believes that the
resolution will not have a material effect on the Company's results of
operations or financial condition.

In October 1996, Itron, Inc., one of the Company's competitors, filed a
complaint against the Company in the Federal District Court in Minnesota
alleging that the Company infringes an Itron patent which was issued in
September 1996. Itron is seeking a judgment for damages, attorneys fees and
injunctive relief. The Company believes, based on its current information, that
the Company's products do not infringe any valid claim in the Itron patent, and
in the opinion of management, the ultimate outcome of the lawsuit is not
expected to have a material adverse effect on the Company's results of
operations or financial condition.

F-18
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

10. LITIGATION (CONTINUED)
Receiver Transmitter ("ERT-Registered Trademark-") device infringes CellNet's
U.S. Patent No. 4,783,623. The Company seeks an injunction, damages and other
relief.

On October 31, 1996, a complaint, SETTLE V. SEIDL, ET AL. No. 398464, was
filed in the Superior Court of California for the County of San Mateo against
the Company, certain of its officers and directors and underwriters of the
Company's Initial Public Offering. The complaint, which is a purported class
action filed on behalf of those purchasing the Company's stock from the period
beginning on September 26, 1996 and ending on October 31, 1996, seeks
unspecified damages and rescission for alleged liability under various
provisions of the federal securities laws and California state law. Plaintiff
alleges that the Prospectus and Registration Statement dated September 26, 1996,
pursuant to which the Company issued 5,000,000 shares of Common Stock to the
public, contained materially misleading statements and/or omissions in that
defendants were obligated to disclose, but failed to disclose, that a patent
conflict with Itron, Inc. was likely to ensue. On November 8 and 13, 1996, two
additional complaints, KAREN ZULLY V. CELLNET DATA SYSTEMS, INC. ET AL. No.
398551 and HOWARD FIENMAN AND GERALD SAPSOWITZ V. CELLNET DATA SYSTEMS, INC. ET
AL. No. 398560, were filed in the Superior Court of California for the County of
San Mateo. These cases are essentially similar in nature to the Settle case. The
Court has ordered consolidation of the SETTLE and ZULLY actions. The FIENMAN
action was voluntarily dismissed with prejudice. The Company believes that the
allegations in these complaints are without merit and intends to defend the
actions vigorously. The Company has filed demurrers seeking dismissal of these
complaints. The motions were assigned by the Court to a special master, who
recommended that the cases be dismissed with prejudice. Plaintiffs have objected
to the special master's recommendation, which is currently under submission
before the Court. In the opinion of management, the ultimate outcome of these
lawsuits is not expected to have a material adverse effect on the Company's
results of operations or financial condition.

11. QUARTERLY RESULTS (UNAUDITED)

The following summarized unaudited results of operations for the quarters in
the years ended December 31, 1997 and 1996 have been accounted for using
generally accepted accounting principles for interim reporting purposes and
reflect adjustments (consisting of normal recurring adjustments) which the

F-19
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

11. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
Company considers necessary for the fair presentation of results of operations
for these interim periods (in thousands, except per share data):

<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1996 1996 1996 1996
------------ ------------- -------- --------- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 1,816 $ 1,533 $ 1,514 $ 979 $ 734 $ 515 $ 251 $ 169

Loss from
operations.......... (22,214) (19,899) (18,576 ) (17,691) (16,352) (15,574) (13,154 ) (11,254)

Loss before
extraordinary loss
on early
extinguishment of
1995 Senior Notes... (31,333) (25,208) (23,922 ) (22,004) (19,927) (20,454) (17,247 ) (15,066)

Extraordinary loss on
early extinguishment
of
1995 Senior Notes... -- (11,417) -- -- -- -- -- --

Net loss.............. (31,333) (36,625) (23,922 ) (22,004) (19,927) (20,454) (17,247 ) (15,066)

Basic and diluted
earnings per share:

Loss per share
before
extraordinary loss
on early
extinguishment of
1995 Senior
Notes............. (0.77) (0.61) (0.62 ) (0.59) (0.54) (4.67) (5.08 ) (4.70)

Net loss per
share............. $ (0.77) $ (0.90) $ (0.62 ) $ (0.59) $ (0.54) $ (4.67) $ (5.08 ) $ (4.70)

Shares used in
computing net loss
per share........... 40,965 40,624 38,734 37,701 36,875 4,378 3,396 3,204
</TABLE>

During the fourth quarter of 1997, the Company adopted SFAS 128 (see Note
1), which requires a dual presentation of basic and diluted earnings per share.
Prior period earnings per share amounts have been restated accordingly. The sum
of the quarterly loss per share for 1996 does not agree with the net loss per
share calculated for the year ended December 31, 1996, resulting from certain
dilutive events occurring in the fourth quarter of 1996 in connection with the
Company's initial public offering on October 2, 1996.

* * * * *

F-20
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 72,106 $ 111,112
Short-term investments.............................................................. 37,754 36,946
Accounts receivable--trade.......................................................... 2,076 1,519
Accounts receivable--other.......................................................... 6,501 5,123
Prepaid expenses and other.......................................................... 2,110 2,060
----------- ------------
Total current assets.............................................................. 120,547 156,760
Network components and inventory...................................................... 27,686 24,225
Networks in progress--net............................................................. 109,965 92,308
Property--net......................................................................... 15,973 16,061
Debt issuance and other costs--net.................................................... 4,588 4,631
----------- ------------
Total assets...................................................................... $ 278,759 $ 293,985
----------- ------------
----------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................... $ 14,138 $ 11,706
Accrued compensation and related benefits........................................... 3,500 2,189
Accrued liabilities................................................................. 2,185 2,655
Current portion of capital lease obligations........................................ 448 466
----------- ------------
Total current liabilities......................................................... 20,271 17,016
----------- ------------
Senior notes--14%..................................................................... 279,952 268,673
Deferred revenue...................................................................... 5,583 5,620
Capital lease obligations............................................................. 593 412

Commitments and Contingencies (Note 3)

Stockholders' equity (deficit):
Preferred stock--$.001 par value; 15,000,000 shares authorized; no shares
outstanding....................................................................... -- --
Common stock--$.001 par value; 100,000,000 shares authorized; shares outstanding,
1998: 41,917,026; 1997: 41,845,475................................................ 210,302 209,996
Notes receivable from sale of common stock.......................................... (668) (676)
Warrants............................................................................ 74,546 74,546
Accumulated deficit................................................................. (311,815) (281,599)
Net unrealized loss on short-term investments....................................... (5) (3)
----------- ------------
Total stockholders' equity (deficit).............................................. (27,640) 2,264
----------- ------------
Total liabilities and stockholders' equity (deficit).................................. $ 278,759 $ 293,985
----------- ------------
----------- ------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-21
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Network service revenues................................................................ $ 1,971 $ 859
Product revenues........................................................................ 166 64
Other revenues.......................................................................... 132 56
---------- ----------
Total revenues........................................................................ 2,269 979
---------- ----------
Costs and expenses:
Cost of network operations.............................................................. 5,145 3,565
Cost of product and other revenues...................................................... 84 78
Research and development................................................................ 7,024 6,396
Marketing and sales..................................................................... 3,051 1,739
General and administrative.............................................................. 3,624 4,427
Depreciation and amortization........................................................... 4,179 2,465
---------- ----------
Total costs and expenses.............................................................. 23,107 18,670
---------- ----------
Loss from operations...................................................................... (20,838) (17,691)
Equity in loss of unconsolidated affiliate................................................ (351) (358)
Other income (expense):
Interest income......................................................................... 1,934 2,291
Interest expense, net of capitalized interest........................................... (10,782) (6,311)
Other--net.............................................................................. (179) 66
---------- ----------
Total other income (expense).............................................................. (9,027) (3,954)
---------- ----------
Loss before income taxes.................................................................. (30,216) (22,003)
Provision for income taxes................................................................ -- 1
---------- ----------
Net loss.................................................................................. $ (30,216) $ (22,004)
---------- ----------
---------- ----------
Basic and diluted earnings per share:
Net loss per share........................................................................ $ (0.73) $ (0.59)
---------- ----------
---------- ----------
Shares used in computing net loss per share............................................... 41,139 37,701
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-22
<PAGE>
CELLNET DATA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................. $ (30,216) $ (22,004)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization.......................................................... 4,179 2,465
Accretion on senior notes.............................................................. 10,652 6,132
Amortization of debt issuance costs.................................................... 101 155
Equity in loss of unconsolidated affiliate............................................. 351 358
Other non-cash expenses................................................................ 276 --
Changes in:
Accounts receivable--trade........................................................... (557) (370)
Accounts receivable--other........................................................... (1,378) 114
Prepaid expenses and other........................................................... (50) (103)
Accounts payable..................................................................... 2,432 93
Accrued compensation and related benefits............................................ 1,311 315
Accrued liabilities and deferred revenue............................................. (25) (119)
--------- ---------
Net cash used for operating activities............................................. (12,924) (12,964)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory......................................................... (3,461) (2,894)
Purchase of property..................................................................... (1,648) (3,310)
Networks in progress..................................................................... (19,123) (9,107)
Investment in unconsolidated affiliate................................................... (833) (516)
Purchase of short-term investments....................................................... (25,509) (11,590)
Proceeds from sales and maturities of short-term investments............................. 24,699 31,934
Other assets............................................................................. (58) (10)
--------- ---------
Net cash provided by (used for) investing activities............................... (25,933) 4,507
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations................................................... (187) (78)
Proceeds from sale of common stock, net of repurchases................................... 38 57
Collection of note receivable from sale of common stock.................................. -- 96
--------- ---------
Net cash provided by (used for) financing activities............................... (149) 75
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (39,006) (8,382)
CASH AND CASH EQUIVALENTS, Beginning of period............................................. 111,112 124,232
--------- ---------
CASH AND CASH EQUIVALENTS, End of period................................................... $ 72,106 $ 115,850
--------- ---------
--------- ---------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases............................................. $ 350 $ 23
Capitalization of interest into networks in progress..................................... $ 627 $ 586
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................................... $ 26 $ 22
Cash paid for income taxes............................................................... $ -- $ 1
Repurchase of unvested common stock and cancellation of related notes receivable......... $ 8 $ --
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-23
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION. In the opinion of management, these unaudited
condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments and accruals the Company considers
necessary for a fair presentation of the Company's financial position as of
March 31, 1998 and the results of operations and cash flows for the three months
ended March 31, 1998 and 1997. This unaudited interim information should be read
in conjunction with the audited consolidated financial statements of CellNet
Data Systems, Inc. and the notes thereto for the year ended December 31, 1997.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.

On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which requires than an
enterprise report, by major components and as a single total, the change in net
assets during the period from nonowner sources. Adoption of SFAS No. 130 did not
impact the Company's consolidated financial position, results of operations or
cash flows. The reconciliation of net loss to comprehensive net loss is as
follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss.............................................................. $ (30,216) $ (22,004)
Other comprehensive loss--net unrealized gain (loss) on short-term
investments......................................................... (2) 3
---------- ----------
Total comprehensive loss.............................................. $ (30,218) $ (22,001)
---------- ----------
---------- ----------
</TABLE>

In June 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt this
statement in its financial statements for the year ending December 31, 1998.

Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 presentation.

2. NET LOSS PER SHARE. During December 1997, the Company adopted Statement
of Financial Accounting Standard No. 128 (SFAS 128), EARNINGS PER SHARE and,
retroactively, restated prior period earnings per share (EPS) for the change.
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS for
the period presented is computed by dividing net loss by the weighted average of
common shares outstanding (excluding shares subject to repurchase). Diluted EPS
for all periods presented is the same as basic EPS since all other potential
dilutive securities are excluded as they are antidilutive.

3. COMMITMENTS AND CONTINGENCIES. In October 1996, Itron, one of the
Company's competitors, filed a complaint against the Company in the Federal
District Court in Minnesota alleging that the Company infringes an Itron patent
which was issued in September 1996. Itron is seeking a judgment for damages,
attorneys fees and injunctive relief. The Company believes, based on its current
information, that the Company's products do not infringe any valid claim in the
Itron patent, and in the Company's opinion, the ultimate outcome of the lawsuit
is not expected to have a material adverse effect on its results of operations
or financial condition.

F-24
<PAGE>
CELLNET DATA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Receiver Transmitter (ERT-Registered Trademark-) device infringes CellNet's U.S.
Patent No. 4,783,623. The Company seeks an injunction, damages and other relief.

The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL,
ET AL., No. 398464 filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC., ET AL., No. 398560, was earlier voluntarily dismissed with
prejudice. These complaints, purported class actions filed on behalf of the
Company's stockholders against the Company, certain of its officers and
directors and underwriters of the Company's initial public offering, sought
unspecified damages and rescission for alleged liability under various
provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which the Company issued 5,000,000 shares
of common stock to the public, contained materially misleading statements and/or
omissions in that defendants were obligated to disclose, but failed to disclose,
that a patent conflict with Itron was likely to ensue.

In 1995, Century Telephone Enterprises, Inc. ("Century Telephone") filed a
petition before the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office for cancellation of the Company's "CellNet" trademark
registration. The parties have agreed to settle the matter under arrangements
whereby Century Telephone will withdraw its petition for cancellation and the
Company will purchase from Century Telephone their rights to the "CellNet"
trademark now registered in Century Telephone's name. The settlement is pending
execution of settlement documents.

F-25
<PAGE>
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