METRICOM INC / DE, 10-K405/A, 1996-10-23

METRICOM INC / DE
10-K405/A, 1996-10-23
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K/A

AMENDMENT NO. 1

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO

COMMISSION FILE NUMBER 0-19903

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METRICOM, INC.

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 77-0294597
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>

980 UNIVERSITY AVENUE, LOS GATOS, CA 95030-2375

(Address of principal executive offices, including zip code)

(408) 399-8200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE

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

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

The approximate aggregate market value of the Common stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market System on March 25, 1996 was
$111,637,000.

The number of shares of Common Stock outstanding as of March 25, 1996 was
13,339,633.

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PART I

ITEM 1 -- BUSINESS.

THE COMPANY

The Company was incorporated in California in December 1985 and
reincorporated in Delaware in April 1992. Unless the context otherwise requires,
references in this Form 10-K to the "Company" refer to Metricom, Inc. and its
subsidiaries. The Company's executive offices are located at 980 University
Avenue, Los Gatos, California 95030-2375, and its telephone number is (408)
399-8200.

Metricom is a leading provider of wide area wireless data communications
solutions. The Company designs, develops and markets wireless network products
and services that provide low-cost, high-performance, easy-to-use data
communications that can be used in a broad range of personal computer and
industrial applications. The Company's networks utilize frequency-hopping,
spread spectrum, packet radio technology that operates in the license-free, 902
to 928 MHz frequency band. The Company's Ricochet(R) service provides
subscriber-based, wireless data communications and Internet access for users of
portable and desktop computers. In September 1995, the Company commenced
commercial operation of Ricochet in California's Silicon Valley. As of July 31,
1996, the Company had approximately 3,900 Ricochet subscribers, and it estimates
that its San Francisco Bay Area service territory, including Silicon Valley,
covered a population of approximately 3.6 million people. The Company's
customers include individuals, corporations and educational institutions using
Ricochet in a broad range of applications, including wireless access to the
Internet, private intranets, local area networks ("LANs"), on-line services and
e-mail. The Company believes that a significant market opportunity exists for
wide area wireless data communications services that provide fast, functional
data transmission at an affordable cost. The Company intends to exploit this
opportunity by deploying its Ricochet networks in major metropolitan areas
throughout the United States and successfully expanding the Ricochet subscriber
base. The Company also sells its UtiliNet(R) products, which provide
customer-owned wireless data communications networks for industrial control and
monitoring, primarily in the electric utility, waste water and natural gas
industries.

This Form 10-K contains forward-looking statements that involve risks and
uncertainties. For example, such statements include statements relating to the
Company's deployment of its Ricochet networks, strategic relationships business
strategy, technological development and other sales, marketing and financial
information. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under the caption "Risk
Factors," as well as those elsewhere in this Form 10-K and any documents
actually or deemed to be incorporated herein by reference.

BACKGROUND

The demand for immediate, convenient and affordable communications,
regardless of location, has grown dramatically over the past decade as a result
of an ever increasing need for improved productivity and access to information.
This demand has been clearly demonstrated by the growth of wireless
communications services, such as cellular telephone and paging services.
According to the Cellular Telecommunications Industry Association ("CTIA"), the
number of domestic cellular telephone subscribers has grown from approximately
91,600 in 1984 to approximately 33.8 million in 1995. In addition, the number of
subscribers to paging services, the most successful wireless data communications
application to date, has also expanded dramatically, growing from approximately
2.6 million in 1984 to approximately 34.1 million in 1995, according to Economic
and Management Consultants International Inc. ("EMCI"). The introduction of
Personal Communications Services ("PCS"), which will provide voice and data
services, is expected to further increase the demand for wireless communications
services. While the attributes of cellular telephone, paging and PCS services
are adequate for voice and certain data applications, there is an increasing
demand for high data rate, wide area wireless access to large amounts of data,
which, the Company believes, will not be cost-effectively met by these services.

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Individuals are increasingly reliant upon the ability to access the large
amount of data available on the Internet, private intranets, LANs, on-line
services and e-mail. For example, the Internet is being used by businesses for
communicating with customers, advertising products and services, publishing
product specifications and completing sales transactions, and by individuals for
entertainment, access to e-mail, information exchange and discussion groups.
According to the findings of International Data Corporation ("IDC"), the number
of domestic Internet users is expected to reach approximately 108 million by the
end of 1999 from approximately 44 million at the end of 1995. Easy-to-use
application software has facilitated broad access to the World Wide Web and its
wide array of text, graphics, video and audio content, increasing the popularity
of the Internet and the demand for high data rate communications solutions.

Today's computer users are demanding the ability to work productively and
use software application programs even when away from their desktop computer.
This trend toward remote computing is reflected in the growing demand for
portable computing devices that can be connected to internal and external
networks from remote locations. IDC estimates that the total domestic installed
base of portable computers will grow to approximately 41.6 million units in 2000
from an estimated 13.2 million units in 1995. The Company believes that a
significant opportunity exists to provide low-cost, high-performance wireless
data services to portable computer users and others that need to communicate
from locations where either convenient access to wired networks, such as the
Internet and private LANs, is unavailable or the use of a dedicated phone line
is expensive or inconvenient. These users include employees who need to access
data while away from their desk, at home or at other locations within their
metropolitan areas and students, faculty and staff who need access from various
locations in and around the school campus.

Organizations are also increasingly seeking cost-effective alternatives to
traditional wired communications for remote data communications. For example,
wireless data communications systems are being used by the electric power, waste
water and natural gas industries to efficiently monitor and control processes
and functions at remote locations. In addition, wireless data communications
solutions have the potential to improve service and reduce costs for
applications such as point-of-sale credit card authorization and delivery
service dispatch.

To date, the number of users of existing wireless data communications
networks has been limited due to the high cost, low data rates or the difficulty
of using such networks. These networks generally employ infrastructures that are
expensive to install and expand. In addition, existing wireless networks
generally use spectrum licensed by the Federal Communications Commissionn
("FCC"), which, when available, is typically very expensive. Together, these
factors have typically resulted in expensive, usage-based pricing structures.
Furthermore, these networks usually operate over narrow radio channels,
restricting user data rates. Finally, many of these networks use proprietary
interfaces, requiring custom applications, thus limiting their ease of use. The
Company believes that a significant market opportunity exists for easy-to-use
wide area wireless data communications networks that can provide fast,
functional data transmission at an affordable cost.

METRICOM SOLUTION

The Company's Ricochet service provides a low-cost, high-performance,
easy-to-use wide area wireless data communications solution for a variety of
users, from individuals to large organizations. Ricochet networks employ an
innovative network architecture in which frequency-hopping, spread spectrum,
digital packet radios are geographically dispersed in a mesh topology. Using
patented routing technology, these intelligent network radios transmit data
packets wirelessly across the Ricochet network along any of a number of
alternative paths until they reach one of the Company's wired access points
("WAPs"), which is connected to a high-speed wired backbone where gateways
provide access to other networks such as the Internet. Unlike other wireless
data communications networks that use radio frequencies licensed by the FCC, the
Company's Ricochet networks were designed to take advantage of license-free,
spread spectrum operation in the 902 to 928 MHz frequency band.

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The Company's innovative Ricochet networks provide the following benefits:

Low Cost. Ricochet employs an efficient network architecture consisting of
components that are easy to install and maintain. Because the primary building
blocks of the Ricochet network are compact, low-cost network radios, the network
is scalable in radio-by-radio increments to provide desired capacity and
coverage. In addition, the Company's use of license-free spectrum provides
significant cost savings. As a result, the Company believes that it offers
solutions that are cost competitive with commonly used wired data communications
services and are significantly less expensive than other wireless data
communications services. The Company's low, fixed monthly pricing structure
ensures that Ricochet subscribers receive a consistent monthly bill, regardless
of their usage.

High Performance. Ricochet offers high-capacity, high data rate, secure
data transmission. The Company's efficient use of the 902 to 928 MHz frequency
band allows for a large number of simultaneous, independent communications at
any given time. With speeds comparable to commonly used wired modems, the
Company believes that Ricochet is faster than other existing wireless data
communications networks and is the only wide area wireless data network able to
meet the high data rate and volume requirements of Internet applications such as
web browsing and transferring large data files. The Company believes that its
use of frequency-hopping spread spectrum technology, combined with encryption,
makes unauthorized interception of data packets difficult and provides greater
security than currently available from other wireless data communications
services.

Ease of Use. Ricochet supports operation with standard TCP/IP protocols
and the AT command set used by telephone modems. This permits the use of
standard third party applications designed to support communication using
dial-up telephone lines, such as those for Internet web browsing and access to
America Online, AppleLink, CompuServe and Lotus cc:Mail. Ricochet is compatible
with most commonly used personal computer hardware and software.

STRATEGY

The Company's strategy is to establish itself as the preferred provider of
wide area wireless data communications solutions. The Company offers low-cost,
high-performance wireless access to the Internet, private intranets, LANs,
on-line services and e-mail and intends to provide its services in major
metropolitan areas across the United States. Key elements of the Company's
strategy are as follows:

DEPLOY RICOCHET NETWORKS IN MAJOR METROPOLITAN AREAS

The Company plans to deploy regional Ricochet networks in a significant
number of major metropolitan areas throughout the United States. As with the
markets for cellular telephone and paging services, the Company believes there
is a significant market for regional wireless data communications services, and
that only a small portion of the total market requires ubiquitous, nationwide
coverage. For example, according to the CTIA, only 13% of United States cellular
telephone service revenues in 1995 were derived from roaming revenues.
Similarly, according to EMCI, only about 3% of United States paging customers in
1994 subscribed to nationwide service. To establish its deployment plans, the
Company prioritizes metropolitan areas based on a number of factors, including
population size, population density, number of computer users, availability of
site agreements for the Company's network infrastructure and strategic value to
the Company. The Company's Ricochet service is presently available throughout
California's Silicon Valley, in other parts of the San Francisco Bay Area and at
eight university campuses across the United States. As of July 31, 1996, the
Company estimates that its Ricochet service territory covered a population of
approximately 3.6 million people. The Company intends to substantially complete
deployment of its Ricochet network in the San Francisco Bay Area in 1996. In
early 1996, the Company began to deploy Ricochet networks in the Seattle,
Washington, and Washington, D.C. metropolitan areas, and service is expected to
begin in both areas in the second half of 1996.

The Company intends to devote additional personnel to obtaining the site
agreements necessary to install its Ricochet network infrastructure. The Company
has begun the process of acquiring these agreements well in advance of
installation of network equipment in additional metropolitan areas in order to
minimize potential delays from lengthy local governmental approval processes.
The Company installs most of its Ricochet

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network radios on street lights on which it leases space from electric
utilities, municipalities or other local government entities. In addition, the
Company is often required to enter into agreements with owners of the
right-of-way in which street lights are located and supply agreements with
providers of electricity to power the Company's network radios. The Company also
leases space on building rooftops for WAP sites. In the event the Company is
unable to negotiate site agreements in a timely manner and on commercially
reasonable terms or at all, it will seek to obtain sites to deploy network
radios on commercial buildings, residential dwellings or similar structures.
While deploying a large area in this manner could be significantly more
expensive than installing radios on street lights, it could reduce the delays
historically experienced in the deployment process.

BROADEN RICOCHET MARKET ACCEPTANCE BY PROVIDING AFFORDABLE, COMPREHENSIVE
SOLUTIONS

To establish broad market acceptance, the Company will continue to provide
low-cost, high-performance wireless data communications solutions to users of
portable and desktop computers who need access to the Internet, private
intranets, LANs, on-line services and e-mail. Unlike many existing wireless
networks, the Company offers a low, fixed monthly price for its basic service,
which ensures that subscribers receive a consistent monthly bill, regardless of
their usage. This is attractive to users who transmit or receive large amounts
of data or remain on-line for extended periods of time. For example, the 1995
Commerce Net/Nielsen Internet Demographics Survey revealed that, during a recent
three-month period, more than 24 million Americans used the Internet, with the
average user on line nearly 5.5 hours each week. Users such as these would
benefit from the fixed monthly pricing structure offered by the Company.

In order to penetrate a broad market, the Company provides a comprehensive
solution that incorporates all of the necessary communications and service
components required to access the Internet. While customers of other Internet
service providers must separately obtain a telephone modem, telephone line,
Internet connection and a web browser, the Company provides all of these in one
package at a competitive price.

DEVELOP STRATEGIC RELATIONSHIPS

The Company intends to accelerate the development, deployment and
commercialization of Ricochet by pursuing partnerships and strategic alliances
with a variety of companies. For example, the Company has entered into a joint
venture with PepData Inc. ("PepData"), a subsidiary of Potomac Electric Power
Company, to own and operate a Ricochet network in the Washington, D.C. area. The
Company believes that similar joint venture arrangements in other metropolitan
areas could provide additional financing and enhance the Company's ability to
acquire site agreements more efficiently. For example, such parties could
provide detailed knowledge of the right-of-way approval process in various local
government jurisdictions. Although the Company intends to concentrate its
resources on the deployment of Ricochet in major metropolitan areas in the
United States, the Company will also evaluate joint ventures and other strategic
alliances to establish Ricochet service internationally.

MAINTAIN TECHNOLOGICAL INDEPENDENCE

The Company's networks and subscriber devices utilize proprietary
technology that the Company has developed internally. The Company is not
dependent upon any of its vendors for the design and development of the core
technology embedded in its network equipment and protocols and believes that
this represents a significant competitive advantage. While the Company intends
to maintain ownership and control of its proprietary technology, it plans to
promote the development of additional subscriber devices by entering into
licensing arrangements with third parties wishing to develop and manufacture
devices intended for use with Ricochet networks.

DEVELOP VERTICAL AND INDUSTRIAL MARKETS

The Company intends to develop vertical and industrial markets with data
communications needs that can be effectively met by the Company's products and
services. Examples of such vertical market opportunities include point-of-sale
credit card authorization and delivery dispatch. In industrial markets, the
Company will focus on sales of additional UtiliNet products and Ricochet service
to support the requirements of customers in the electric, wastewater and natural
gas industries.

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RICOCHET SERVICE

NETWORK CHARACTERISTICS

The Company's Ricochet networks use a wireless data communications
infrastructure to provide wide area coverage in metropolitan areas. With speeds
comparable to commonly used wired modems, the Company believes Ricochet is
faster than other existing wireless data communications networks. Individual
subscribers access the network with wireless portable radio modems that connect
to the serial port of a computer or personal digital assistant ("PDA"). Ricochet
also supports wireless communications from other devices, such as point-of-sale
terminals, that can incorporate or connect to a portable radio modem.

The primary elements of a Ricochet network are compact, inexpensive network
radios that are deployed on street lights, utility poles and building roofs in a
geographical mesh pattern. The Company's meshed network architecture and
patented routing technology moves data packets across the network along any of a
number of alternative paths, thus allowing data packets to be routed around busy
or non-functioning radios. In addition, system congestion can be reduced and
network coverage and capacity increased by the installation of one or more
relatively inexpensive network or WAP radios where needed. Network radios are
quickly and easily installed since no wired communications line is required and
power is normally obtained directly from the street light. A WAP, which
typically incorporates eight WAP radios to provide the required capacity,
provides service to clusters of up to 140 network radios. The WAP and its
associated WAP radios typically provide coverage for up to a 25 square mile
area. All of the WAPs in the Ricochet network are interconnected with a
high-speed frame relay wired backbone. This wired backbone provides access
points to the public switched telephone network, gateways to other networks such
as the Internet, private intranets and LANs, which provide e-mail and
value-added services.

A data packet transmitted by a subscriber's Ricochet wireless modem travels
through one or more network radios wirelessly to a WAP where it is routed to its
destination over the wired backbone. The network is designed so that a data
packet typically requires no more than one or two hops through network radios
before reaching a WAP. Destinations may include another Ricochet modem anywhere
in the Ricochet network, a public packet-switched network like the Internet, a
private intranet, a LAN or an on-line service. In addition, Ricochet modems can
support communications with one another without accessing network radios,
provided that they are close enough to establish a direct radio connection.
Network performance is currently monitored and controlled by the Company's
network operations facility located in Houston, Texas. As the extent and
complexity of the Ricochet network grows, certain network management activities
will be distributed throughout the network to provide redundancy and limit
administrative communications over the network.

Ricochet supports operation with standard protocols and interfaces. This
permits the use of software applications intended to communicate over dial-up
telephone lines for access to the Internet, private intranets, LANs, on-line

services and e-mail.

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NETWORK DEPLOYMENT

The network deployment process consists of obtaining site agreements,
including lease, supply and right-of-way agreements, designing the network
configuration, acquiring and installing the network infrastructure and testing
the network. The Company believes that deploying the initial service territory
in a metropolitan area of approximately 650 square miles with a population of
approximately 2.1 million people (an "average metropolitan area," which is
equivalent to an average of the 50 largest Urbanized Areas, as defined by the
U.S. Bureau of the Census), will take approximately 12 to 18 months depending on
numerous factors, the most time-consuming of which is obtaining the necessary
site agreements. Once the necessary site agreements have been obtained,
installing the network infrastructure and testing the network can typically be
completed in a relatively short period of time. The service territory in a
metropolitan area will typically be expanded beyond the initial service
territory as additional site agreements are obtained and as the market for the
Company's service expands.

The Company believes that the total cost to deploy the initial service
territory in an average metropolitan area will be approximately $5 million to $7
million depending on a variety of factors, including the size of the area to be
deployed, topology, density and construction of buildings and costs associated
with availability of site agreements. The Company believes that, for an average
metropolitan area, the cost of efforts to obtain the necessary site agreements
and design the network configuration will be approximately $500,000 to $1
million. These costs primarily consist of personnel costs and are generally
expensed as incurred. The cost to acquire and install the network equipment will
be approximately $4.5 million to $6 million depending on the factors discussed
above. These costs are capitalized. As the deployment process progresses, the
Company begins to incur rent and communications costs associated with the
installed equipment before revenues are generated. These costs, which are not
expected to be significant, are expensed as incurred.

MARKETING, SALES AND SUPPORT

The Company has targeted a number of specific markets with demonstrated
data communication needs that can be effectively addressed by Ricochet. These
markets include individuals, corporations and students, faculty and staff at
educational institutions. The Company is building awareness in its markets
through regionally focused public relations activities, print and radio
advertising, attendance at trade shows and exhibits, direct mail campaigns and
subscriber referral programs. The Company utilizes direct sales representatives
primarily to target key corporate accounts, such as Hewlett-Packard Company and
Sun Microsystems, Inc., where users of portable computers are currently using
Ricochet to access the Internet, private intranets and LANs. The Company sells
its services to individuals in metropolitan areas and to students, faculty and
staff at educational institutions through telephone sales, direct sales
representatives and a limited number of independent dealers and retailers. The
Company intends to increase the number of independent dealers and retail outlets
in the future and may also sell its products and service through resellers.

Because the Company believes that a predictable service price is important
to establishing broad market acceptance, the Company does not currently intend
to impose usage-based pricing for its basic service, unlike many existing
wireless networks. As of March 29, 1996, to access the Ricochet network and
receive unlimited Internet access, subscribers typically pay a $45.00 activation
fee and a fixed monthly fee of $29.95 for the basic service package. Additional
subscriber charges are incurred for value-added services such as premium e-mail,
fax and access to the public switched telephone network. Subscribers are also
required to rent or purchase a Ricochet modem from the Company. Currently,
subscribers may rent the modem for $10.00 per month or, with a year's
subscription, purchase the modem for $299.00.

The Company provides timely, high quality customer service and technical
support to meet the needs of its customers. The Company offers customer service
and technical support through a toll-free telephone number and World Wide
Web-based support tools. The Company believes that a high level of customer
service and technical support is essential to its business and expects to incur
significant expenditures in the future to increase its service and support
capabilities.

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COMPETITION

Competition in the market for wide area wireless data communications
services is intensifying and a large number of companies in diverse industries
are expected to enter the market. There can be no assurance that the Company
will be able to compete successfully in this market. A number of privately and
publicly held communications companies have developed or are developing wireless
data communications services and products using competing technologies. Two
wireless data communications network services, ARDIS and RAM Mobile Data
Networks ("RAM"), are widely installed and operating across the United States
and in some foreign countries. Cellular Digital Packet Data ("CDPD") is either
installed or being installed in a number of metropolitan areas and analog
cellular networks are widely available throughout the United States. Additional
competition is expected from companies that currently provide paging services
and from emerging providers of PCS. Most of the current and anticipated
competitors in this market have substantially greater management, technical,
marketing and financial resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing new technologies,
products and services that achieve broader market acceptance than Ricochet,
which could render Ricochet obsolete or noncompetitive.

Competition in the market for wide area wireless data communications
services is based primarily on cost of service, data rate, ease of use,
including compatibility with existing applications, cost and size of modems,
extent of coverage, customer support, security and effectiveness of distribution
channels and marketing strategies. Compared to ARDIS and RAM, the Company
believes that Ricochet has advantages with respect to cost, data rate, ease of
use and security. However, the Company recognizes that ARDIS and RAM currently
have advantages with respect to cost and size of subscriber equipment, extent of
coverage and customer support. Compared to CDPD and analog cellular, the Company
believes that Ricochet has advantages with respect to cost, security and data
rate. However, the Company recognizes that CDPD and analog cellular currently
have advantages with respect to extent of coverage and customer support. The
Company's ability to compete on the basis of support services and extent of
coverage will be determined by the growth of the Ricochet business, which cannot
be reliably estimated.

A broad market for wireless data communications services has not yet
developed. In order for the market to develop and for wireless services to
compete effectively with widely available wired solutions, the Company believes
that wireless data communications services will need to provide data rates and
functionality comparable to those of the predominant mode of wired
communications at an affordable cost, without compromising ease of use. The
Company believes that its Ricochet service is comparable to the commonly used
wired solutions with respect to data rate, functionality, ease of use and cost
while providing the additional advantage of portability.

In addition, the Company's Internet access services compete with those
offered by a large number of companies. Many of these companies have had
significantly more experience offering such services than the Company. Several
of the current and anticipated competitors in this market have substantially
greater management, technical, marketing and financial resources than the
Company. Certain competitors could choose to offer Internet access services at a
price substantially below the cost of providing such services. Such actions
would place the Company at a substantial competitive disadvantage.

STRATEGIC PARTNERSHIPS

The Company has entered into a joint venture with PepData to own and
operate a Ricochet network in the Washington, D.C. area. PepData will finance up
to $7 million of the cost of deploying Ricochet in the Washington, D.C.
metropolitan area in exchange for a 20% ownership interest in the joint venture.
The Company provides all management, marketing, sales, network installation,
operations, maintenance, administrative and other services for the joint venture
and, subject to certain limitations, is reimbursed for such services by the
joint venture.

The Company has entered into a memorandum of understanding with another
party to install and operate a Ricochet network in a portion of a metropolitan
area in the Northeast. Pursuant to the memorandum of understanding, the Company
will receive $2.5 million as it deploys this Ricochet network, plus a five-year
contract for 1,000 subscribers upon reaching a certain milestone. Also pursuant
to the memorandum of

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understanding, the strategic partner will receive, subject to certain regulatory
approvals, an option to purchase 20% of the ownership interest in the Company's
subsidiary, which will be formed to own the proposed network, upon the payment
of an additional $2.5 million.

In both of these cases the joint venture partner makes capital
contributions up to the maximum amount specified and, subject to acquiring
necessary site agreements, periodically in accordance with a predefined
schedule. In addition, there is a provision for a preferential distribution of
cash to the joint venture partner until such time that the initial investment is
recovered through the operations of the joint venture.

UTILINET NETWORKS

The Company's UtiliNet products provide customer-owned wireless data
communications networks for industrial control and monitoring, primarily in the
electric utility, wastewater and natural gas industries. UtiliNet networks
provide high-capacity, reliable, secure, two-way wireless data communications
for multi-point-to-multi-point communications over large geographic areas.
UtiliNet is designed to be easy to install, operate and expand, making it
suitable for sale to industrial customers that require privately owned and
operated networks. A UtiliNet network may be accessed at any packet radio
through the Company's proprietary software products or through software products
designed by third parties to work with UtiliNet. In a similar manner, many
application devices such as remote terminal units, meters or other controls and
monitoring equipment from third parties are compatible with the UtiliNet
network. In addition to direct sales, marketing programs are underway in
UtiliNet's main markets to recruit system integrators and value added resellers.

The Company believes that the principal competitive factors in the markets
served by UtiliNet are the ability to interface with and support other
companies' products, the capabilities and characteristics of products and
systems, customer support capabilities and price. The Company believes that it
competes favorably with respect to the ability to interface with and support
other companies' products and capabilities and characteristics of products and
systems, and that it has improved its competitive position with respect to
customer support and price. However, a number of competitors have substantially
greater financial, technical and marketing resources than the Company, offer
products or have announced new products that provide or, when available, will
provide many of the capabilities of the UtiliNet product line. There can be no
assurance that the Company's competitors will not succeed in developing services
or products that are more effective than UtiliNet, that would render UtiliNet
obsolete or non-competitive, or that would be priced more competitively than
UtiliNet.

TECHNOLOGY

Unlike other wireless data communications networks that use radio
frequencies licensed by the FCC exclusively to specific users, the Company's
networks were designed to take advantage of FCC regulations that permit
license-free, spread spectrum operation in the 902 to 928 MHz frequency band.
The Company believes that the use of license-free, spread spectrum technology
enables the Company to expand coverage more easily, due in part to the
increasing difficulty and cost of obtaining exclusive FCC licenses.

The Company's networks utilize a hardware and software platform based on
spread spectrum, digital, packet-switched radio technology. In packet-switched
networks such as the Company's and the Internet, data is communicated in
discrete units called packets rather than in a continuous stream. Network radios
are the primary component of the hardware platform and are geographically
dispersed in a mesh topology. The Company's meshed network architecture and
patented routing technology moves data packets across the network along any of a
number of alternative paths, thus allowing data packets to be routed around busy
or non-functioning radios. If interference is encountered on any given channel,
the radio automatically hops to another channel. A high level of security is
offered by the frequency-hopping pattern of the Company's spread spectrum
technology, which makes interception of data packets by unauthorized users
difficult. In 1996, the Company incorporated encryption capability into the
Ricochet service to provide an additional level of security.

The Company believes that the mesh topology used in its networks provides
certain advantages over the more typical star topology, where all communications
are required to pass through one or more central base

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<PAGE> 10

stations or hubs. In a star topology system, congestion and impaired signal
communications because of weak signal strength must generally be addressed by
installation of another hub, typically a costly and time consuming process. With
the Company's networks, system congestion can be reduced and network coverage
and capacity increased by the installation of one or more relatively inexpensive
network or WAP radios where needed.

The Company's patented, software-based, radio-to-radio routing method is
based on the geographic address of each radio, eliminating the need for static
routing tables. Through a built-in acquisition routine, network radios
communicate with neighboring network radios to learn their identity, geographic
location, how well they can communicate with each other and the frequencies
where they can be found at any particular point in time. When this process is
complete, a network radio sends data packets by adjusting its transmit frequency
to the receive frequency of the intended receiving radio. In the course of
network operation, if a network radio is unavailable or out of service, a data
packet being transmitted across the network is immediately rerouted along
another path by the transmitting radio.

RESEARCH AND DEVELOPMENT

The Company intends to maintain technology leadership by continuing
significant investment in research and development of its networking products.
The Company focuses its resources on enhancements and improvements to the
technology employed by the Company's networks, primarily that used by Ricochet
networks, and to develop complementary technology. The Company also intends to
invest significant resources to develop various types of subscriber devices that
will address the evolving requirements of the Company's customers and the
equipment and applications they use. The markets in which the Company
participates and intends to participate are characterized by rapid technological
change. The Company believes that it will for the foreseeable future be required
to make significant investments of resources in research and development in
order to continue to enhance its services and products. Research and development
expense was $3.3 million, $8.7 million and $9.1 million in 1993, 1994 and 1995,
respectively. Failure by the Company to anticipate or respond adequately to
changes in technology or customer preferences or any significant delays in
product development or introduction could have a material adverse effect on the
Company's business, financial condition and operating results.

The Company recently purchased an option (the "Option") to acquire Overall
Wireless Communications Corporation ("Overall Wireless"), a corporation that
holds a nationwide, wireless communications license issued by the FCC with
respect to 50 kHz of radio spectrum in the 220 to 222 MHz frequency band (the
"License"). The Company paid $700,000 for the Option and agreed to loan to
Overall Wireless up to $2 million for the construction of a system utilizing the
License, of which $500,000 had been loaned as of July 31, 1996. The Option,
which terminates in January 1997, may be extended until July 1997 under certain
circumstances upon payment by the Company of an additional $500,000. The
additional consideration payable upon exercise of the Option includes a
combination of cash and stock valued at $7.3 million in the aggregate. The
transaction is the subject of pending litigation, the outcome of which could
have a material adverse effect on the Company's financial condition or operating
results. See "Risk Factors -- Risks Relating to Potential Acquisition of Overall
Wireless and Related Legal Proceedings" and "-- Pending Litigation."

In the event that the Option becomes exercisable and is in fact exercised
by the Company, the Company intends to use the License to provide enhancements
to its Ricochet networks, which could include "wake-up" features that would
extend the battery life of Ricochet devices and short messaging capabilities
that could improve the "reach" of the Ricochet network significantly. The
License could also enable the Company to offer additional wireless services such
as low-cost telemetry, two-way paging and a wireless return path for wireless
cable customers. All of such uses would require significant engineering efforts
by the Company to develop satisfactory equipment for 220 MHz operations. In
addition, the FCC rules governing the spectrum covered by the License currently
permit only mobile voice communications and would not permit the uses of the
License proposed by the Company. If, by January 1, 1997, the FCC rules are not
changed to permit such activities or the FCC has not approved the transfer of
the License to the Company, the Company can terminate the Option and obtain a
refund of $350,000. See "Federal Communications Commission Regulation."

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<PAGE> 11

MANUFACTURING

The Company's printed circuit boards and other subassemblies are assembled
on a contract basis by local manufacturers. Final assembly and test operations
are performed internally. The Company believes that it has or can develop
adequate capacity to meet forecasted demand for Ricochet products and UtiliNet
networks at least through 1996. However, if customers begin to place large
orders for the Company's products or if the Company decides to accelerate
deployment of Ricochet, the Company's present manufacturing capacity may prove
inadequate. To be successful, the Company's products and components must be
manufactured in commercial quantities at competitive cost and quality. The
Company's long-term manufacturing strategy is to supplement its manufacturing
capabilities by increasing outsourcing of product assembly and test and by
licensing other companies to manufacture certain of the Company's products. In
the future, the Company will be required to achieve significant product and
component cost reductions. If the Company is unable to develop or contract for
manufacturing capabilities on acceptable terms and if product and component cost
reductions are not achieved, the Company's competitive position, and the ability
of the Company to achieve profitability, could be materially impaired.

The Company generally uses standard component parts that are available from
multiple sources. However, certain component parts used in the Company's
products are available only from sole or limited source vendors. The Company's
reliance on these sole or limited source vendors involves certain risks,
including the possibility of a shortage of certain key component parts and
reduced control over delivery schedules, manufacturing capability, quality and
costs. In addition, some key component parts require long delivery times. The
Company has in the past experienced delays in its ability to obtain certain key
component parts from suppliers. In the event of future supply problems from the
Company's sole or limited source vendors, the inability of the Company to
develop alternative sources of supply quickly and on a cost-effective basis
could materially impair the Company's ability to manufacture and deliver its
products and to implement its services.

PATENTS AND LICENSES

The Company relies on a combination of patent, copyright, trademark and
trade secret protection and non-disclosure agreements to establish and protect
its proprietary rights. The Company has been issued 20 patents in the United
States, which expire on dates between 2004 and 2014. As of March 29, 1996
foreign corresponding patents of one domestic patent have been granted so far in
nine foreign countries, and other foreign and domestic patents are pending. The
Company has applied for patents covering several other features of the Company's
current products. However, there can be no assurance that patents will issue
from any pending applications or, if patents do issue, that claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any patents issued to the Company or that may be issued
in the future will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
The Company is not aware of any infringement of its patents by others.

Although the Company has pursued and intends to continue pursuing patent
protection of inventions that it considers important, the Company does not
believe that its patent position has as much significance as other competitive
factors. See "Competition." However, these patents may not preclude competitors
from developing equivalent or superior products and technology to those of the
Company. There can be no assurance that the measures adopted by the Company for
the protection of its intellectual property will be adequate to protect its
interests.

The Company also pays license fees to third parties, such as Netscape
Communications Corporation, RSA Data Security Inc., Counterpoint Systems
Foundry, Inc. and NetManage, Inc. for rights to use or incorporate certain
software or technology in its products. Such payments are typically based on
products shipped. In addition, the Company pays a royalty to Southern California
Edison ("SCE") based on sales and internal use of products incorporating
technology developed with funding from SCE pursuant to the Company's development
agreement with them.

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<PAGE> 12

FEDERAL COMMUNICATIONS COMMISSION REGULATION

The Company is subject to various FCC regulations. The FCC, pursuant to the
Communications Act of 1934, as amended (the "Communications Act"), regulates
non-government use of the electromagnetic spectrum in the United States,
including the 902 to 928 MHz frequency band currently used by the Company's
radio products. Part 15 of the FCC's regulations (47 C.F.R. sec. 151 et seq.)
specifies frequency bands in which the operation of certified radio equipment is
permitted without a license. The Company has designed its products to conform
to, and be certified under, the FCC's Part 15 spread spectrum rules.

License-free operation of the Company's products and other Part 15 products
in the 902 to 928 MHz band is subordinate to certain licensed and unlicensed
uses of the band, including industrial, scientific and medical equipment, the
United States government applications and, in certain instances, location and
monitoring systems and amateur radio services. The Company's products must not
cause harmful interference to any non-Part 15 equipment operating in the band
and must accept interference from any of them, as well as from any other Part 15
equipment operating in the band. If the Company were unable to eliminate any
such harmful interference caused by its products through technical or other
means, the Company or its customers could be required to cease operations in the
band in the locations affected by the harmful interference. Additionally, in the
event the 902 to 928 Mhz band becomes unacceptably crowded, and no additional
frequencies are allocated by the FCC, the Company's business, financial
condition and results of operations could be materially and adversely affected.

The regulatory environment in which the Company operates is subject to
change. Changes in the regulation of the Company's activities by the FCC, as a
result of its own regulatory process or as directed by legislation or the
courts, including changes in the allocation of available spectrum, could have a
material adverse effect on the Company, and the Company might deem it necessary
or advisable to move to another of the Part 15 bands or to obtain the right to
operate in the licensed spectrum or other portions of the unlicensed spectrum.
Redesigning products to operate in another band could be expensive and time
consuming, and there can be no assurance that such redesign would result in
commercially viable products. In addition, there can be no assurance that, if
needed, Metricom could obtain appropriate licensed or unlicensed spectrum on
commercially acceptable terms, if at all. The FCC has issued a Notice of
Proposed Rule Making concerning amendment of the rules for Part 15 spread
spectrum transmitters to expand the ability of equipment manufacturers to
develop spread spectrum systems for unlicensed use. While the Company believes
that the proposed rules will not have any significant adverse impact on its
operations, there can be no assurance that the FCC will not take regulatory
action in this proceeding which will result in material adverse effects on the
Company.

The FCC recently adopted rules for location and monitoring system ("LMS")
services that are, in certain instances, senior to the Company's unlicensed
operation in the 902 to 928 Mhz band because they are licensed. While the
Company believes that there are sufficient means to mitigate harmful
interference by its networks to this service, there can be no assurance that the
operation of one or more of the Company's network installations at particular
locations would not be adversely affected. These rules are currently under
reconsideration by the FCC. While the Company believes that the revised rules
ultimately adopted by the FCC will serve to further minimize any impact LMS will
have on present license-free use of the band, there can be no assurance that the
FCC will not take regulatory action in this proceeding that would have a
material adverse effect on the Company's business, financial condition or
operating results.

The FCC has also solicited comments on a private entity's proposal to allow
Wind Profiler Radar Systems in the 902 to 928 Mhz frequency band. While not
currently the subject of proposed rules, if the FCC proposes and ultimately
adopts such rules, there can be no assurance that such regulation would not have
a material adverse effect on the Company.

The Company recently purchased an option to acquire a corporation that
holds a nationwide wireless communications license issued by the FCC with
respect to 50 kHz of radio spectrum in the 220 to 222 MHz frequency band. Before
the license can be transferred to the Company, Overall Wireless must construct
40% of the system, and the FCC must approve the transfer. Operation in the
licensed service is governed by Part 90 of the FCC's rules (47 C.F.R. sec. 90.01
et seq.). At present, these rules permit only mobile voice communica-

12
<PAGE> 13

tions. The Company is interested in using the 220 MHz license for communications
that are not currently authorized under Part 90, but that are proposed in a
current Notice of Proposed Rule Making. While the Company believes that the
system will be sufficiently constructed, that the FCC will approve the license
transfer, and that the FCC will adopt 220 MHz rules as proposed, there can be no
assurance that the FCC will not take action that would significantly affect the
Company's investment in Overall Wireless and the Company's ability to develop
220 MHz equipment to perform as desired. There also can be no assurance, even if
the FCC adopts 220 MHz rules, as proposed, that the Company will be able to
develop satisfactory equipment for 220 MHz operations. There also can be no
assurance that the plaintiff in the pending litigation will not delay or be
successful in challenging the transfer of the license to the Company. See
"Research and Development," and "Risk Factors -- Risks Relating to Potential
Acquisition of Overall Wireless and Related Legal Proceedings" and " -- Pending
Litigation."

The FCC is considering proposed rules that may require the Company to make
substantial contributions to the Universal Service Fund. While the Company
believes that this regulatory action would not have any significant adverse
impact on the Company, there can be no assurance that these regulatory actions
will not result in material adverse effects on the Company.

STATE REGULATION OF COMMUNICATIONS ACTIVITY

As a result of the recent amendment to the Communications Act, certain
states may attempt to regulate the Company with respect to the terms and
conditions of service offerings. While the Company believes that state
regulation, if any, will be minimal, there can be no assurance that such
regulation will not have a material adverse effect on the Company's business,
financial condition or operating results.

BACKLOG

The Company had no backlog at March 31, 1995 and $2.4 million of backlog at
March 29, 1996. The Company expects to fill the orders by the end of the third
quarter of 1996. Backlog as of any particular date is cancelable at any time
without penalty and should not be relied on as an indicator of future revenues.

EMPLOYEES

As of March 29, 1996, the Company employed approximately 180 people, 163 of
whom were based in the United States. Of the total employees, 36 were in
manufacturing, 30 were in network operations and deployment, 44 were in research
and development, 42 were in sales, marketing and customer support and 28 were in
administration. The Company is highly dependent on certain members of its
management and engineering staff, the loss of the services of one or more of
whom might impede the achievement of the Company's development, deployment and
commercialization of the Company's products and services. None of these
individuals has an employment contract with the Company. None of the Company's
employees is represented by a labor union. The Company has not experienced any
work stoppage and considers its relations with its employees to be good.

RISK FACTORS

Uncertainty Regarding Deployment of Ricochet; Acquisition of Deployment
Agreements

The Company believes that its future success depends on the successful
deployment of Ricochet in major metropolitan areas of the United States. Before
offering Ricochet service, the Company must complete deployment of the network
in a portion of a metropolitan area that is large enough to justify commencement
of marketing and sales efforts. The deployment process consists of obtaining
site agreements, designing the network configuration, installing the network
infrastructure and testing the network. The Company substantially completed
deployment of its first Ricochet network in the Silicon Valley portion of the
San Francisco Bay Area, in September 1995. After initial deployment and
commencement of service in a portion of a metropolitan area, the Company can
extend the geographic coverage of the Ricochet network to include additional
portions of the metropolitan area, as the Company is currently doing in the San
Francisco Bay Area. Deployment has also begun in the Seattle, Washington and
Washington, D.C. metropolitan areas. The

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<PAGE> 14

Company believes that the deployment of the initial service territory in a
metropolitan area equivalent to an average of the 50 largest Urbanized Areas, as
defined by the U.S. Bureau of the Census, will take approximately 12 to 18
months depending on a number of factors, including availability of sufficient
financial, technical, marketing and management resources, technological
feasibility and availability of Ricochet radios and modems. The Company has
limited prior experience in deploying and operating a wireless data
communications service. Accordingly, there can be no assurance as to the timing
or extent of the deployment of Ricochet.

The construction of the Company's networks will depend, to a significant
degree, on the Company's ability to lease or acquire sites for the location of
its network equipment and to maintain agreements for such sites as needed. The
Company installs most of its Ricochet network radios on street lights on which
it leases space from electric utilities, municipalities or other local
government entities. In addition, the Company is often required to enter into
agreements with owners of the right-of-way in which street lights are located
and supply agreements with providers of electricity to the street lights to
provide power for the Company's network radios. The process of obtaining these
agreements is complex and has caused significant delays in deploying Ricochet
networks. Among other factors, the Company must deal separately with each city
in which it plans to deploy its network. In some instances, cities have never
faced requests similar to the Company's, are reluctant to grant such rights or
do not have a process in place to do so. The Company must then meet with various
municipal organizations to discuss issues such as pricing, health and safety
concerns, traffic disruption, aesthetics and citizen concerns. In the event the
Company is unable to negotiate site agreements in a timely manner and on
commercially reasonable terms or at all, it would need to obtain sites to deploy
network radios on commercial buildings, residential dwellings or similar
structures. Deploying a large area in this manner could be significantly more
expensive than installing network radios on street lights and may be restricted
or prohibited by a municipality. The Company also leases space on building
rooftops for its WAP sites. In connection with the leasing of WAP sites, the
Company faces competition with other providers of wireless communication
services. The Company expects that the site acquisition process will continue
throughout the construction of the Company's networks. Each stage of the process
involves various risks and contingencies, many of which are not within the
control of the Company and any of which could adversely affect the construction
of the Company's networks should there be delays or other problems. See
"Strategy" and "Ricochet Service -- Network Deployment."

Uncertainty of Market Acceptance

Commercialization of Ricochet is subject to market acceptance risks. A
broad market for wide area wireless data communications services has not yet
developed. As a result, the extent of the potential demand for Ricochet service
cannot be reliably estimated. In addition, the Company has limited experience
marketing to individual subscribers. As of July 31, 1996, the Company had
approximately 3,900 subscribers. The Company believes that market acceptance
depends principally on cost competitiveness, data rate, ease of use, including
compatibility with existing applications, cost and size of Ricochet modems,
extent of coverage, customer support, marketing, distribution and pricing
strategies of the Company and competitors, Company reputation and general
economic conditions. Some of the foregoing factors are beyond the control of the
Company. If the Company's customer base for Ricochet does not expand as required
to support the deployment of additional networks, the Company's business,
financial condition and operating results will be materially and adversely
affected. In addition, the market for wireless communications services is
characterized by a high turnover rate for customers. There can be no assurance
that the Company will be able to retain existing or future customers. See
"Strategy" and "Ricochet Service -- Marketing, Sales and Support."

Continuing Net Losses; Negative Cash Flow

The Company has incurred cumulative net losses since inception to March 29,
1996 of approximately $58 million. During the year ended December 31, 1995 and
the three-month period ended March 29, 1996, the Company incurred net losses of
approximately $23.5 million and $7.1 million, respectively. The Company expects
that net losses and negative cash flow from operating activities will increase
in the future as a result of the continued development, deployment and
commercialization of its Ricochet networks. There can be no

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<PAGE> 15

assurance that the Company will achieve or sustain profitability or positive
cash flow from operating activities in the future. In addition, the Company's
ability to achieve or sustain positive cash flow from operating activities may
be restricted by contractual arrangements with joint venture partners which may
limit distributions of cash to the Company from certain joint ventures.

Capital Needs; Uncertainty of Additional Financing

The Company intends to continue the development, deployment and
commercialization of its Ricochet networks. The timing and amount of capital
expenditures may vary significantly depending on numerous factors including
market acceptance of Ricochet, availability and financial terms of site
agreements for the Company's network infrastructure, availability of Ricochet
radios and modems and availability of sufficient management, technical,
marketing and financial resources. The Company will need to raise substantial
additional funds through the sale of its equity or debt securities in private or
public financings or through strategic partnerships in order to extend the
deployment and commercialization of Ricochet to a significant number of
metropolitan areas. No assurance can be given that additional financing will be
available or that, if available, such funding can be obtained on terms favorable
to the Company. Should the Company be unable to obtain additional financing, it
may be required to scale back the planned deployment of its Ricochet networks
and reduce capital expenditures, which would have a material adverse effect on
the Company's business, financial condition and operating results.

Risks of Developing Technology

Neither Ricochet nor UtiliNet networks have been in commercial operation
for an extended period of time. There can be no assurance that unforeseen
problems will not develop with respect to the Company's technology or products
or that the Company will be successful in completing the development of its
technology and products. Significant risks remain as to the technological
performance of the Company's services and products. These include, for example,
firmware failures, problems associated with large-scale deployment, inability of
networks to meet expected performance in data rate, latency, capacity and range,
hardware reliability and performance problems, problems associated with links
between Ricochet network radios, WAPs, the wired backbone and other wired
networks, excessive interference with or by the Company's networks, failure to
receive FCC certification, inability to reduce product size and cost and timing
of completion of development. Given the limited deployment of Ricochet to date
there can be no assurance that selected Ricochet network components will be
adequate to meet the geographic and radio frequency propagation characteristics
of new areas of development. For example, in mid-1995 because of network
performance problems discovered during the initial deployment of the Ricochet
network in the Silicon Valley, the Company had to redesign certain portions of
its Ricochet radios and modems to improve transmission and reception quality and
upgrade all of the radios that had been deployed to date. Delays in
implementation of the Company's networks as a result of technical difficulties
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Technology" and "Federal Communications
Commission Regulation."

Highly Competitive Industry

Competition in the market for wide area wireless data communications
services is intensifying and a large number of companies in diverse industries
are expected to enter the market. There can be no assurance that the Company
will be able to compete successfully in this market. A number of privately and
publicly held communications companies have developed or are developing wireless
data communications services and products using competing technologies. Two
wireless data communications network services, ARDIS and RAM, are widely
installed and operating across the United States and in some foreign countries.
CDPD is either installed or being installed in a number of metropolitan areas
and analog cellular networks are widely available throughout the United States.
Additional competition is expected from companies that currently provide paging
services and from emerging providers of PCS. Most of the current and anticipated
competitors in this market have substantially greater management, technical,
marketing and financial resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing new

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<PAGE> 16

technologies, products and services that achieve broader market acceptance,
which could render Ricochet obsolete or noncompetitive.

A broad market for wide area wireless data communications services has not
yet developed. In order for the market to develop and for wireless services to
compete effectively with widely available wired solutions, the Company believes
that wireless data communications services will need to provide data rates and
functionality comparable to those of the predominant mode of wired
communications at an affordable cost without compromising ease of use.

A number of competitors have substantially greater financial, technical and
marketing resources than the Company, offer products or have announced new
products that provide or, when available, will provide many of the capabilities
of the UtiliNet product line. There can be no assurance that the Company's
competitors will not succeed in developing services or products that are more
effective that UtiliNet, that would render UtiliNet obsolete or non-competitive,
or that would be priced more competitively than UtiliNet. See "Competition" and
"UtiliNet Networks."

Technological Change

The market for data communications systems is characterized by rapidly
changing technology and evolving industry standards in both the wireless and
wireline industries. The Company's success will depend to a substantial degree
on its ability to develop and introduce in a timely and cost-effective manner
enhancements to its existing systems and new products that meet changing
customer requirements and evolving industry standards. For example, increased
data rates, such as those provided by wired solutions like Integrated Services
Digital Network ("ISDN"), may affect customer perceptions as to the adequacy of
the Company's services and may also result in the widespread development and
acceptance of applications that require a higher data rate than the Company's
Ricochet service currently provides. There can be no assurance that the
Company's technology or systems will not become obsolete upon the introduction
of alternative technologies. If the Company does not develop and introduce new
products and services and achieve market acceptance in a timely manner, its
business, financial condition and operating results could be materially and
adversely affected.

Federal and State Regulation of Communications Activities

The Company is subject to various FCC regulations. The FCC, pursuant to the
Communications Act, regulates non-government use of the electromagnetic spectrum
in the United States, including the 902 to 928 MHz frequency band currently used
by the Company's radio products. Part 15 of the FCC's regulations (47 C.F.R.
sec. 151 et seq.) specifies frequency bands in which the operation of certified
radio equipment is permitted without a license. The Company has designed its
products to conform to, and be certified under, the FCC's Part 15 spread
spectrum rules.

License-free operation of the Company's and other Part 15 products in the
902 to 928 MHz band is subordinate to certain licensed and unlicensed uses of
the band, including industrial, scientific and medical equipment, the United
States government and, in certain instances, location and monitoring systems and
amateur radio services. The Company's products must not cause harmful
interference to any non-Part 15 equipment operating in the band and must accept
interference from any of them, as well as from any other Part 15 equipment
operating in the band. If the Company were unable to eliminate any such harmful
interference caused by its products through technical or other means, the
Company or its customers could be required to cease operations in the band in
the locations affected by the harmful interference. Additionally, in the event
the 902 to 928 MHz band becomes unacceptably crowded, and no additional
frequencies are

16
<PAGE> 17

allocated by the FCC, the Company's business, financial condition and operating
results could be materially and adversely affected.

The FCC recently adopted rules for LMS services that are, in certain
instances, senior to the Company's unlicensed operation in the 902 to 928 MHz
band because they are licensed. While the Company believes that there are
sufficient means to mitigate harmful interference by its networks to this
service, there can be no assurance that the operation of one or more of the
Company's network installations at particular locations would not be adversely
affected. These rules are currently under reconsideration by the FCC. While the
Company believes that the revised rules ultimately adopted by the FCC will serve
to further minimize any impact LMS will have on present license-free use of the
band, there can be no assurance that the FCC will not take regulatory action in
this proceeding that would have a material adverse effect on the Company's
business, financial condition or operating results.

The Company recently purchased the Option to acquire Overall Wireless, a
corporation that holds a nationwide wireless communications license, issued by
the FCC with respect to 50 kHz of radio spectrum in the 220 to 222 MHz frequency
band. Before the license can be transferred to the Company, Overall Wireless
must construct 40% of the system, and the FCC must approve the transfer.
Operation in the licensed service is governed by Part 90 of the FCC's rules (47
C.F.R. sec. 90.01 et seq.). At present, these rules permit only mobile voice
communications. The Company is interested in using the 220 MHz license for
communications that are not currently authorized under Part 90, but that are
proposed in a current Notice of Proposed Rule Making. There can be no assurance
that the FCC will approve the license transfer or that the FCC will not take
action that would significantly affect the Company's investment in Overall
Wireless. See "-- Risks Relating to Potential Acquisition of Overall Wireless
and Related Legal Proceedings" and "Federal Communications Regulation."

On an ongoing basis, the FCC proposes and issues new rules and amendments
to existing rules that affect the Company's business. The Company closely
monitors the FCC's activities and, when appropriate, files comments on the
proposed rules. The Company is currently monitoring several proceedings at the
FCC that could have an impact on the Company. If the FCC adopts rules that
directly or indirectly restrict the Company's ability to conduct its business as
currently conducted or proposed to be conducted, the Company's business,
financial condition or operating results could be materially adversely affected.
See "FCC Regulation."

Risks Relating to Potential Acquisition of Overall Wireless and Related Legal
Proceedings

The Company recently purchased an option to acquire Overall Wireless, a
corporation that holds a nationwide, wireless communications license issued by
the FCC with respect to 50 kHz of radio spectrum in the 220 to 222 MHz frequency
band. The Company paid $700,000 for the Option and agreed to loan to Overall
Wireless up to $2 million for the construction of a system utilizing the
License, of which approximately $500,000 had been loaned as of July 31, 1996.
The Option, which terminates in January 1997, may be extended until July 1997
under certain circumstances upon payment by the Company of an additional

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<PAGE> 18

$500,000. The additional consideration payable upon exercise of the Option
includes a combination of cash and stock valued at $7.3 million in the
aggregate.

The transaction is the subject of pending litigation challenging the right
of Overall Wireless to transfer any interest in the License to the Company and
naming both parties as defendants. See "Legal Proceedings." The plaintiffs have
requested specific performance including the potential transfer of the license
to them, subject to the approval of the FCC. Although the Company is entitled to
indemnification with respect to the litigation by the principal shareholder of
Overall Wireless, the plaintiffs have requested damages in excess of $100
million and it is possible that the indemnitor will not have sufficient assets
to reimburse the Company for any damages awarded. In September 1996, the Company
was dismissed from the action for lack of jurisdiction. See "-- Pending
Litigation" and "Legal Proceedings."

The Company's ability to exercise the Option is subject to Overall
Wireless' completion of construction of 40% of the system prior to July 29,
1997, the subsequent filing of an application to transfer the License with the
FCC and the approval by the FCC of the application, which approval process
typically takes from three to six months. While the Company believes that the
requisite construction will be completed on time, that the FCC will consent to
the assignment of the License and that the FCC will adopt 220 MHz rules as
proposed, there can be no assurance that the FCC will not take action that would
significantly affect the Company's investment in Overall Wireless and the
Company's ability to develop 220 MHz equipment to perform as desired. There also
can be no assurance that the pending litigation will not delay or defeat FCC
action on the license transfer application, and there can be no assurance even
if the FCC takes favorable action, that the Company will be able to develop
satisfactory equipment for 220 MHz operations. Accordingly, the Option may
expire prior to becoming exercisable. In the event that the Company does not
exercise the Option or terminates it due to the failure of certain conditions,
the Company must pay a termination fee of up to $2 million, which may be paid
through cancellation of indebtedness of Overall Wireless. See "Research and
Development."

Uncertainty of Proprietary Rights

The Company relies on a combination of patent, copyright, trademark and
trade secret protection and non-disclosure agreements to establish and protect
its proprietary rights. As of March 29, 1996, the Company has been issued 20
patents in the United States, which expire on dates between 2004 and 2014.
Corresponding patents of one domestic patent have been granted so far in nine
foreign countries, and other foreign and domestic patents are pending. The
Company has applied for patents covering several other features of the Company's
current products. However, there can be no assurance that patents will issue
from any pending applications or, if patents do issue, that claims allowed will
be sufficiently broad to protect the Company's technology. There can be no
assurance that any patents issued to the Company or that may be issued in the
future will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection to the Company. In
addition, there can be no assurance that infringement, invalidity, right to use
or ownership claims by third parties or claims for indemnification resulting
from infringement claims will not be asserted in the future. Litigation to
defend and enforce the Company's proprietary rights could result in substantial
costs and diversion of resources and could have a material adverse effect on the

18
<PAGE> 19

Company's business, financial condition or operating results regardless of the
final outcome of such litigation. See "Proprietary Rights."

Management of Growth

Management of growth is especially challenging for a company with a short
operating history and the failure to effectively manage growth could have a
material adverse effect on the Company's business, financial condition and
operating results. Development, deployment and commercialization of Ricochet has
required and will continue to require management of a number of operational
activities in which the Company has little or no prior experience, including the
administration of its subscriber base, maintenance and support of Ricochet
hardware and software and management of Company activities and properties in
dispersed locations. There can be no assurance that the Company will be able to
manage the growth of its business successfully. See "Strategy" and "Management."

Pending Litigation

In US MobilComm Inc., et al. ("US MobilComm") v. Warren, et al., an action
filed in the United States District Court for the Western District of Oklahoma
in September 1994, US MobilComm alleged that Overall Wireless breached an oral
agreement to transfer an interest in its national FCC license. In May 1996, US
MobilComm filed an amended complaint naming the Company as a defendant, alleging
that the Company tortiously interfered with its oral agreement with Overall
Wireless. US MobilComm seeks specific performance, including transfer of the
license to them, subject to the approval of the FCC, and alleges damages for,
among other things, lost revenues, profits and business opportunities in excess
of $100 million. Although the Company is entitled to indemnification with
respect to the litigation by the sole stockholder of Overall Wireless, it is
possible that the indemnitor will not have sufficient assets to reimburse the
Company for any damages awarded. While management believes that the allegations
are without merit and that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
operating results, there can be no assurance to that effect. In September 1996,
the Company was dismissed from the action for lack of jurisdiction.

Quarterly Fluctuations

The Company has recognized product revenues for only a limited period and
most of such revenues have been associated with UtiliNet. The Company's product
revenues have historically fluctuated from quarter to quarter based on such
factors as the timing of significant customer orders, the timing of product
shipments, customer buying patterns and general trends in the economy. The
procurement process of the Company's electric utility customers is lengthy and
may involve competing capital budget considerations, making the timing of
product revenues from sales of UtiliNet difficult to predict. In addition,
Ricochet is at an early stage of development, and as a result the timing or
degree of success of Ricochet cannot be reliably predicted. It is not known
whether revenues from Ricochet, if any, will be subject to seasonal or periodic
fluctuations. As a result, the Company expects that quarter-to-quarter
performance will fluctuate for the foreseeable future and, consequently, that
quarter-to-quarter comparisons may not be meaningful.

Dependence on Southern California Edison

The Company has relied to date primarily on SCE as the principal source of
its revenues. Revenues from SCE accounted for 79%, 84%, 72% and 73% of the
Company's total revenues in 1993, 1994, 1995 and for the three-month period
ending March 29, 1996, respectively. As of March 29, 1996, SCE is the only
company that has made a commitment to purchase a large volume of the Company's
products. Thus, the benefits of large-scale, commercial deployment of UtiliNet
have not been fully demonstrated. There can be no assurance that other companies
will adopt UtiliNet or that the Company will be successful in marketing UtiliNet
to other industries.

19
<PAGE> 20

Dependence on Key Personnel

The Company is highly dependent on certain members of its management and
engineering staff, the loss of the services of one or more of whom might impede
the achievement of the Company's business objectives. None of these individuals
has an employment contract with the Company. Furthermore, recruiting and
retaining qualified technical personnel to perform research, development and
technical support work is critical to the Company's success. If the Company's
Ricochet business grows, the Company will also need to recruit a significant
number of management, technical and other personnel for such business.
Competition for employees in the Company's industry is intense. Although the
Company believes that it will be successful in attracting and retaining skilled
and experienced personnel, there can be no assurance that the Company will be
able to continue to attract and retain such personnel on acceptable terms. See
"Employees."

Limited Manufacturing Experience and Capability; Inventory Management

The Company has limited experience in large-scale manufacturing. The
Company's printed circuit boards and other subassemblies are assembled on a
contract basis by local manufacturers. Final assembly and test operations are
performed internally. The Company believes that it has or can secure adequate
capacity to meet forecasted demand for Ricochet products and UtiliNet networks
for at least the next 12 months. However, if customers begin to place large
orders for the Company's products or if the Company decides to accelerate
deployment of Ricochet, the Company's present manufacturing capacity may prove
inadequate. To be successful, the Company's products and components must be
manufactured in commercial quantities at competitive cost and quality. The
Company's long-term manufacturing strategy is to supplement its manufacturing
capabilities by increasing outsourcing of product assembly and test and by
licensing other companies to manufacture certain of the Company's products. In
the future, the Company will be required to achieve significant product and
component cost reductions. If the Company is unable to develop or contract for
manufacturing capabilities on acceptable terms and if product and component cost
reductions are not achieved, the Company's competitive position, and the ability
of the Company to achieve profitability, would be materially impaired.

Effective inventory management requires the Company to accurately forecast
demand for its services and products and to adequately take into account the
introduction of new or replacement products. Failure to manage this process
effectively could result in insufficient inventory to meet demand, thereby
limiting revenues and deployment of Ricochet networks, or in excess inventory
that may become obsolete before it is sold, either of which could have a
material adverse effect on the Company's business, financial condition or
operating results. See "Manufacturing" and "Competition."

Sole Sources of Supply

Volatility of Stock Price

The market price of the Company's Common Stock has been volatile and may be
volatile in the future. Future announcements concerning the Company or its
competitors, including technological innovations, new commercial products,
status of network implementation, government regulations, proprietary rights or
product or patent litigation, operating results and general market and economic
conditions may have a significant

20
<PAGE> 21

impact on the market price of the Company's Common Stock. In addition, any
delays or difficulties in establishing Ricochet or attracting Ricochet
subscribers are likely to result in pronounced fluctuations in the market price
of the Company's Common Stock.

ITEM 2 -- PROPERTIES.

The largest part of the Company's operations and its headquarters are
located in approximately 66,000 square feet of leased office and manufacturing
space located in Los Gatos, California. The lease on this space expires in
January 2004. The Company believes this space will provide the office and
manufacturing space that will be required for anticipated increases in the
Company's business activity over the next year. The Company also leases
approximately 13,000 square feet for its product development facility in
Vancouver, Canada, pursuant to a lease which expires in June 2002, and
approximately 10,000 square feet for its network operations facility in Houston,
Texas pursuant to a lease which expires in the year 2000. The Company also
maintains small offices in Washington and Virginia.

ITEM 3 -- LEGAL PROCEEDINGS

In US MobilComm Inc., et al. ("US MobilComm") v. Warren, et al., an action
filed in the United States District Court for the Western District of Oklahoma
in September 1994, US MobilComm alleged that Overall Wireless Communications
Corporation ("Overall Wireless") breached an oral agreement to sell its national
Federal Communications Commission ("FCC") license. In May 1996, US MobilComm
filed an amended complaint naming the Company as a defendant, alleging that the
Company tortiously interfered with its oral agreement with Overall Wireless. US
MobilComm seeks specific performance, including transfer of the license to them,
subject to the approval of the FCC, and alleges damages for among other things,
lost revenues, profits and business opportunities in excess of $100 million.
Although the Company is entitled to indemnification with respect to the
litigation by the sole stockholder of Overall Wireless, it is possible that the
indemnitor will not have sufficient assets to reimburse the Company for any
damages awarded. While management believes that the allegations are without
merit and that the resolution of this matter will not have a material adverse
effect on the Company's business, financial condition or operating results,
there can be no assurance to that effect. In September 1996, the Company was
dismissed from the action for lack of jurisdiction.

21
<PAGE> 22

PART IV

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index to Financial Statements

The consolidated financial statements and related notes, together with the
report thereon of Arthur Andersen LLP, independent public accountants, are
submitted in a separate section beginning on page F-1 of this report.

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Public Accountants.................................. F-1
Consolidated Balance Sheets as of December 31, 1994 and 1995.............. F-2
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995..................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995........................................ F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995..................................................... F-5
Notes to Consolidated Financial Statements................................ F-6
</TABLE>

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1995.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<S> <C>
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company
4.1 Reference is made to exhibits 3.1 and 3.2
4.2(1) Registration Rights Agreement between the Company and the other parties named
therein, dated as of June 23, 1986, as amended.
4.3(1) Specimen stock certificate.
4.4(5) Fifth Amendment to Registration Rights Agreement.
4.5(5) Sixth Amendment to Registration Rights Agreement.
10.1(1) Form of Indemnity Agreement entered into between the Company and its directors
and officers, with related schedule.
10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993.
10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan.
10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan.
10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended.
10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the
option Plan.
10.7(1) Form of Market Stand-Off Agreement between the Company and various holders of
Common Stock.
10.8(1)(2) 1991 Employee Stock Purchase Plan.
10.9(1) Form of Co-Sale Agreement between the Company and various holders of Common
Stock, with related schedule.
10.10(1) Form of Stock Repurchase Agreement between the Company and various holders of
Common Stock, with related schedule.
10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and
various investors, with related schedule.
10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui &
Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of March 12,
1991.
</TABLE>

22
<PAGE> 23

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<S> <C>
10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation dated
as of October 17, 1991.
10.14(3) Agreement between the Company and Southern California Edison dated October 1,
1992.
10.15(2)(5) 1993 Non-Employee Directors' Stock option Plan, as amended November 1, 1993
(the "Directors' Plan").
10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan.
10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan
Ventures Incorporated.
10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28, 1993.
10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald H.
Rumsfeld.
10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993 granted
to Sterling Payot Company.
10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993
granted to Sterling Payot Company.
10.22(5) Letter Agreements between the Company and Sterling Payot Company dated February
19, 1993 and September 15, 1993.
10.23(6) Purchase Agreement, dated February 18, 1994, between the Company an Microsoft
Corporation.
10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27, 1994
granted to Sterling Payot Company.
10.25(8) Letter Agreement between the Company and Sterling Payot Company dated October
31, 1994.
10.26(7) Management Agreement of Metricom DC, L.L.C.
23.1 Consent of Independent Public Accountants.
24.1(5) Power of Attorney.
</TABLE>

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

(1) Incorporated by reference from the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 33-46050), as amended.

(2) Management contract or compensatory plan or arrangement.

(3) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1992.

(4) Incorporated by reference from the Company's Form 10-Q for the quarter ended
October 1, 1993.

(5) Incorporated by reference from the indicated exhibit in the Company's Form
10-K for the year ended December 31, 1993.

(6) Incorporated by reference from the indicated exhibit in the Company's Form
10-K/A Amendment No. 1 to the Company's Form 10-K for the year ended
December 31, 1993.

(7) Incorporated by reference from the Company's Form 10-Q for the quarter ended
June 30, 1994.

(8) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1994.

23
<PAGE> 24

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 23rd day of
October, 1996.

METRICOM, INC.

By: /s/ William D. Swain

William D. Swain

Chief Financial Officer and
Secretary

(duly authorized representative)

24
<PAGE> 25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Board Of Directors And Stockholders Of Metricom, Inc.:

We have audited the accompanying consolidated balance sheets of Metricom,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
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, the financial statements referred to above present fairly,
in all material respects, the financial position of Metricom, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Jose, California

January 24, 1996, except for

Note 9, as to which the

date is May 10, 1996

F-1
<PAGE> 26

METRICOM, INC.

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 35,460 $ 5,201
Short-term investments............................................... 33,792 40,090
Accounts receivable.................................................. 2,318 439
Inventories.......................................................... 3,869 4,467
Prepaid expenses and other........................................... 1,120 1,666
-------- --------
Total current assets.............................................. 76,559 51,863
Property and equipment, net.......................................... 8,404 14,923
Long-term investments................................................ 20,336 19,124
Other assets......................................................... 235 166
-------- --------
Total assets...................................................... $105,534 $ 86,076
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,993 $ 3,296
Accrued liabilities.................................................. 1,554 1,796
-------- --------
Total current liabilities......................................... 3,547 5,092
-------- --------
Deferred rent.......................................................... 471 510
Minority interest...................................................... -- 100
Commitments (Note 5)
Stockholders' equity:
Preferred Stock $.001 par value; Authorized -- 2,000,000 shares;
Issued and outstanding -- none....................................
Common Stock, $.001 par value; Authorized -- 20,000,000 shares;
Issued and outstanding -- 13,291,025 shares on December 31, 1995
and 12,978,677 on December 31, 1994............................... 13 13
Additional paid-in capital............................................. 129,280 130,831
Unrealized holding gain (loss) on investments.......................... (673) 155
Accumulated deficit.................................................... (27,104) (50,625)
-------- --------
Total stockholders' equity........................................ 101,516 80,374
-------- --------
Total liabilities and stockholders' equity................... $105,534 $ 86,076
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-2
<PAGE> 27

METRICOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
<S> <C> <C> <C>
Revenues:
Product revenues.......................................... $ 8,173 $ 19,580 $ 4,995
Service revenues.......................................... -- 27 789
Development contract revenues............................. 1,884 1,957 --
------- -------- --------
Total revenues......................................... 10,057 21,564 5,784
------- -------- --------
Costs and expenses:
Cost of product revenues.................................. 6,401 15,116 3,134
Cost of service revenues.................................. -- 1,244 9,360
Cost of development contract revenues..................... 1,932 1,890 --
Research and development.................................. 3,256 8,668 9,145
Selling, general and administrative....................... 5,027 9,695 12,029
------- -------- --------
Total costs and expenses............................... 16,616 36,613 33,668
------- -------- --------
Loss from operations........................................ (6,559) (15,049) (27,884)
Interest income, net........................................ 410 3,300 4,363
------- -------- --------
Net loss.................................................... $(6,149) $(11,749) $(23,521)
======= ======== ========
Net loss per share.......................................... $ (.74) $ (.96) $ (1.79)
======= ======== ========
Weighted average shares outstanding......................... 8,353 12,202 13,140
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-3
<PAGE> 28

METRICOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NOTES UNREALIZED
RECEIVABLE HOLDING
COMMON STOCK ADDITIONAL FROM SALE GAIN
------------------- PAID-IN OF COMMON (LOSS) ON ACCUMULATED
SHARES AMOUNT CAPITAL STOCK INVESTMENTS DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992..... 7,974,237 $ 8 $ 25,027 $ (90) $ -- $ (9,206) $15,739
Sale of common stock........... 1,241,667 1 18,596 -- -- -- 18,597
Common stock issued to
employees.................... 44,241 -- 248 -- -- -- 248
Exercise of common stock
warrants..................... 57,648 -- 419 -- -- -- 419
Exercise of common stock
options...................... 71,693 -- 227 -- -- -- 227
Repayment of notes
receivable................... -- -- -- 90 -- -- 90
Net loss....................... -- -- -- -- -- (6,149) (6,149)
---------- --- -------- ---- ----- -------- --------
BALANCE, DECEMBER 31, 1993..... 9,389,486 9 44,517 -- -- (15,355) 29,171
Sale of common stock........... 2,616,699 3 75,184 -- -- -- 75,187
Exercise of common stock
warrants..................... 869,342 1 8,868 -- -- -- 8,869
Exercise of common stock
options...................... 57,516 -- 241 -- -- -- 241
Common stock issued to
employees.................... 45,634 -- 470 -- -- -- 470
Unrealized holding loss on
investments.................. -- -- -- -- (673) -- (673)
Net loss....................... -- -- -- -- -- (11,749) (11,749)
---------- --- -------- ---- ----- -------- --------
BALANCE, DECEMBER 31, 1994..... 12,978,677 13 129,280 -- (673) (27,104) 101,516
Exercise of common stock
warrants..................... 72,896 -- 64 -- -- -- 64
Exercise of common stock
options...................... 198,566 -- 894 -- -- -- 894
Common stock issued to
employees.................... 40,886 -- 593 -- -- -- 593
Unrealized holding gain on
investments.................. -- -- -- -- 828 -- 828
Net loss....................... -- -- -- -- -- (23,521) (23,521)
---------- --- -------- ---- ----- -------- --------
BALANCE, DECEMBER 31, 1995..... 13,291,025 $ 13 $130,831 $ -- $ 155 $ (50,625) $80,374
========== === ======== ==== ===== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE> 29

METRICOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (6,149) $(11,749) $(23,521)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization............................. 419 634 1,902
Provision for obsolete inventory.......................... 422 1,011 523
Rent expenses in excess of rent payments.................. 173 79 39
(Increase) decrease in accounts receivable, prepaid
expenses and other current
assets.................................................. (1,309) 321 1,333
(Increase) decrease in inventories........................ (1,306) (2,194) (1,121)
(Increase) decrease in other assets....................... 290 (75) 69
Increase in accounts payable, accrued liabilities and
customer deposits....................................... 1,406 627 1,545
-------- -------- --------
Net cash used in operating activities................ (6,054) (11,346) (19,231)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment........................... (395) (8,180) (8,421)
(Increase) decrease in investments........................... (14,976) (39,825) (4,258)
-------- -------- --------
Net cash provided by (used in) investing
activities......................................... (15,371) (48,005) (12,679)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of notes
receivable and repurchases................................ 19,581 84,767 1,551
Contribution from minority interest.......................... -- -- 100
-------- -------- --------
Net cash provided by financing activities............ 19,581 84,767 1,651
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... (1,844) 25,416 (30,259)
Cash and cash equivalents, beginning of period................. 11,888 10,044 35,460
-------- -------- --------
Cash and cash equivalents, end of period....................... $ 10,044 $ 35,460 $ 5,201
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE> 30

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.

Organization and Basis of Presentation. Metricom, Inc. (the "Company")
designs, develops and markets radio-based network products and services that
provide license-free, high performance, low-cost, regional data communications
systems based on spread spectrum, packet radio technology that can be used in a
broad range of personal computer and industrial applications. The Company's
Ricochet service provides subscriber-based, wireless data communications for
users of portable and desktop computers. As of December 1995 Ricochet was
available throughout Silicon Valley, other parts of the San Francisco Bay Area
and five college and university campuses across the United States. In the
future, the Company plans to deploy Ricochet in selected metropolitan areas
throughout the United States. The Company's UtiliNet products provide
customer-owned wireless data communications for industrial control and
monitoring primarily in the electric utility, wastewater and natural gas
industries. UtiliNet products are sold throughout the United States.

Since its inception, the Company has incurred significant operating losses.
The Company expects that operating losses will increase in the future as a
result of the continued development and deployment of Ricochet and efforts to
attract Ricochet subscribers. The ability of the Company to achieve
profitability will depend in part upon the successful and timely deployment of
Ricochet and its successful marketing, as to which there can be no assurance. A
broad market for wide area wireless data communications has not yet developed.
As a result, the extent of the potential demand for Ricochet cannot be reliably
estimated. In addition, the Company is subject to additional risks, including
the risks of developing technology, competition from companies with
substantially greater financial, technical, marketing and management resources
than the Company and potential changes in the regulatory environment.

The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries after elimination of significant intercompany
accounts and transactions. Certain amounts have been restated from the
previously reported balance to conform to the 1995 presentation. 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 and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Cash and Cash Equivalents. All highly liquid monetary instruments with an
original maturity of 90 days or less from the date of purchase are considered to
be cash equivalents. Cash paid during fiscal 1993, 1994 and 1995 for interest
and income taxes was not significant.

Concentration of Credit Risks. Financial instruments that may potentially
subject the Company to concentration of credit risk consist principally of cash
and cash equivalents, investments in marketable securities and accounts
receivable. The Company's investment policy limits investments to short-term,
low-risk instruments. Accounts receivable are primarily due from a small number
of electric utilities and are unsecured. To date, the Company has not incurred
any significant losses due to uncollectible accounts receivable.

Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market and include purchased parts, labor and manufacturing
overhead. Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
<S> <C> <C>
Raw materials and component parts.................................. $ 1,998 $ 1,786
Work-in-process.................................................... 1,268 1,459
Finished goods and consigned inventory............................. 603 1,222
------ ------
Total.................................................... $ 3,869 $ 4,467
====== ======
</TABLE>

F-6
<PAGE> 31

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment. Property and equipment are stated at cost and are
depreciated using the straight-line method over the shorter of their estimated
useful lives of three to five years or the lease term. As of December 31, 1995
and 1994, network equipment included approximately $5.5 million and $4.3
million, respectively, of raw materials, work-in-process and finished goods
related to network radios that are being manufactured by the Company for the
Ricochet network. Depreciation of these radios will commence when they are
placed in service. Property and equipment consisted of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
<S> <C> <C>
Machinery and equipment.......................................... $ 3,670 $ 4,685
Network equipment................................................ 5,348 11,069
Furniture and fixtures........................................... 778 1,214
Leasehold improvements........................................... 374 749
------- -------
10,170 17,717
Less -- Accumulated depreciation and amortization................ (1,766) (2,794)
------- -------
Total.................................................. $ 8,404 $14,923
======= =======
</TABLE>

In March 1995, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of " ("Statement 121"). Statement 121
requires that long-lived assets be reviewed for impairment and, if necessary, an
impairment loss be recorded whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Statement 121 is
effective for fiscal year 1996. Management does not believe the adoption of
Statement 121 will have a material effect on the financial position or results
of operations of the Company.

Accrued Liabilities. Accrued liabilities consisted of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
<S> <C> <C>
Employee Stock Purchase Plan....................................... $ 185 $ 241
Accrued payroll and related........................................ 488 621
Royalties.......................................................... 232 274
Sales taxes........................................................ 122 118
Warranty........................................................... 256 256
Customer deposits.................................................. 97 110
Other.............................................................. 174 176
------ ------
Total.................................................... $ 1,554 $ 1,796
====== ======
</TABLE>

Revenue Recognition. Product revenues are recognized upon shipment. Cash
received from customers in advance of product shipment is deferred as an accrued
liability in the accompanying consolidated balance sheets. Development contract
revenues are recognized when the related development costs are incurred (see
Note 4). Service revenues consist of subscriber fees and equipment rentals from
Ricochet and fees for UtiliNet customer support and are recognized ratably over
the service period.

Research and Development Expenditures. Research and development
expenditures are charged to operations as incurred.

Net Loss Per Share. Net loss per share data has been computed using the
weighted average number of shares of common stock outstanding. Common equivalent
shares from options and warrants to purchase common stock have been excluded
from the calculation as their effect would be anti-dilutive.

F-7
<PAGE> 32

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Interim Financial Data. The interim financial statements as of March 29,
1996 and for the three months ended March 29, 1996 and March 31, 1995 have been
prepared on the same basis as the year-end financial statements and, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
Company's interim results are subject to fluctuation. As a result, the Company
believes the results of operations for the interim periods are not necessarily
indicative of the results to be expected for any future period.

2. SHORT-TERM AND LONG-TERM INVESTMENTS

The Company's investments in debt and equity securities are considered
available-for-sale and are recorded at their fair value as determined by quoted
market prices with any unrealized holding gains or losses classified as a
separate component of stockholders' equity. Upon sale of the investments, any
previously unrealized gains or losses are recognized in results of operations.
As of December 31, 1995, the aggregate fair value, cost basis and unrealized
holding gain on investments consisted of the following (in thousands):

<TABLE>
<CAPTION>
UNREALIZED
FAIR COST HOLDING
SECURITY TYPE VALUE BASIS GAIN
<S> <C> <C> <C>
United States Treasury and Agencies.................. $29,607 $29,546 $ 61
Corporate debt securities............................ 29,607 29,513 94
------- ------- ----
Total...................................... $59,214 $59,059 $155
======= ======= ====
</TABLE>

As of December 31, 1995, investments in obligations of the United States
Treasury and Agencies and corporate debt securities had remaining contractual
maturities of 1-3 years.

3. INVESTMENT IN METRICOM DC, L.L.C.

On June 8, 1995, Metricom Investments DC, Inc. ("Metricom Investments"), a
subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of
Potomac Electric Power Company, formed Metricom DC, L.L.C. ("Metricom DC") to
own and operate a wireless data communications network in the Washington D.C.
metropolitan area. Metricom Investments contributed $1,000 in exchange for an
80% ownership interest in Metricom DC and PepData will contribute up to $7
million in exchange for a 20% ownership interest in Metricom DC. As of December
31, 1995, PepData had contributed $100,000 to the joint venture, which is
reflected as a minority interest in the accompanying consolidated financial
statements.

4. DEVELOPMENT CONTRACTS

In October 1992, the Company entered into a development and supply
agreement with Southern California Edison ("SCE") that superseded a prior
agreement in force since 1986. Under the terms of the new agreement, which
expired in December 1994, SCE provided the Company with funding for certain
development activities. Although SCE will be entitled to utilize the technology
for its own internal purposes, the Company retains title to the technology.

In connection with the development agreement, the Company agreed to give
specified discounts to SCE on future purchases of standard commercial equipment
for a period of 15 years. Additionally, the Company agreed to pay a royalty of
2% of its annual gross revenues on sales or leases to third parties of
contractual products, as defined. The Company also agreed to pay a royalty for
the internal use of contractual products at the rate of 2% of the fair value of
the products, as defined. The royalty payment is to be made annually beginning
in 1996. The royalty payments cease to accrue after 25 years from the date of
the last reimbursement of development activities. Accrued royalties are included
in accrued liabilities in the accompanying consolidated balance sheets.

F-8
<PAGE> 33

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended December 31, 1995, 1994 and 1993, combined product and
development contract revenues from SCE accounted for 72%, 84% and 79%,
respectively, of total revenues.

5. COMMITMENTS

The Company leases various facilities and equipment under operating lease
agreements. Rent expense under these agreements for the years ended December 31,
1995, 1994 and 1993, was approximately $1.1 million, $638,000 and $644,000,
respectively. The lease agreement for the Company's primary facility provides
for escalating rent payments over a 12-year term ending February 2004, however,
rent expense is recognized ratably over the lease term. As of December 31, 1995
and 1994, the Company had accrued approximately $510,000 and $471,000,
respectively, of deferred rental payments under this agreement, which are
included in deferred rent in the accompanying consolidated balance sheets.
Approximate future minimum rental payments under operating lease agreements are
as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1996...................................................................... $1,283
1997...................................................................... 1,260
1998...................................................................... 1,169
1999...................................................................... 1,105
2000...................................................................... 950
Thereafter................................................................ 2,475
------
Total............................................................. $8,242
======
</TABLE>

The Company has also entered into various agreements with electric
utilities and municipalities for the use of utility poles on which network
equipment is installed. Payment under these agreements is contingent upon the
number of network radios installed during the year. Rent expense under these
agreements for the year ended December 31, 1995 was approximately $69,000.

6. COMMON STOCK

In March 1994, the Company completed a public offering of 2,103,454 shares
of common stock at $30.25 per share for aggregate net proceeds of approximately
$59.7 million. Concurrent with the public offering, the Company completed two
registered private placements for the sale of a total of 513,245 shares of
common stock at $30.25 per share for aggregate net proceeds of approximately
$15.5 million.

In October 1993, the Company completed two registered private placements
for the sale of 1,166,667 and 75,000 shares of common stock at $15.00 and $15.25
per share, respectively, for aggregate net proceeds of approximately $18.6
million.

Common Stock Warrants. In September 1994, the Company issued warrants to
purchase 200,000 shares of common stock at $13.75 per share in exchange for
certain investment banking services. These warrants are exercisable in cash or
via a net exercise, expire five years from the date of issuance and provide for
certain registration rights. The Company has the right to repurchase these
warrants for $0.01 per warrant if certain milestones, as defined in the warrant,
are not achieved. The effect of these warrants will be included in the
consolidated financial statements when the milestones are achieved.

In connection with a March 1994 registered private placement, the Company
issued an investor a warrant to purchase 75,000 shares of common stock at $37.50
per share. These warrants are exercisable immediately, expire three years from
the date of issuance and provide for certain registration rights.

F-9
<PAGE> 34

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with an October 1993 private placement, the Company issued an
investor a warrant to purchase 408,333 shares of common stock at $20.00 per
share. This warrant was exercised in January 1994.

In February and March 1993, the Company issued warrants to purchase a total
of 450,000 shares of common stock at $5.75 per share in exchange for certain
investment banking services. In March 1994, 364,463 shares were issued upon a
net exercise of these warrants.

Upon closing of the Company's initial public offering in May 1992, warrants
to purchase 368,000 shares of Series C preferred stock at $7.81 per share were
converted to warrants to purchase 395,541 shares of common stock at $7.27 per
share. These warrants are exercisable immediately and expire in May 1996. As of
December 31, 1995, warrants to purchase 168,451 shares of common stock were
outstanding.

Stock Options. In March 1988, the Company adopted the 1988 Stock Option
Plan. Under the plan, as amended, the Company is authorized to grant up to
3,669,500 incentive or non-qualified stock options to purchase shares of common
stock. Incentive stock options may be granted to employees at prices not lower
than the market value of the stock at the date of grant. Non-qualified stock
options may be granted to employees, officers, directors and consultants at
prices not lower than 85% of the market value of the stock at the date of the
grant. Options granted under the plan are exercisable at any time, as determined
by the Board of Directors, and will expire no later than ten years from the date
of grant. Options generally vest 25% after the first year and ratably over the
following three years.

In February 1993, the Company adopted the 1993 Non-Employee Directors'
Stock Option Plan. Under the plan, as amended, the Company is authorized to
grant up to 300,000 non-qualified stock options to purchase shares of common
stock at the market value at the date of grant. Options granted under the plan
are exercisable in three equal annual installments commencing one year from the
date of grant and will expire no later than 10 years from the date of grant.

F-10
<PAGE> 35

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activity under the 1988 Stock Option Plan and the 1993
Non-Employee Directors' Stock Option Plan for the fiscal years ended December
31, 1993, 1994 and 1995 was as follows:

<TABLE>
<CAPTION>
SHARES
AVAILABLE
FOR FUTURE OPTIONS EXERCISE
GRANT OUTSTANDING PRICE
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992.................. 289,371 670,755 $ .20 - $ 6.00
Authorized.................................. 1,590,000 -- --
Grants...................................... (916,500) 916,500 $ 6.19 - $24.25
Exercises................................... -- (71,693) $ .20 - $ 6.19
Cancellations............................... 11,563 (11,563) $ 3.00 - $ 4.88
-
--------- --------- ------ ------
BALANCE, DECEMBER 31, 1993.................. 974,434 1,503,999 $ .20 - $24.25
Authorized.................................. -- -- --
Grants...................................... (848,500) 848,500 $ 11.88 - $28.75
Exercises................................... -- (57,516) $ 1.00 - $10.19
Cancellations............................... 50,331 (50,331) $ 3.00 - $23.75
-
--------- --------- ------ ------
BALANCE, DECEMBER 31, 1994.................. 176,265 2,244,652 $ .20 - $28.75
Authorized.................................. 900,000 -- --
Grants...................................... (655,250) 655,250 $ 14.25 - $22.13
Exercises................................... -- (198,566) $ 0.20 - $16.00
Cancellations............................... 253,517 (253,517) $ 3.00 - $22.38
-
--------- --------- ------ ------
BALANCE, DECEMBER 31, 1995.................. 674,532 2,447,819 $ .20 - $28.75
========= ========= ====== = ======
</TABLE>

As of December 31, 1995, options to purchase 1,179,219 shares of common
stock were vested.

During 1993, 1994 and 1995, the Company issued members of the Board of
Directors and Advisory Board options to purchase 75,000, 75,000 and 50,000
shares, respectively, of common stock at exercise prices ranging from
$10.69 - $22.62 per share which represented the market value of the stock at the
date of grant. These options vest 25% in the first year and ratably over the
following three years and will expire no later than ten years from the date of
grant. As of December 31, 1995, options to purchase 200,000 shares of common
stock were outstanding, of which options to purchase 56,250 shares of common
stock were vested.

In October 1995, the FASB issued FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"). Statement 123 defines a fair value
method of accounting for stock-based compensation plans. Under the fair value
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period. Statement 123 allows
entities to continue to account for stock-based compensation plans using the
intrinsic value method. Under the intrinsic value method, compensation cost is
the excess, if any, of the quoted market price of the stock at the measurement
date over the amount the employee must pay to acquire the stock. As permitted
under Statement 123, the Company will continue to account for stock-based
compensation plans using the intrinsic value method and, beginning in the fiscal
year ending December 31, 1996, will make pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.

Stock Purchase Plan. In 1991, the Board of Directors adopted the 1991
Employee Stock Purchase Plan (the "Purchase Plan"). An aggregate of 150,000
shares of common stock have been reserved for issuance under the Purchase Plan.
Employees may designate up to 15% of their earnings, as defined, to purchase
shares at 85% of the lesser of the fair market value of the common stock at the
beginning of the offering period or on any purchase date during the offering
period, as defined. In 1993, 1994 and 1995, the Company issued 29,241, 41,884
and 35,886 shares, respectively, under this plan.

F-11
<PAGE> 36

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock Reserved for Future Issuance. As of December 31, 1995, the
Company had reserved the following shares of common stock for future issuance:

<TABLE>
<S> <C>
Exercise of stock options................................................. 3,122,351
Exercise of common stock warrants......................................... 443,451
Stock purchase plan....................................................... 42,989
---------
Total........................................................... 3,608,791
=========
</TABLE>

7. 401(K) PLAN

In November 1987, the Company adopted a tax-qualified savings and
retirement plan (the "401(k) Plan"). Pursuant to the terms of the 401(k) Plan,
employees may elect to contribute up to 15% of their gross compensation. The
Company matches employee contributions at the rate of 50% for the first $2,000
contributed. Contributions by the Company to date have not been material.

8. INCOME TAXES

Deferred taxes are provided to reflect the net tax effects of temporary
differences between the financial reporting and income tax bases of assets and
liabilities using the currently enacted tax rate. The tax effect of temporary
differences and carryforwards that give rise to a significant portion of
deferred tax assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
<S> <C> <C>
Reserves and other........................................... $ 1,249 $ 2,423
Capitalized research and development......................... 699 999
--------- ---------
Total.............................................. 1,948 3,422
NOL and other credit carryforwards........................... 9,373 17,602
Valuation allowance.......................................... (11,321) (21,024)
--------- ---------
Total.............................................. $ -- $ --
========= =========
</TABLE>

As of December 31, 1995 and 1994, a valuation allowance was provided for
the net deferred tax assets as a result of uncertainties regarding their
realization. During 1995, the valuation allowance increased by approximately
$9.7 million due to increases in temporary differences and additional losses
incurred during the year. Approximately $1.5 million of the valuation allowance
will be credited directly to stockholders' equity and will not be available to
reduce the provision for income taxes in future years.

As of December 31, 1995, the Company had net operating loss carryforwards
for Federal and California income tax purposes of approximately $44.9 million
and $14.1 million, respectively, and research and development tax credit
carryforwards of approximately $1.5 million. To the extent not used, these
carryforwards expire at various times through 2010. The Company's ability to
utilize the net operating loss carryforwards in any given year may be limited
upon the occurrence of certain events, including significant changes in
ownership interests.

9. SUBSEQUENT EVENT

Subsequent to year end, the Company purchased an option (the "Option) to
acquire Overall Wireless, a corporation that holds a nationwide, wireless
communications license (the "License") issued by the FCC with respect to 50 kHz
of radio spectrum in the 220 to 222 MHz frequency band. The Company paid
$700,000 for the Option and agreed to loan to Overall Wireless up to $2 million
for the construction of a system utilizing the License, of which $500,000 has
already been loaned. The Option, which terminates in January 1997, may

F-12
<PAGE> 37

METRICOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

be extended until July 1997 upon payment by the Company of an additional
$500,000. The additional consideration payable upon exercise of the Option
includes a combination of cash and stock valued at $7.3 million in the
aggregate.

In connection with its acquisition of the Option, the Company was named as
a defendant in US MobilComm Inc., et al. ("US MobilComm") v. Warren, et al., an
action filed in the United States District Court for the Western District of
Oklahoma in September 1994. US MobilComm alleged that Overall Wireless breached
an oral agreement to transfer an interest in its national FCC license. In May
1996, US MobilComm filed an amended complaint naming the Company as a defendant,
alleging that the Company tortiously interfered with its oral agreement with
Overall Wireless. US MobilComm seeks specific performance, including transfer of
the license to them, subject to the approval of the FCC, and alleges damages for
among other things, lost revenues, profits and business opportunities in excess
of $100 million. Although the Company is entitled to indemnification with
respect to the litigation by the sole stockholder of Overall Wireless, it is
possible that the indemnitor will not have sufficient assets to reimburse the
Company for any damages awarded. While the Company believes that the allegations
are without merit and that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
operating results, there can be no assurance to that effect. In September 1996,
the Company was dismissed from the action for lack of jurisdiction.

F-13
<PAGE> 38

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------------ --------------------------------------------------------------------------
<S> <C> <C>
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company
4.1 Reference is made to exhibits 3.1 and 3.2
4.2(1) Registration Rights Agreement between the Company and the other parties
named therein, dated as of June 23, 1986, as amended.
4.3(1) Specimen stock certificate.
4.4(5) Fifth Amendment to Registration Rights Agreement.
4.5(5) Sixth Amendment to Registration Rights Agreement.
10.1(1) Form of Indemnity Agreement entered into between the Company and its
directors and officers, with related schedule.
10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993.
10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan.
10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan.
10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended.
10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the
option Plan.
10.7(1) Form of Market Stand-Off Agreement between the Company and various holders
of Common Stock.
10.8(1)(2) 1991 Employee Stock Purchase Plan.
10.9(1) Form of Co-Sale Agreement between the Company and various holders of
Common Stock, with related schedule.
10.10(1) Form of Stock Repurchase Agreement between the Company and various holders
of Common Stock, with related schedule.
10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and
various investors, with related schedule.
10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui
& Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of
March 12, 1991.
10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation
dated as of October 17, 1991.
10.14(3) Agreement between the Company and Southern California Edison dated October
1, 1992.
10.15(2)(5) 1993 Non-Employee Directors' Stock option Plan, as amended November 1,
1993 (the "Directors' Plan").
10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan.
10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan
Ventures Incorporated.
10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28,
1993.
10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald
H. Rumsfeld.
10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993
granted to Sterling Payot Company.
</TABLE>

<PAGE> 39

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------------ --------------------------------------------------------------------------
<S> <C> <C>
10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993
granted to Sterling Payot Company.
10.22(5) Letter Agreements between the Company and Sterling Payot Company dated
February 19, 1993 and September 15, 1993.
10.23(6) Purchase Agreement, dated February 18, 1994, between the Company an
Microsoft Corporation.
10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27,
1994 granted to Sterling Payot Company.
10.25(8) Letter Agreement between the Company and Sterling Payot Company dated
October 31, 1994.
10.26(7) Management Agreement of Metricom DC, L.L.C.
23.1 Consent of Independent Public Accountants.
24.1(5) Power of Attorney.
</TABLE>