METRICOM INC / DE, 10-K, 1997-03-28

METRICOM INC / DE
10-K, 1997-03-28
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________

FORM 10-K

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

For the Fiscal Year Ended Commission File Number
December 31, 1996 0-19903

______________________

METRICOM, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 77-0294597
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

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 PER SHARE

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

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

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 on March 17, 1997 was $94,275,297.

The number of shares of Common Stock outstanding as of March 17, 1997
was 13,599,613.

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. 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 factors
identified below under "Item 1 -- Business -- Risk Factors."

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Metricom, Inc. Annual Report to Stockholders
for the fiscal year ended December 31, 1996 (the "Annual Report") are
incorporated by reference into Part II of this Annual Report on Form 10-K.
Certain parts of the Metricom, Inc. Proxy Statement relating to the annual
meeting of stockholders to be held on May 1, 1997 (the "Proxy Statement") are
incorporated by reference into Part III of this Annual Report on Form 10-K.

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PART I
ITEM 1 - BUSINESS.

Metricom, Inc. ("Metricom" or 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 were designed to
take advantage of Federal Communications Commission ("FCC") regulations that
permit license-free, spread spectrum operation in the 902 to 928 MHz frequency
band. The Company's primary service, Ricochet, provides users of portable and
desktop computers and hand-held computing devices with fast, reliable, portable,
wireless access to the Internet, private intranets, local area networks
("LANs"), e-mail and on-line services for a low, flat monthly subscription fee
that permits unlimited usage. The Company began commercial Ricochet service in
September 1995, and Ricochet service is now available in the San Francisco Bay
Area, in the Seattle and Washington, D.C. metropolitan areas and in a number of
airports and corporate and university campuses. Ricochet's customers include
individuals, corporations and educational institutions. As of February 28,
1997, there were approximately 10,700 Ricochet subscribers, and the Company
estimates that its networks covered areas with an aggregate population of
approximately 6.1 million people.

The Company's Ricochet service provides subscribers with the following
combination of benefits:

PORTABILITY. Today's computer users demand the ability to use
communications-enabled software application programs even when away from their
desktop computers. The most significant benefit of Ricochet is that a
subscriber within the network coverage area can access the Internet, private
intranets, on-line services and e-mail anytime, anywhere, without a telephone
connection, giving the subscriber untethered mobility. The Company's surveys
show that current subscribers use Ricochet with portable and desktop computers
in offices, conference rooms, throughout their homes, airports, libraries and
other locations where connecting to a telephone line may be inconvenient or
impossible.

AFFORDABILITY. The Company offers products and services that it
believes are price-competitive with commercial Internet and on-line service
providers and other wired data communications services and are significantly
less expensive than other wireless data communications services. For a low,
flat, monthly subscription fee, subscribers to Ricochet get unlimited, fast,
reliable, portable, wireless access to the Internet, private intranets, LANs,
e-mail and on-line services. Due to Ricochet's bypass of the local exchange
network, the Company believes that it will not be affected by potential
regulatory changes that could result in Internet users being charged on a
per-minute basis. In addition, because Ricochet is wireless, there is no need
for a subscriber to incur costs associated with installing and maintaining a
separate telephone line for wired data communications. The Company believes it
is able to offer an affordable solution because Ricochet employs an efficient,
scalable network architecture and license-free spectrum, both of which provide
significant cost savings to the Company over other wireless data communications
technologies.

SPEED, SECURITY AND RELIABILITY. Ricochet operates at speeds
comparable to the most commonly used wired modems, and the Company believes it
operates faster than other commercially available wireless wide area data
communications networks. Ricochet's use of frequency- hopping, spread spectrum
technology, combined with optional encryption, makes unauthorized interception
of its data packets extremely difficult and provides greater security than is
currently available from other wired and wireless data communications services.
Furthermore, Ricochet is extremely reliable because Ricochet's network radios
have a low failure rate. In addition, if a network radio is busy or not
functioning properly, data is routed along a different path to its destination
within the networks.

ACCESSIBILITY. Because of the Company's unique network design and
patented routing technology, Ricochet subscribers have not experienced the
well-publicized "busy signals" that have been suffered by users of popular
on-line services and wired Internet service providers. In addition, subscribers
are able to remain on-line with Ricochet for an unlimited amount of time. These
benefits result from the use of packet-switched communications in Ricochet
networks as compared to circuit switched technology. In packet-switched
networks, capacity is based on the amount of data actually passing through the
networks at a given time, rather than the number of users on the networks. In
addition, system congestion can be reduced and network coverage and capacity can
be increased quickly and inexpensively by the installation of additional network
or wired access point ("WAP") radios in areas of high use.

SINGLE-SOURCE SOLUTION; EASE OF INSTALLATION AND USE. Users of other
data communications services must usually obtain and integrate a telephone
modem, telephone line, Internet service connection and World Wide Web ("Web"),
browser software, usually from separate parties. By providing the equivalent of
all of these in one package, the Company provides "one stop shopping" for
Ricochet subscribers. In addition, the subscriber can easily install the system
using the self-configuring Ricochet installation software. Finally, Ricochet
supports operation with standard

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TCP/IP protocols and the AT command set used by telephone modems, which permits
the use of standard third-party applications designed to support communications
using dial-up telephone lines.

MARKET OPPORTUNITY

The demand for immediate, convenient and affordable communications,
regardless of location, has grown over the past several years as a result of a
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, the number of domestic cellular
telephone subscribers has grown from approximately 91,600 in 1984 to
approximately 44.3 million in 1996. In addition, the number of subscribers to
paging services has grown from approximately 2.6 million in 1984 to
approximately 43.1 million in 1996, according to Strategis Group. The
introduction of PCS, which will provide voice and certain 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 that the Company
believes will not be cost-effectively met by these services.

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 IDC, the number of domestic
Web users has grown from approximately 12.4 million at the end of
1995 to approximately 24.8 million at the end of 1996 and is expected to reach
approximately 81.0 million by the end of 2000. Easy-to-use application
software has facilitated broad access to the 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
computers. 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 projects that total domestic
installed base of portable computers will grow to approximately 10.0 million
units in 2000 from approximately 4.7 million units in 1996 for a compounded
annual growth rate of 20.7%. The Company believes that a significant
opportunity exists to provide low-cost, high-performance wireless data services
that bypass the local telephone exchange network 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
individuals 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

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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 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.

BUSINESS STRATEGY

The Company's mission is to establish itself as the preferred provider
of wide area wireless data communications solutions in the major metropolitan
areas of the United States. The key elements of the Company's business
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. The Company has prioritized the
major metropolitan areas of the United States 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 and its partners. Based on these factors, the
Company has deployed Ricochet networks in the San Francisco Bay Area and the
Seattle and Washington, D.C. metropolitan areas.

Accelerate Subscriber Growth. The Company has targeted a number of
specific markets with demonstrated data communication needs that can be
effectively addressed by Ricochet. These markets include individual and
corporate users of portable and desktop computers and hand-held computing
devices. To address these areas, the Company prices its products and services
attractively as compared to the Company's competitors, and provides "one stop
shopping" for its customers. The Company offers a low, flat monthly price for
its basic service, which ensures that subscribers receive a consistent monthly
bill regardless of their usage. In addition, 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 Web browser, the Company provides the
equivalent of all of these in one package. The Company utilizes direct sales
representatives for key corporate accounts and telephone sales, direct sales
representatives and a limited number of independent dealers and retailers for
individuals and other corporate accounts. The Company also sells its products
and services through certain resellers. For example, AirTouch Communications
began selling Ricochet service in February 1997 using the Ricochet and
AirTouch names. The Company expects to increase its direct and indirect sales
forces and enter into additional reseller arrangements as deployment of its
networks continues.

Pursue Strategic Relationships to Cost-Effectively Expand and
Accelerate Network Deployment. The Company intends to expand and accelerate the
deployment of Ricochet by pursuing partnerships and strategic alliances with
utility and telecommunications companies. The Company expects to focus on such
companies because they generally can provide significant capital, existing
large customer bases, a core business that requires wireless communications and
manpower or equipment that would aid in the deployment or operation of
Ricochet. 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. metropolitan area,
and has recently agreed with PepData to deploy and operate a Ricochet network
in the Baltimore metropolitan

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area on substantially the same terms. The Company believes that similar joint
venture arrangements in other metropolitan areas could enhance the Company's
ability to acquire site agreements more efficiently by providing detailed
knowledge of the right-of-way approval process in various local jurisdictions.
Although the Company intends to concentrate its resources on the deployment of
Ricochet in major metropolitan areas across the United States, the Company will
also evaluate joint ventures and other strategic alliances to establish
Ricochet internationally and in less populous areas in the United States.

Leverage Low-Cost Infrastructure to Service New Markets. The Company
believes its efficient, scalable network architecture and use of license-free
spectrum, both of which provide significant cost savings to the Company over
other wireless data communications technologies, will enable it to effectively
address a number of vertical and industrial markets with data communications
needs. Ricochet is a low-cost solution that can be installed quickly and does
not require any additional wiring. Due to Ricochet's open protocols, it can
easily be specified by original equipment manufacturers ("OEMs") and system
integrators for almost any project requiring wide area, wireless data
communications. For example, the Company, in cooperation with an affiliate of
Visa, is using Ricochet on a test basis in a small number of commercial
locations in Seattle for point-of-sale credit card authorization. In industrial
markets, the Company focuses on sales of products and services to customers in
the electric, waste water and natural gas industries.

TARGET MARKETS

CURRENT MARKETS

The Company's primary target markets for its Ricochet service are (i)
individual users of portable computers in metropolitan areas, (ii) corporate
users of portable computers in metropolitan areas, such as Cisco Systems, Inc.
and Microsoft Corporation, (iii) individual and small-office/home-office users
of desktop computers in metropolitan areas and (iv) students, faculty and staff
using computers at educational institutions. All of the Company's subscribers
are from such markets. In addition, through the Company's Industrial
Communications Division, the Company utilizes its significant expertise in
utility markets to provide wireless wide area data communications solutions to
utility companies through Ricochet and its UtiliNet products.

FUTURE MARKETS

The Company believes that markets to be addressed in the future include
(i) hand-held computing device users and (ii) users of specialized services such
as point-of-sale credit card verification. Currently, there are only a small
number of hand-held computing devices in use. However, the Company believes
that hand-held computing device sales will increase as they become more
affordable and more functional as a result of new product offerings and
increased competition. Because hand-held computing devices do not yet have an
affordable, high-performance data communications solution, the Company believes
that the availability of Ricochet will also increase the size of the hand-held
computing device market. In partnership with an affiliate of Visa and SeaFirst
Bank, the Company is testing Ricochet for use in credit card point-of- sale
verification in the Seattle area. The Company believes Ricochet is ideally
suited for such an application, because there is no need for a dedicated phone
line, call set-up and verification are faster than on a telephone and the
transmitted data is more secure due to Ricochet's frequency-hopping, spread
spectrum technology and optional encryption. The Company believes Ricochet also
enables point-of-sale credit card verification in areas that cannot easily be
serviced by wireline telephone now, such as taxicabs, airport shuttles and
kiosks.

The Company also believes its networks are suitable for mobile
dispatch and industrial telemetry applications. The Company is negotiating
several deployment agreements with major utility companies to build mobile data
dispatch ("MDD") systems based on the existing Ricochet technology. Ricochet
MDD systems will be designed to enable customers with fleets of mobile workers
to dispatch trucks, process trouble tickets and

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complete work orders from the field with standard portable computers or
hand-held computing devices. Ricochet MDD networks will be built by deploying
sparse networks of WAPs from towers without deploying a large number of network
radios. This design will enable the Company to deliver MDD service to trucks,
cars and other outdoor users at a cost far below that of a standard Ricochet
network, though they will not offer the same capacity, throughput and
in-building coverage as a fully-deployed Ricochet network. In addition, the
Company is working with providers of ruggedized portable computers on several
bids for municipal service projects to supply police, fire and other markets
with Ricochet service.

SALES, MARKETING AND SUPPORT

The Company's sales are handled primarily through a staff of
approximately 25 direct sales representatives, approximately 12 contract
telemarketers, approximately 30 retail outlets and a limited number of
independent dealers. Direct sales representatives are primarily used to target
key corporate accounts, such as Cisco Systems, Inc. and Microsoft Corporation,
where users of portable computers are currently using Ricochet to access the
Internet, private intranets and LANs. Ricochet is sold 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 retail outlets. The Company
structures the compensation arrangements for its direct sales representatives,
contract telemarketers, retail outlets and independent dealers so that at least
one half of aggregate compensation paid is based on subscribers obtained. Any
subscriber obtained must remain a subscriber for at least six months in order
for compensation to be paid. The Company expects to increase such sales
channels as deployment of Ricochet networks continues.

The Company is also building indirect sales channels in order to
maximize the commercialization of Ricochet. These include resellers, OEMs and
systems integrators, all of whom are compensated on a commission-only basis.
For example, Ricochet service in the Seattle area is being sold by AirTouch
Communications for a four-month trial period. The Company expects to enter
into more reseller arrangements as deployment of its networks continues. The
Company also is pursuing relationships with OEMs and systems integrators in
order to address specialized markets such as mobile dispatch and industrial
telemetry in each metropolitan area in which Ricochet is deployed.

The Company seeks to market Ricochet aggressively by pricing the
service attractively as compared to other wired and wireless data communications
services. The Company believes that its prices are comparable to commonly used
wired data communications services; however, such wired services do not offer
the benefit of portability offered by Ricochet. Currently, to access the
Ricochet networks 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 $12.50 per month or,
with a year's subscription, purchase the modem for $299.00. Prices for the
Company's primary competing services, ARDIS, RAM Mobile Data Networks ("RAM")
and Celular Digital Packet Data ("CDPD"), are based on the amount of data passed
through the network. The Company estimates that the average Web user accesses 30
megabytes of information per month. Based on that figure, the Company believes
ARDIS, RAM and CDPD would cost the user approximately $4,000 ($0.14 per
kilobyte), $4,000 ($0.14 per kilobyte) and $1,800 ($0.06 per kilobyte) per
month, respectively. Other wireless solutions, such as analog cellular and PCS,
charge based on the amount of time the user accesses the network. Assuming an
average of 100 minutes of air time per month, such services would cost the user
approximately $300 per month ($0.30 per minute).

The Company provides timely, high quality customer service and
technical support to meet the needs of its customers. The Company's current
customer service and technical support staff consists of 35 full-time employees.
The Company offers such services through a toll-free telephone number and
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 as deployment of Ricochet networks grows.

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THE RICOCHET NETWORK

NETWORK CHARACTERISTICS

The Company's Ricochet networks use a wireless data communications
infrastructure to provide wide area coverage in metropolitan areas. Individual
subscribers access the network with wireless portable radio modems that connect
to the serial port of a desktop or portable computer or hand-held computing
device. Ricochet also supports wireless communications from other devices,
such point-of-sale terminals, that can incorporate or connect to a portable
radio modem.

The Company believes Ricochet provides user data rates that are
significantly faster than its wireless competitors and at a rate comparable to
that of the most commonly used wired modems. Ricochet provides user data rates
of 10 to 30 kbps, depending on factors such as geography and network usage. The
Company estimates that its primary wireless competitors, ARDIS, RAM and CDPD,
provide user data rates of approximately 1 to 4 kbps, 1 to 4 kbps and 5 to 10
kbps, respectively. A variety of high-speed (up to 1 Mbps) fixed-point wireless
data technologies are in various stages of development. In addition, it is
anticipated that in the future, PCS providers will offer higher speed solutions
by combining channels and refining their protocols, but the Company expects that
these services will not be price competitive. The most commonly used wired
modems operate at 14.4 and 28.8 kbps; however, the Company estimates that the
quality of a telephone line may decrease such rate under certain circumstances.

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 mesh 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 radios 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 8 to 12 WAP radios to provide the required
capacity, provides service to clusters of up to 140 network radios. The Company
believes that a WAP will typically support approximately 1,800 subscribers. The
WAP and its associated WAP radios typically provide coverage for up to a 15 to
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.

Ricochet networks employ packet-switched technology. The Company
believes that data communications networks that utilize packet- switched
technology offer a number of inherent advantages over circuit-switched networks
such as commonly available wired data communications networks. In a
packet-switched network, data is transmitted in discrete units called packets,
rather than in a continuous stream as with a telephone modem using a
circuit-switched telephone line. The packets travel along any number of
alternative paths and are reassembled into the proper order when they arrive at
their destination, thus allowing multiple users to efficiently share network
capacity. In addition, because a dedicated physical connection is not
established between modems at each end of the circuit, network capacity is used
only when data packets are actually being transmitted. In a circuit-switched
network, a dedicated physical connection is established between modems at each
end of the circuit, thus limiting network capacity to the number of circuits
available and modems installed. In addition, in a circuit-switched network,
once a connection is established, neither modem is available to other users
even when data is not being transmitted. Because of these factors, "busy
signals" occur in circuit-switched networks when the number of users exceeds
the number of physical connections available.

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 monitored and controlled by
the Company's network operations center located in Houston, Texas. As the size
of the Ricochet networks grows, certain network management activities that are
currently performed centrally will be distributed throughout the network to
provide redundancy and limit administrative communications over the network.

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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 intranet, LANs,
on-line services and e-mail.

NETWORK DEPLOYMENT

The Ricochet 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 the period from the beginning of
deployment through commencement of commercial service in 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 14 to 18 months
depending on numerous factors, the most time-consuming of which is obtaining the
necessary site agreements. This estimate is consistent with the Company's
experience in Seattle and Washington, D.C.; however, deployment in a larger
metropolitan area, such as the New York City metropolitan area, may take
significantly longer. Once the necessary site agreements have been obtained,
installing the network infrastructure and testing the network can typically be
completed in two to three months. 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 $4.9 million to
$7.2 million depending on a variety of factors, including the size of the area
to be deployed, topology, vegetation, 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 $1,500 to $2,000 per square mile, based on the number of
municipalities in the deployment area. The cost to acquire and install the
network equipment will be approximately $6,000 to $9,000 per square mile,
depending on the factors discussed above. As the deployment process progresses,
the Company begins to incur rent and communications costs associated with the
installed equipment before revenues are generated.

The Company intends to begin the process of acquiring the 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 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 has been used on a limited basis to
reduce the delays historically experienced in the deployment process.

STRATEGIC PARTNERSHIPS

The Company intends to accelerate the deployment of Ricochet by
pursuing partnerships and strategic alliances with utility and
telecommunications companies. The Company expects to focus on such companies
because they generally can provide significant capital, a large customer base,
a core business that requires wireless communications or facilities, manpower
or equipment that would aid in the deployment or operation of Ricochet. The
Company believes that alliances of this type in other metropolitan areas could
enhance the Company's ability to acquire site agreements more efficiently by
providing detailed knowledge of the right-of-way approval process in various
local jurisdictions. Although the Company intends to concentrate its resources
on the deployment of Ricochet in major metropolitan areas across the United
States, the Company will also evaluate joint ventures and other strategic
alliances to establish Ricochet internationally and in smaller areas in the
United States.

The Company hopes to structure future strategic partnerships for
deployment in major metropolitan areas through joint ventures whereby the
Company and the strategic partner would contribute equal amounts of cash for the
deployment and operation of a Ricochet network in the partner's geographic area.
In addition, the Company would license its technology to the joint venture for
use in the geographic area. As a result, the Company would receive a majority

9.
<PAGE> 10
interest in the joint venture and the strategic partner would receive a
minority interest. Profits and losses would be allocated according to the
relative percentage ownership interests in the joint venture.

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 $7.0 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. In addition, there is a provision for a
preferential distribution of cash to PepData until such time that the initial
investment is recovered through the operations of the joint venture. Recently,
PepData exercised an option to own and operate a Ricochet network in the
Baltimore area on substantially the same terms and subject to substantially the
same conditions as the Washington, D.C. joint venture. Pursuant to such
arrangements, PepData has agreed to finance up to $5.6 million of the cost of
deploying Ricochet in the Baltimore metropolitan area.

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 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 is required to make
capital contributions up to the maximum amount specified and, subject to
acquiring necessary site agreements, periodically in accordance with a
predefined schedule.

COMPETITION

Competition in the market for 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 new wired and wireless
data communications services and products using competing technologies. The
competition can be placed into two categories: portable and fixed access. While
Ricochet can be used as a fixed point service, it is positioned primarily as a
portable service with its largest competitive advantages being portability and
low flat rate pricing.

Portable Services. Companies offering portable data communications
services include CDPD, cellular analog, PCS, ARDIS, RAM and two-way paging. The
primary attributes distinguishing these competitors are speed, price and
availability. The Company estimates that user throughput speed for these
competitors range from 2 to 10 kbps and pricing is typically based on usage.
CDPD is either installed or being installed in a number of metropolitan areas,
but complete coverage and roaming arrangements are not yet in place. CDPD is
typically priced between $0.05 and $0.15 per kilobyte making heavy usage very
expensive. Analog cellular networks are widely available throughout the United
States and, with the addition of a special modem, can also be used for sending
data. Cellular data services are priced at the same per minute rate as voice
services. PCS service providers who recently acquired spectrum at FCC auctions
are now launching new digital voice services in competition with existing
cellular providers. These PCS providers are also planning to offer data
services. Such data services are expected to be priced on a per minute basis
similar to voice services. It is anticipated that in the future, PCS
providers will offer higher speed solutions by combining channels and refining
their protocols. In addition, two wireless data communications network
services, ARDIS (owned by Motorola, Inc.) and RAM, an affiliate of BellSouth
Corporation, are widely installed and operating across the United States and in
some foreign countries. Pricing for ARDIS and RAM is based on data-usage. Mtel
Paging has also recently introduced a two-way data paging service for short
messages. ARDIS, RAM and two-way paging are currently not compatible or fast
enough for standard Internet browsers.

Fixed-Point Access. A variety of fixed point high speed (up to 1
Mbps) data technologies for both wired and wireless products are in various
stages of development. Fixed-point data services and technologies include XDSL,
wireless LANs, cable modems, satellite service, Integrated Services Digital
Network ("ISDN") and AT&T's digital wireless service. These services
are aimed at providing data connectivity to the home or office at speeds that
will support future video & multimedia applications over the Internet. XDSL is a
technology under development expected to be deployed by the phone companies,
providing very high speed data access over existing phone lines. This technology
is likely to require high quality phone lines between the home and central phone
switch. Cable modems are also under development by a number of manufacturers.
Most cable service today is "one-way" requiring the addition of two-way
capabilities or a phone line for the return path. Hughes Satellite Data Service
offers high speed Internet access by placing a satellite dish on the
subscriber's home and using a phone line for the return path. ISDN is currently
the most popular method of accessing high speed data overphone lines; however,
it requires special modems and phone line installation. AT&T has recently
announced plans to install digital wireless receivers on houses over the next
couple of years, providing a package of fixed wireless services including
traditional voice-telephone service and high-speed Internet access. Finally,
wireless LAN hardware equipment is sold by several vendors. It allows
corporations to avoid installing Ethernet cables and provides limited
portability (typically 200-500 feet) around a corporate campus. Most of the
current and anticipated competitors in the market for data communications
services 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 or that could render
Ricochet obsolete or uncompetitive.

Internet Access Services. The Company's Internet access services
compete with those currently offered by a large number of companies. The
Company believes that existing competitors include numerous national and
regional independent Internet service providers, established on- line service
providers such as American Online ("AOL"), the Microsoft Network, CompuServe and
Prodigy, as well as long distance and regional telephone companies. These
services are typically offered over the phone network at speeds ranging between
14.4 and 36.6 kbps. Access speeds are increasing with the recently announced
56.6 kbps modems from U.S. Robotics Corporation and others. Such high speed
modems require high quality phone lines and matching high speed modems at the
service provider end. Many of such competitors have had significantly more
experience offering such services than the Company. Most 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 or on-line services at a price
substantially below that of Ricochet.

10.
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Such actions would place the Company at a substantial competitive disadvantage.
The competitive environment could limit the Company's ability to grow its
subscriber base and retain existing subscribers and could result in increased
spending on selling, marketing and product development activities. These
factors could have a material adverse effect on the Company's financial
condition and operating results.

The Company's competitors are becoming increasingly aware of the
commercial value of technical findings and are becoming more active in seeking
patent protection and licensing arrangements for the use of technology that
others have developed. The development by others of new products and processes
competitive with or superior to those of the Company could render the Company's
products obsolete or uncompetitive. The Company's competitive position also
depends upon its ability to attract and retain qualified personnel, obtain
patents or otherwise develop proprietary products or processes, and secure
sufficient capital resources.

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.

TECHNOLOGY

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 mesh 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. The Company incorporated optional
encryption capability into the Ricochet service in 1996 to provide an
additional level of security.

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

Unlike other wireless data communication networks that use radio
frequencies licensed by the FCC, the Company's networks were designed to take
advantage of FCC regulations that permit license-free, spread spectrum
operation, currently 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 an exclusive FCC license. However, the Company has also purchased
an option to acquire a corporation that holds a nationwide, wireless
communications license issued by the FCC authorizing operations on 50 kHz of
radio spectrum in the 220 to 222 MHz band and may pursue other opportunities to
use FCC-licensed spectrum when it believes such use would be cost-effective in
conjunction with its license-free, spread spectrum operations.

11.
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RESEARCH AND DEVELOPMENT

The Company intends to maintain technology leadership by continuing to
invest heavily in research and development of its networking products to
increase speed and performance. The Company focuses its resources on
enhancements and improvements to the technology employed by the Company's
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 $8.7 million, $9.1 million and $9.9 million in 1994,
1995 and 1996, respectively. The Company expects research and development
expenses to increase in absolute dollars in future periods.

In 1996, the Company purchased an option to acquire Overall Wireless
Communications Corporation ("Overall Wireless"), a corporation that holds a
nationwide, wireless communications license issued by the FCC authorizing
operations on 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 $2.0 million for the construction of a system utilizing the license, of
which $500,000 had been loaned as of December 31, 1996. In January 1997, the
Company extended the term of the option until July 1997 by paying 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 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 typically takes from
three to six months. 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.

MANUFACTURING

The Company's printed circuit boards and other subassemblies are
assembled on a contract basis by outside manufacturers. The Company's only
manufacturing facilities are for final assembly and testing operations, which
are performed internally. The Company believes that it has or can develop
adequate capacity to meet forecasted demand for its products and 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 its outsourcing of product assembly and testing 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.

12.
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PATENTS, PROPRIETARY RIGHTS AND LICENSES

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. However, these patents may not preclude competitors from
developing equivalent or superior products and technology to those of the
Company.

The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
otherwise gain access to or disclose such information of the Company. It is
the Company's policy to require its employees, certain contractors,
consultants, directors and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of such relationships with the
Company. There can be no assurance that these agreements will not be breached,
that they will provide meaningful protection of the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information or that the Company's trade secrets will not otherwise become known
or be independently discovered by the Company's competitors.

The Company also pays license fees to third parties, such as
Counterpoint Systems Foundry, Inc., NetManage, Inc., Netscape Communications
Corporation and RSA Data Security 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 SCE.

The commercial success of the Company will also depend in part on the
Company not infringing the proprietary rights of others and not breaching
technology licenses that cover technology used in the Company's products. It
is uncertain whether any third party patents will require the Company to
develop alternative technology or to alter its products or processes, obtain
licenses or cease certain activities. If any such licenses are required, there
can be no assurance that the Company will be able to obtain such licenses on
commercially favorable terms, if at all. Failure by the Company to obtain a
license to any technology that it may require to commercialize its products and
services could have a material adverse effect on the Company. Litigation,
which could result in substantial cost to the Company, may also be necessary to
enforce any patents issued or licensed to the Company or to determine the scope
and validity of third party proprietary rights.

13.
<PAGE> 14
GOVERNMENT REGULATION OF COMMUNICATIONS ACTIVITIES

Federal Regulation. 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 specifies frequency bands in which the operation of certified
radio equipment is permitted without a license. The Company has designed its
products to conform with, 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 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, or were unwilling to accept interference caused by others to its
services, 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, the Company 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 that will result in material adverse effects on the
Company.

The FCC has adopted rules for the Location and Monitoring Service
("LMS"), a licensed service replacing the Automatic Vehicle Monitoring service
operating in the 902 to 928 MHz frequency band. These rules are currently
under reconsideration at the FCC. Generally, the LMS rules, as adopted,
expanded the class of persons eligible to hold licenses and their potential
customer base. In adopting the LMS rules, the FCC affirmed the right of Part
15 users such as the Company to operate in this frequency band so long as such
operation does not cause "harmful interference," which was specifically defined
by the FCC. While the rules could lead to increased congestion in the 902 to
928 MHz frequency band, they provide a greater degree of protection to Part 15
users by providing certain "safe harbors" for Part 15 operations. In addition,
LMS licenses will be conditioned on testing to assure that specific LMS
operations will not cause harmful interference to Part 15 operations. While
the Company believes that there are sufficient means to mitigate harmful
interference to Part 15 operations, 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. While the Company believes that if
the FCC chooses to revise these rules on reconsideration, the revised rules
ultimately adopted will serve to further minimize any impact LMS will have on
present license-free use of the 902 to 928 MHz frequency 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.

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<PAGE> 15
if the FCC ultimately adopts such rules, there can be no assurance that such
regulation would not have a material adverse effect on the Company's business,
financial condition or operating results.

In 1996, the Company purchased an option to acquire Overall Wireless,
a corporation that holds a nationwide wireless communications license issued by
the FCC authorizing operations on 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 this licensed spectrum is governed by Part 90 of the
FCC's rules. The applicable FCC rules were amended by an Order released in
March 1997 to permit the types of operations in this frequency band proposed by
the Company. Generally, these rules become effective when published in the
Federal Register. Upon publication, interested persons will have an opportunity
to request reconsideration of the new rules. While the Company believes that
the system will be sufficiently constructed and that the FCC will approve the
license transfer, there can be no assurance that the Company will be able to
develop 220 MHz equipment that performs in accordance with the FCC's rules or
that the FCC will not take action adverse to the Company.

In March 1997, the FCC initiated a rulemaking proceeding in response to
a request filed by the American Radio Relay League, Inc. The FCC proposes to
amend its rules for the Amateur Radio Services to allow amateur stations greater
flexibility in the use of high powered spread spectrum technologies in, among
others, the 902 to 928 MHz frequency band. To protect other users, including
Part 15 users such as the Company, the FCC proposes to require spread spectrum
equipment used by amateur radio licenses to use the minimum power necessary and
to incorporate automatic power control circuitry in their equipment to reduce
the potential for interference. If the FCC ultimately adopts rules as proposed,
amateur spread spectrum operations may interfere with the Company's operations
in certain discrete geographic areas. Although the Company believes it would be
able to overcome such interference, if any, by installing additional network
radios and other measures, there can be no assurance to that effect.

The FCC recently initiated a rulemaking proceeding and inquiry to
determine, among other things, whether to permit local exchange carriers to
assess interstate access charges on information service providers. The FCC has
tentatively concluded that access charges should not apply to information
service providers and left standing an earlier decision that such charges would
not apply to enhanced services, which includes access to the Internet and other
interactive computer networks. However, the FCC also sought comment on whether
to initiate a separate rulemaking proceeding and inquiry to consider additional
rules or actions that may be necessary relating to information services and the
Internet. There can be no assurance that the final rules adopted, if any, will
reflect the FCC's tentative conclusion with regard to the imposition of access
charges or that the outcome of any rulemaking proceeding and inquiry concerning
information services and the Internet would not have a material adverse effect
on the Company's business, financial condition and results of operations.

In November 1996, the Federal-State Joint Board on Universal Service,
charged under the Communications Act of 1934, as amended, with making
recommendations to the FCC regarding contributions to support the universal
service fund, released its decision. Although it recommended that the FCC not
require information and enhanced service providers to contribute to the
universal service fund, it suggested that the FCC reevaluate which services
qualify as information services, taking into account changes in technology and
the regulatory environment. If the FCC rejects the Board's recommendation, it
could require providers of information services such as the Company to make
contributions to the universal service fund. The Company cannot predict what,
if any, impact such contributions would have on its business, financial
condition and results of operations.

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, actively
participates in policy and rulemaking proceedings. 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.

Wireless networks such as the Company's are subject to certain Federal
Aviation Administration and FCC guidelines regarding the location, lighting,
construction and modification of structures and antennas used in

15.
<PAGE> 16
connection with the radio spectrum. In addition, the FCC has authority to
enforce certain provisions of the National Environmental Policy Act as they may
apply to the Company's facilities. The FCC recently adopted new rules
containing guidelines and methods for evaluating the environmental effects of
radio frequency emissions from FCC-regulated transmitters. The new rules
categorically exclude low power, Part 15 devices of the type used by the Company
from routine environmental evaluation because they offer little or no potential
for exposure in excess of specified health and safety guidelines. The FCC also
incorporated into its rules provisions of the Telecommunications Act of 1996
that preempt state and local governmental regulation over the placement of radio
frequency based on radio frequency environmental effects. Despite these actions,
some public concerns about radio frequency emissions remains. These concerns
could have an adverse affect on the Company's business, financial condition and
results of operations.

State and Local Regulation. As a result of a recent amendment to
the Communications Act of 1934 (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.

The Company often requires the siting of its network radios and WAPs
on public rights-of-way and other public property. Due to state and local
right-of-way, zoning and franchising issues, the Company is not always able to
place its radios in the most desirable locations, on an optimal schedule or in
the most cost-effective manner. There can be no assurance that state and local
processes associated with radio location will not have a material adverse
effect on the Company's business, financial condition or operating results.

BACKLOG

The Company had backlog of $1.1 million and $4.2 million as of
December 31, 1996 and 1995, respectively. The Company expects to fill the
orders pending at the end of 1996 by the end of the first quarter of 1997.
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 December 31, 1996, the Company employed approximately 248
people, 230 of whom were based in the United States. Of the total employees,
34 were in manufacturing, 45 were in network operations and deployment, 61 were
in research and development, 73 were in sales, marketing and customer support
and 35 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 AND ACQUISITION
OF DEPLOYMENT AGREEMENTS

The Company's 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. 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. The 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 14 to 18 months depending on a number of factors,
including

16.
<PAGE> 17
availability of sufficient financial, technical, marketing and management
resources, technological feasibility and availability of Ricochet radios and
modems. Deployment in a larger metropolitan area, such as the New York City
metropolitan area, may take significantly longer. Any inability or delays in
execution in its deployment plan could have a material adverse effect on the
Company's business, financial condition and results of operations. 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. 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, renew or extend 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.

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 its Ricochet service. As of February 28, 1997, the Company
had approximately 10,700 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 adversely affected. In addition, the market for wireless
communications services is characterized by a high customer turnover rate.
There can be no assurance that the Company will be able to retain existing or
future customers.

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 additional
funds through the sale of its equity or debt securities in private or public
financings or through strategic partnerships in order to complete the
deployment and commercialization of Ricochet. There can be no assurance that
such funds will be sufficient to fund such deployment as planned. In addition,
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.

EARLY-STAGE TECHNOLOGY; FUTURE OPERATING LOSSES AND NEGATIVE CASH
FLOW FROM OPERATIONS

The Company's Ricochet technology is at an early stage of development
and has been in commercial operation for only a short period of time;
consequently, the Company has limited historical financial information upon
which a prospective investor could perform an evaluation. The Company will
incur significant expenses in advance of generating revenues and is expected to
realize significant operating losses in the future as a result of the
continuing development, deployment and commercialization of its Ricochet
networks. The Company's future operating results are subject to a number of
risks, including the Company's ability to implement its strategic plan, to
attract and retain qualified individuals and to raise appropriate financing as
necessary. As such, no assurance can be given as to the timing and extent of
revenue receipts and expense disbursements or the Company's ability to
successfully complete all of the tasks associated with developing and
maintaining a successful enterprise. In addition, there can be no assurance
that the Company will be able to successfully manage operations. Management's

17.
<PAGE> 18
failure to guide and control growth effectively (including implementing
adequate systems, procedures and controls in a timely manner) could have a
material adverse effect on the Company's financial condition and results of
operations.

The Company has incurred cumulative net losses through December 31,
1996 of approximately $90.0 million. These losses resulted primarily from
expenditures associated with the development, deployment and commercialization
of the Company's Ricochet networks. The Company expects to incur significant
operating losses and to generate negative cash flow from operating activities
during the next several years while it continues to develop and deploy its
Ricochet networks and build its customer base. There can be no assurance that
the Company will achieve or sustain profitability or positive cash flow from
operating activities in a timely manner. The Company may not be able to meet
its debt service or working capital requirements and the Notes and the Warrants
may, as a result, have little or no value.

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 specifies frequency bands in which the operation of certified radio
equipment is permitted without a license. The Company has designed its
products to conform with, and be certified under, the FCC's Part 15 spread
spectrum rules.

The FCC has adopted rules for the LMS, a licensed service replacing
the Automatic Vehicle Monitoring service operating in the 902 to 928 MHz
frequency band. These rules are currently under reconsideration at the FCC.
Generally, the LMS rules, as adopted, expanded the class of persons eligible to
hold licenses and their potential customer base. In adopting the LMS rules,
the FCC affirmed the right of Part 15 users such as the Company to operate in
this frequency band so long as such operation does not cause "harmful
interference," which was specifically defined by the FCC. While the rules
could lead to increased congestion in the 902 to 928 MHz frequency band, they
provide a greater degree of protection to Part 15 users by providing certain
"safe harbors" for Part 15 operations. In addition, LMS licenses will be
conditioned on testing to assure that specific LMS

18.
<PAGE> 19
operations will not cause harmful interference to Part 15 operations. While
the Company believes that there are sufficient means to mitigate harmful
interference to Part 15 operations, 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. While the Company believes that if
the FCC chooses to revise these rules on reconsideration, the revised rules
ultimately adopted will serve to further minimize any impact LMS will have on
present license-free use of the 902 to 928 MHz frequency 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
authorize non-government wind profiler radar systems in the 902 to 928 MHz
frequency band. While not currently the subject of proposed rules, if the FCC
ultimately adopts such rules, there can be no assurance that such regulation
would not have a material adverse effect on the Company's business, financial
condition or operating results.

In 1996, the Company purchased an option to acquire Overall Wireless,
a corporation that holds a nationwide wireless communications license issued by
the FCC authorizing operation on 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 spectrum is governed by Part 90 of the
FCC's rules. The applicable FCC rules were amended by an Order released in
March 1997 to permit the types of operations in this frequency band proposed by
the Company. Generally, these rules become effective when published in the
Federal Register. Upon publication, interested persons will have an opportunity
to request reconsideration of the new rules. While the Company believes that
the system will be sufficiently constructed and that the FCC will approve the
license transfer, there can be no assurance that the Company will be able to
develop 220 MHz equipment that performs in accordance with the FCC's rules or
that the FCC will not take action adverse to the Company.

In March 1997, the FCC initiated a rulemaking proceeding in response
to a request filed by the American Radio Relay League, Inc. The FCC proposes to
amend its rules for the Amateur Radio Services to allow amateur stations greater
flexibility in the use of high powered spread spectrum technologies in, among
others, the 902 to 928 MHz frequency band. To protect other users, including
Part 15 users such as the Company, the FCC proposes to require spread spectrum
equipment used by amateur radio licensees to use the minimum power necessary and
to incorporate automatic power control circuitry in their equipment to reduce
the potential for interference. If the FCC ultimately adopts rules as proposed,
amateur spread spectrum operations may interfere with the Company's operations
in certain discrete geographic areas. Although the Company believes it would be
able to overcome such interference, if any, by installing additional network
radios or other measures, there can be no assurance to that effect.

19.
<PAGE> 20
to make contributions to the universal service fund. The Company cannot
predict what, if any, impact such contributions would have on its business,
financial condition and results of operations.

As a result of a 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.

RISKS OF DEVELOPING TECHNOLOGY

The Company's networks have not 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, timing of
completion of development and preclusion from commercialization by proprietary
rights of third parties. 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.

HIGHLY COMPETITIVE INDUSTRY

Competition in the market for 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 new wired and
wireless data communications services and products using competing
technologies. The competition can be placed into two categories: portable and
fixed access. While Ricochet can be used as a fixed point service, it is
positioned primarily as a portable service with its largest competitive
advantages being portability and low flat rate pricing.

Portable Services. Companies offering portable data communications
services include CDPD, cellular analog, PCS, ARDIS, RAM and two-way paging. The
primary attributes distinguishing these competitors are speed, price and
availability. The Company estimates that user throughput speed for these
competitors range from 2 to 10 kbps and pricing is typically based on usage.
CDPD is either installed or being installed in a number of metropolitan areas,
but complete coverage and roaming arrangements are not yet in place. CDPD is
typically priced between $0.05 and $0.15 per kilobyte making heavy usage very
expensive. Analog cellular networks are widely available throughout the United
States and, with the addition of a special modem, can also be used for sending
data. Cellular data services are priced at the same per minute rate as voice
services. PCS service providers who recently acquired spectrum at FCC auctions
are now launching new digital voice services in competition with existing
cellular providers. These PCS providers are also planning to offer data
services. Such data services are expected to be priced on a per minute basis
similar to voice services. It is anticipated that in the future, PCS providers
will offer higher speed solutions by combining channels and refining their
protocols. In addition, two wireless data communications network services, ARDIS
(owned by Motorola, Inc.) and RAM, an affiliate of BellSouth Corporation, are
widely installed and operating across the United States and in some foreign
countries. Pricing for ARDIS and RAM is based on data-usage. Mtel Paging has
also recently introduced a two-way data paging service for short messages.
ARDIS, RAM and two-way paging are currently not compatible or fast enough for
standard Internet browsers.

Fixed-Point Access. A variety of fixed point high speed (up to 1 Mbps)
data technologies for both wired and wireless products and services are in
various stages of development. Fixed-point data services and technologies
include XDSL, wireless LANs, cable modems, satellite service, Integrated
Services Digital Network ("ISDN") and AT&T's digital wireless service. These
services are aimed at providing data connectivity to the home or office at
speeds that will support future video & multimedia applications over the
Internet. XDSL is a technology under development expected to be deployed by the
phone companies, providing very high speed data access over existing phone
lines. This technology is likely to require high quality phone lines between the
home and central phone switch. Cable modems are also under development by a
number of manufacturers. Most cable service today is "one-way" requiring the
addition of two-way capabilities or a phone line for the return path. Hughes
Satellite Data Service offers high speed Internet access by placing a satellite
dish on the subscriber's home and using a phone line for the return path. ISDN
is currently the most popular method of accessing high speed data over phone
lines. It requires special modems and phone line installation. AT&T has recently
announced plans to install digital wireless receivers on homes over the next
couple of years, providing a package of fixed wireless services including
traditional voice- telephone service and high-speed Internet access. Finally,
wireless LAN hardware equipment is sold by several vendors. It allows
corporations to avoid installing Ethernet cables and provides limited
portability (typically 200-500 feet) around a corporate campus. Most of the
current and anticipated competitors in the market for data communications
services 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 or that could render
Ricochet obsolete or uncompetitive.

20.
<PAGE> 21
Internet Access Services. The Company's Internet access services
compete with those currently offered by a large number of companies.
Competition in the market for Internet services is intense and there can be no
assurance the Company will be able to compete successfully in this market. The
Company believes that existing competitors include numerous national and
regional independent Internet service providers, established on- line service
providers such as AOL, the Microsoft Network, CompuServe and Prodigy, as well as
long distance and regional telephone companies. These services are typically
offered over the phone network at speeds ranging between 14.4 and 36.6 kbps.
Access speeds are increasing with the recently announced 56.6 kbps modems from
U.S. Robotics Corporation and others. Such high speed modems require high
quality phone lines and matching high speed modems at the service provider end.
Many of such competitors have had significantly more experience offering such
services than the Company. Most 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 or on-line services at a price substantially below that of Ricochet.
Such actions would place the Company at a substantial competitive disadvantage.
The competitive environment could limit the Company's ability to grow its
subscriber base and retain existing subscribers and could result in increased
spending on selling, marketing and product development activities. These
factors could have a material adverse effect on the Company's financial
condition and operating results.

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 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.

RISKS RELATING TO POTENTIAL ACQUISITION OF OVERALL WIRELESS

21.
<PAGE> 22
July 1997 by paying 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 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 will take from three to six months. While the Company believes that
the requisite construction will be completed on time and that the FCC will
consent to the assignment of the license, there can be no assurance that the
Company will be able to develop 220 MHz equipment that performs in accordance
with the FCC's rules or that the FCC will not take action adverse to the
Company. 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 $2.0 million, which may be paid through cancellation of indebtedness of
Overall Wireless. In such event, Overall Wireless would retain its rights to
the license and would be available for purchase by a third party, including a
competitor of the Company.

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 equipment for 220 MHz
operations that comply with the FCC's rules. Thus, even with the exercise of the
option, there can be no assurance that the Company will be able to develop or
use the 220 MHz technology.

In addition, in the event that the Company exercises the option and
subsequently sells the license or any equity interest in Overall Wireless to a
third party before December 31, 1999, the Company may be forced to pay a
percentage of the profits realized by the Company on the sale to each person or
entity that held Overall Wireless stock immediately before exercise of the
option.

UNCERTAINTY OF PROPRIETARY RIGHTS

The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect its technology, inventions and improvements to its inventions that
it considers important to its business. 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 21 patents in the United States, which expire on dates between 2007
and 2014. Foreign patents corresponding to one domestic patent have been
granted in nine foreign countries, foreign patents corresponding to two other
U.S. patents have been approved for grant in four foreign countries, and other
foreign and domestic patents are pending. 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.
The Company also owns over 30 United States trademark registrations and
approximately 20 foreign counterparts. There can be no assurance that any of
the Company's current or future patents or trademarks will not be challenged,
invalidated, circumvented or rendered unenforceable, or that the rights granted
thereunder will provide significant proprietary protection or commercial
advantage to the Company. The Company is not aware of any infringement of its
patents, trademarks or other proprietary rights by others.

22.
<PAGE> 23
The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
otherwise gain access to or disclose such information of the Company. It is
the Company's policy to require its employees, certain contractors,
consultants, directors and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of such relationships with the
Company. There can be no assurance that these agreements will not be breached,
that they will provide meaningful protection of the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information or that the Company's trade secrets will not otherwise become known
or be independently discovered by the Company's competitors.

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.

SOLE SOURCES OF SUPPLY

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.

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.

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 testing operations
are performed internally. The Company believes that it has or can secure
adequate capacity to meet forecasted demand for its products and 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 testing 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

23.
<PAGE> 24
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 could result
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.

QUARTERLY FLUCTUATIONS

The Company believes that its future operating results over both the
short and long term will be subject to annual and quarterly fluctuations due to
several factors, some of which are outside the control of the Company. These
factors include the significant cost of building its Ricochet networks
(including any unanticipated costs associated therewith), fluctuating market
demand for the Company's services, establishment of a market for the Ricochet
service, pricing strategies for competitive services, delays in the
introduction of the Company's services, new offerings of competitive services,
changes in the regulatory environment, the cost and availability of Ricochet
infrastructure and subscriber equipment and general economic conditions.

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 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.

DEPENDENCE ON SOUTHERN CALIFORNIA EDISON

The Company has relied to date primarily on Southern California Edison
("SCE") as the principal source of its revenues. Revenues from SCE accounted
for 79%, 84%, 72% and 51% of the Company's total revenues in 1993, 1994, 1995
and 1996, respectively. As of December 31, 1996, SCE was the only company to
have made a commitment to purchase a large volume of the Company's products.
The Company expects only a small amount of revenues from SCE in 1997 and does
not expect any revenues from SCE in 1998 or thereafter.

24.
<PAGE> 25
ANTITAKEOVER PROVISIONS; POSSIBLE FUTURE ISSUANCES OF PREFERRED STOCK

The Company's Certificate of Incorporation, as amended (the "Amended
Certificate"), Bylaws and the provisions of the Delaware General Corporation
Law (the "Delaware GCL") contain certain provisions that may have the effect of
discouraging, delaying or making more difficult a change in control of the
Company or preventing the removal of incumbent directors. The existence of
these provisions may have a negative impact on the price of the Common Stock
and may discourage third party bidders from making a bid for the Company or may
reduce any premiums paid to security holders for their Common Stock.
Furthermore, the Company is subject to Section 203 of the Delaware GCL, which
could have the effect of delaying or preventing a change in control of the
Company.

The Amended Certificate also allows the Board of Directors to issue up
to 2,000,000 shares of Preferred Stock and to fix the rights, preferences and
privileges of such shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. While the Company has no present
intention to issue shares of Preferred Stock, any such issuance could be used
to discourage, delay or make more difficult a change in control of the Company.

ITEM 2 - PROPERTIES.

The largest part of the Company's operations and its headquarters are
located in approximately 78,500 square feet of leased office, manufacturing and
warehouse space located in Los Gatos, California. The leases on this space
expire on various dates from January 2004 to January 2007. 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 under a lease that
expires in June 2002, and approximately 10,000 square feet for its network
operations facility in Houston, Texas under a lease that expires in the year
2000. The Company maintains small offices in Washington and Virginia.

ITEM 3 - LEGAL PROCEEDINGS.

The Company is not a party to any material litigation.

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

No matters were submitted to a vote of Metricom's security holders
during the fourth quarter of 1996.

25.
<PAGE> 26
PART II

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

The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "MCOM." The table below sets forth the high and low sales
prices for the Company's Common Stock (as reported on the Nasdaq National
Market) during the periods indicated. The reported last sale price of the
Common Stock on the Nasdaq National Market on March 17, 1997 was $11.125.

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-------------------------------
HIGH LOW
-------------------------------
<S> <C> <C>
Year Ending December 31, 1995:
1st Quarter . . . . . . . . . . . . . . . . . . . . $16.25 $13.75
2nd Quarter . . . . . . . . . . . . . . . . . . . . 18.25 14.00
3rd Quarter . . . . . . . . . . . . . . . . . . . . 25.75 14.50
4th Quarter . . . . . . . . . . . . . . . . . . . . 22.50 10.25

Year Ending December 31, 1996:
1st Quarter . . . . . . . . . . . . . . . . . . . . $14.375 $ 9.25
2nd Quarter . . . . . . . . . . . . . . . . . . . . 19.75 10.75
3rd Quarter . . . . . . . . . . . . . . . . . . . . 18.625 11.375
4th Quarter . . . . . . . . . . . . . . . . . . . . 18.625 11.25
</TABLE>

As of March 17, 1997, there were approximately 346 holders of record
of the Company's Stock. Since inception, the Company has not declared or paid
any cash dividends on its capital stock. The Company currently intends to
retain future earnings, if any, to finance the growth and development of its
business and, therefore does not anticipate paying any cash dividends in the
foreseeable future.

ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA.

The information under "Selected Consolidated Financial Data" on page
13 of the Annual Report is incorporated herein by reference.

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

The information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 14 through 18 of the
Annual Report is incorporated herein by reference.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information on pages 19 through 31 of the Annual Report is
incorporated herein by reference.

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

None.

26.
<PAGE> 27
PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS.

The names, ages and positions held by the executive officers of the
Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert P. Dilworth . . . . . . . . . . . . . . 55 President, Chief Executive Officer and Chairman
of the Board

William D. Swain . . . . . . . . . . . . . . . 56 Chief Financial Officer and Secretary

Gary M. Green . . . . . . . . . . . . . . . . . 56 Executive Vice President and Chief Operating
Officer

Donald F. Wood . . . . . . . . . . . . . . . . 42 Executive Vice President, Wireless Services
Division
</TABLE>

ROBERT P. DILWORTH has served as the Company's President and Chief
Executive Officer since September 1987, as a director since August 1987 and as
Chairman of the Board since February 1997. Prior to joining the Company, he
served as President of Zenith Data Systems Corp., a microcomputer manufacturer
and a wholly-owned subsidiary of Zenith Electronics Corp., from May 1985 to
November 1987. Mr. Dilworth is also a director of VLSI Technology, Inc. and
Data Technology Corporation.

WILLIAM D. SWAIN has served as the Company's Chief Financial Officer
since February 1988 and its Secretary since April 1992. Mr. Swain joined the
Company as Director of Finance in January 1988. Prior to joining the Company,
Mr. Swain was Chief Financial Officer of Morrow Designs, Incorporated, a
computer manufacturer; Controller of the mini-computer division of Unisys
Corporation; and Controller of Varian Data Machines, the computer division of
Varian Associates, Inc.

GARY M. GREEN has served as the Company's Executive Vice President and
Chief Operating Officer since October 1991. Mr. Green joined the Company in
January 1991 as Vice President, New Products Division. Prior to joining the
Company, Mr. Green served as Senior Vice President and General Manager of
Energy Sciences Inc., a manufacturer of electron-beam processing systems, from
April 1987 to January 1991. From 1984 to April 1987, Mr. Green served as
General Manager, Vacuum Products Division, of Varian Associates, Inc.

DONALD F. WOOD has served as the Company's Executive Vice President,
Wireless Services Division since joining the Company in November 1994. From
June 1990 to November 1994, he was employed by Octel Communications, Inc., a
voice processing, equipment and services company, where he last served as
Director of Marketing of the Customer Premise Equipment Division. He has also
served as Vice President, Marketing, of International Power Technology, Inc., a
supplier of energy-related capital equipment; a management consultant with
McKinsey and Company; and an economist with the Environmental Protection
Agency. In 1987 he co-founded Wood-Howard Products, Inc., a consumer product
publishing company. Mr. Wood is also a director of My Software, Inc.

Additional information regarding directors and executive officers
contained on pages 2 through 4 of the Proxy Statement is incorporated herein
by reference.

ITEM 11 - EXECUTIVE COMPENSATION.

Information regarding executive compensation contained on pages 13
through 20 of the Proxy Statement is incorporated herein by reference.

27.
<PAGE> 28
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information regarding security ownership of certain beneficial owners
and management contained on pages 11 and 12 of the Proxy Statement is
incorporated herein by reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding certain relationships and related transactions
contained on pages 21 and 22 of the Proxy Statement is incorporated herein by
reference.

PART IV

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

(A) FINANCIAL STATEMENTS.

The consolidated financial statements and related notes, together with
the report thereon of Arthur Andersen LLP, independent public accountants, are
incorporated by reference herein from the Annual Report.

(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, 1996.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
3.1(9) Restated Certificate of Incorporation of the Company, as
amended.

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.

4.6(10) Form of 8% Convertible Subordinated Note due 2003.

4.7(10) Indenture, dated as of August 15, 1996, between the Company and
U.S. Trust Company of California, N.A.

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.
</TABLE>

28.
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
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.

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.
</TABLE>

29.
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
10.23(6) Purchase Agreement, dated February 18, 1994, between the Company
and 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.

10.27(8) Option Agreement and Agreement and Plan of Reorganization, dated
as of February 7, 1996, among the Company, Overall Wireless and
the sole stockholder of Overall Wireless.

10.28(8) Loan and Security Agreement, dated as of February 7, 1996, among
the Company, Overall Wireless and the sole stockholder of
Overall Wireless.

10.29(10) Registration Rights Agreement, dated as of August 28, 1996,
among the Company, Furman Selz LLC and Feshbach Brothers
Investor Services, Inc.

10.30(10) Placement Agreement, dated as of August 20, 1996, among the
Company, Furman Selz LLC and Feshbach Brothers Investor
Services, Inc.

10.31 Letter Agreement, dated as of January 23, 1997, between the
Company and Sterling Payot Company

23.1 Consent of Independent Public Accountants.

24.1(5) Power of Attorney.

27.1 Financial Data Schedule.
</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 31, 1993.

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

(6) Incorporated by reference from 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, 1995.

(8) Incorporated by reference from the Company's Form 10-Q for the quarter
ended June 28, 1996.

30.
<PAGE> 31
(9) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 27, 1996.

(10) Incorporated by reference from the Company's Form 8-K filed September
11, 1996.

31.
<PAGE> 32
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
27th day of March, 1997.

METRICOM, INC.

By: /s/ William D. Swain
-------------------------------
William D. Swain
Chief Financial Officer and
Secretary
(duly authorized representative)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dated indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S><C> <C> <C>
By: /s/ Robert P. Dilworth President, Chief Executive Officer March 27, 1997
------------------------------ and Chairman of the Board
Robert P. Dilworth (principal executive officer)

By: /s/ William D. Swain Chief Financial Officer and March 27, 1997
------------------------------ Secretary (principal financial and
William D. Swain accounting officer)

By: /s/ Cornelius C. Bond, Jr. Director March 27, 1997
-----------------------------
Cornelius C. Bond, Jr.

By: /s/ Robert S. Cline Director March 27, 1997
-----------------------------
Robert S. Cline

By: /s/ Justin L. Jaschke Director March 27, 1997
-----------------------------
Justin L. Jaschke

By: /s/ George W. Levert Director March 27, 1997
------------------------------
George W. Levert

By: /s/ Donald Rumsfeld Director March 27, 1997
------------------------------
Donald Rumsfeld

By: /s/ Robert M. Smelick Director March 27, 1997
------------------------------
Robert M. Smelick

By: /s/ Jerry Yang Director March 27, 1997
------------------------------
Jerry Yang
</TABLE>

32.
<PAGE> 33
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
<S> <C>
3.1(9) Restated Certificate of Incorporation of the Company, as
amended.

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.

4.6(10) Form of 8% Convertible Subordinate Note due 2003.

4.7(10) Indenture, dated as of August 15, 1996, between the Company and
U.S. Trust Company of California, N.A.

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.
</TABLE>

33.
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
<S> <C>
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.