CIDCO INC, 10-K405, 1998-03-31

CIDCO INC
10-K405, 1998-03-31
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE> 1
UNITED STATES 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 December 31, 1997.

Commission file number: 0-23296

CIDCO INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 13-3500734
(State or other jurisdiction of (IRS employer
Incorporation or organization) identification number)

220 COCHRANE CIRCLE
MORGAN HILL, CA 95037
(Address of principal executive offices and zip code)

(408) 779-1162
(Registrant's telephone number, including area code)

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

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01

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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
--------

Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of such stock at $9.25 on
March 26, 1998: $129,779,433

Number of shares outstanding of the Registrant's Common Stock on March 26,
1998: 14,030,209

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders is incorporated by reference into Part III (Items 10, 11, 12, and
13) hereof.

================================================================================
This report consists of 45 sequentially numbered pages. The exhibit index is
contained on pages 42 and 43 of this report.

<PAGE> 2
CIDCO INCORPORATED

INDEX

<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I

Item 1. Business ................................................................. 3

Item 2. Properties ............................................................... 13

Item 3. Legal Proceedings ........................................................ 13

Item 4. Submission of Matters to a Vote of Security Holders ...................... 13

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...... 13

Item 6. Selected Financial Data .................................................. 15

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 16

Item 7A.Quantitative and Qualitative Disclosure About Market Risk................. 25

Item 8. Financial Statements and Supplementary Data .............................. 26

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................................. 41

PART III

Item 10. Directors and Executive Officers of the Registrant ....................... 41

Item 11. Executive Compensation ................................................... 41

Item 12. Security Ownership of Certain Beneficial Owners and Management............ 41

Item 13. Certain Relationships and Related Transactions ........................... 41

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 42

SIGNATURES .................................................................................. 44

</TABLE>
2
<PAGE> 3

FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements which reflect the
Company's current views with respect to future events which may impact the
Company's results of operations and financial condition. In this Report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
those set forth below under the caption "Factors Which May Affect Future
Results," which could cause actual future results to differ materially from
historical results or those described in the forward-looking statements. The
forward-looking statements contained in this Report should be considered in
light of these factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.

PART I.

ITEM 1. BUSINESS

CIDCO Incorporated ("CIDCO" or the "Company") is a leading innovator in
advanced telephony products - from Caller ID equipment to Internet-enabled
telephones - which support Caller ID, Caller ID on Call Waiting and other
intelligent network services (collectively "Services") being offered by Regional
Bell Operating Companies ("RBOCs") and independent telephone operating
companies, both domestic and international (collectively with RBOCs, "Telcos")
and by internet service providers ("ISPs"). The Company is a leading supplier of
Caller ID in the United States and has sold over 20 million products, including
Caller ID display units, network feature telephones, advanced cordless
telephones and smart screen phones. The Company's products are provided to
telephone subscribers through a variety of channels, which include distribution
arrangements with leading Telcos and numerous retail outlets. The Company was
incorporated in Delaware in 1988. The Company's principal executive offices are
located at 220 Cochrane Circle, Morgan Hill, California (telephone number
408-779-1162). The Company's common stock trades on The Nasdaq Stock Market.

The first Service to require specialized subscriber telephone
equipment was Caller ID, first introduced by New Jersey Bell in 1987. Caller
ID not only requires compatibility with complex network signaling, but also a
screen on which to display Caller ID information. Originally, Caller ID
service provided only the number of the party initiating the call and
transmitted data only within local area networks. Since the early 1990's,
certain Telcos have offered both number and name identification. In December
1995, the Federal Communications Commission (the "FCC") mandated that Caller ID
service be supported nationally. California was the last state to provide the
service, instituting it in mid-1996, making the service available in all 50
states, the District of Columbia and Puerto Rico. Additionally, Caller ID on
Call Waiting was first introduced in late 1995. This service, also known as
Type II Caller ID, allows the subscriber to utilize Caller ID service to
identify a second incoming call while already engaged in a telephone
conversation.

Penetration for Caller ID service has increased as necessary approvals
by state public utility commissions have been obtained and as the Telcos have
upgraded their switches and implemented new signaling technologies. Caller ID
service is also currently available in most of Canada, Mexico and numerous
European and Asian countries. During 1998, Caller ID service is expected to be
introduced in a number of additional countries.

Since its founding in 1988, the Company has concentrated its product
development and marketing efforts on products that support Caller ID and other
emerging Services. The Company's products can be categorized into three primary
product families: Accessory Products, SmartPhones and Internet Solutions.

Accessory Products
The Company's accessory products include a line of Caller ID adjunct
units which connect directly into subscribers' telephone lines, receive complex
network signaling and display call information on a liquid crystal display
("LCD"). In addition, the Company has introduced a display unit that combines
two of the most popular services, Caller ID and Call Waiting, into a unit which
essentially provides "visual call waiting". In 1998, the Company expects to
introduce a unit combining Caller ID on Call Waiting, disposition and Voice
Mail review/control. Since the introduction of its first Caller ID unit in
1989, the Company has become a leading provider of Caller ID equipment, having
sold more than twenty million units.

<PAGE> 4
SmartPhones
The Company has sourced, developed or is currently developing a number
of new products for existing and future Services, including a family of
intelligent feature telephones ("SmartPhones"), first introduced in September
1994. These phones are designed to support an entire package of Services
including Caller ID, Call Return, Call Forwarding, and central office Voice
Mail in a single device. The Company's most recent products include a
screenphone with a large display capable of accommodating Bellcore Analog
Display Services Interface ("ADSI") scripts, which enable phone companies to
provide sophisticated advanced telephone transaction and e-mail services.

Internet Solutions
The Company is developing a line of next-generation, telephone-based
"information appliances" which allow access to the World Wide Web and e-mail as
well as Services such as traditional Caller ID, Call Waiting and central office
Voice Mail. In addition, certain of these devices would also be intended to
enable electronic commerce and services based business models. The Company's
first such product in the Internet Solutions market is the CIDCO iPhone,
developed in conjunction with InfoGear Technology Corporation ("InfoGear"), a
privately held corporation in which the Company is an investor. The Company
began commercial shipments of the iPhone in the first quarter of 1998.

CIDCO sells its products to individual subscribers through direct
marketing fulfillment relationships with certain Telcos ("Agency Fulfillment"),
standard fulfillment of Telco-generated orders ("Non-Agency Fulfillment"),
wholesale shipments directly to Telcos ("Direct to Telco"), and to a lesser
extent, international accounts, retail stores ("Retail"), original equipment
manufacturers ("OEMs") and via its own direct marketing (telemarketing, web
marketing, direct mail, direct response advertising). CIDCO's customers include
A&A International (RadioShack), Bell Atlantic Corporation ("Bell Atlantic"),
GTE Corporation ("GTE"), Hong Kong Telephone, Kmart, Nippon Telegraph &
Telephone ("NTT"), Office Depot, Pacific Bell, SBC Communications, Inc.
("Southwestern Bell"), Sprint and U S WEST Communications, Inc. ("U S WEST").

INDUSTRY BACKGROUND

Prior to its court-mandated break-up in 1984, American Telephone &
Telegraph ("AT&T") was a regulated monopoly that provided local and long
distance services, and customer telephone equipment to over two-thirds of the
telephone subscribers in the United States. Today's competitive
telecommunications industry has evolved principally as a result of AT&T's
divestiture of the RBOCs. The RBOCs, which currently account for approximately
77% of local telephone access lines in the United States, provide standard dial
tone service and local telephone access lines. Interexchange carriers, such as
AT&T, MCI Corp. and Sprint, provide long distance services. Since the
divestiture, AT&T (and its recently spun off affiliate Lucent Technologies) has
continued to sell switching equipment and telephone equipment, while the RBOCs
have been prohibited from manufacturing any type of telephony equipment. This
prohibition has been eliminated by the Telecommunications Act of 1996, although
final implementation of regulations have not yet been issued by the FCC. The
RBOCs have been permitted to sell telephony equipment manufactured by others
bearing the RBOCs tradename and may purchase network equipment from vendors
other than AT&T. Consumers are no longer required to lease telephones from AT&T
and now purchase telephone equipment from numerous suppliers. The AT&T
divestiture, therefore, resulted in a more deregulated telephone service
industry, and a more dynamic and competitive telephony equipment industry in
the United States.

The Telcos have approached saturation levels for the installation of
local telephone access lines, thus limiting future growth of their core
business. In order to supplement growth in revenues from standard dial tone
service within their respective service areas, the Telcos have offered Services
for which they can charge their subscribers additional monthly fees. In
addition, the Telcos have used these Services to respond to increased
competition from alternative service providers such as cellular companies,
cable companies, data transmission companies and competitive access providers
by differentiating their services and creating consumer awareness and customer
loyalty.

Although Services such as call waiting, call forwarding and speed
dialing have been available for over ten years, more recent investments by the
Telcos to upgrade their networks and accommodate new signaling technologies
have enabled the rapid introduction of Services known as CLASS (custom local
area signaling services). These include:

<PAGE> 5

- Caller ID, which displays information about an incoming call
(including the number and name of the caller and the time and date of
the call) on a display screen built into the telephone or a separate
display unit connected to the telephone;

- Repeat Dialing, which continues to dial a busy number until the
connection is made;

- Selective Call Forward, which lets the subscriber pre-select certain
numbers to be forwarded to another number;

- Automatic Call Back, which automatically dials the number of the last
incoming call;

- Selective Call Block, which lets the subscriber select certain
telephone numbers to be blocked;

- Distinctive Ringing, which lets the subscriber pre-select numbers to
ring with a distinctive sounding ring;

- Call Trace, which allows a subscriber to have a call traced by the
telephone company; and

- Caller ID on Call Waiting, which allows the subscriber to utilize
Caller ID service to identify an incoming call while already engaged
in a telephone conversation.

In addition to these Services, the Company believes important future
services will include information services, transaction services, messaging
services and call management services, accessed via ADSI protocols and the
Internet.

The ability of Telcos to achieve high penetration levels for Services,
especially Caller ID, is dependent, in part, upon the availability of a new
generation of subscriber telephone equipment. Most existing telephones
discourage use of these current and future Services because they require
subscribers to remember and dial sequences of symbols and numbers to access the
Services. Such telephones are also incapable of receiving the complex network
signaling required for Caller ID Service and other future Services and do not
have a display screen and controls for viewing and managing call information.
Therefore, a market for a new generation of user-friendly, intelligent,
network-compatible subscriber telephone equipment has emerged.

This new generation of subscriber telephone equipment must operate
reliably over a wide range of telephone network conditions. Although general
specifications exist for Caller ID and other Services, network variations among
Telcos often require manufacturers to debug and field test their products on
various telephone networks in order to ensure that their equipment operates
properly throughout these networks and meets the high standards of reliability
and compatibility required by the Telcos.

Traditional consumer telephone suppliers, which sell primarily through
retailers, have focused on the types of high volume "generic" equipment that
are most suitable for such a distribution channel. However, the market for
intelligent network subscriber telephone equipment currently relies in
significant part on specialized distribution arrangements and requires close
working relationships with the RBOCs and independent Telcos to address
compatibility issues promptly as they arise. This created an opportunity for
entrants in the market for intelligent network subscriber equipment.

STRATEGY

CIDCO's mission is to provide the world's easiest-to-use personal
communications products and services. The Company's objective is to envision,
produce and distribute a range of products that will become the primary
telephony and communication appliances utilized by customers of Telcos and
ISPs. To achieve this objective, the Company has developed the following
strategy:

Diversify Product Line
The Company is seeking to expand its product offerings into a number
of new business areas including the Internet and electronic commerce, and
devoting the substantial majority of its research and development resources on
developing telephone based "information appliances" which allow access to
intelligent network services on the public switched telephone network as well
as the Internet via telephone-based, or telephone-like, devices. The Company's

5
<PAGE> 6

recent iPhone product and other products currently in development are expected
to broaden the Company's product line and are intended to broaden the markets
it can address while continuing to leverage CIDCO's experience and core
competencies.

Diversify Channels of Distribution
The Company is seeking to diversify its distribution channels toward
direct-to-end-user, retail, targeted vertical market segments and other
alternate distribution channels, with the goals of broadening the Company's
market opportunities and adding predictability to the Company's
quarter-to-quarter revenues.

Strengthen Infrastructure
The Company's future success will require, among other things, that
the Company improve its operating and information systems. In particular, the
Company is seeking to improve its order entry and tracking, product
fulfillment service capabilities and systems in order to retain and/or obtain
Telco customers.

Leverage Relationships with Telcos
The Company believes that it has established close working
relationships with certain Telcos, which enable the Company to design its
products to be compatible with the existing and evolving Telco networks. These
relationships allow the Company to understand variations between networks and
to design its products to operate reliably over a wide range of network
conditions. The Company has developed direct fulfillment relationships with
certain Telcos, which allow it to market its equipment together with Services
and leverage the efforts of the Telcos to market these Services. CIDCO has
experienced greater acceptance for its products in regions where it maintains
direct fulfillment relationships. These fulfillment arrangements differ by
Telco, but typically allow subscribers to purchase equipment with Caller ID
service through one phone call to a Telco sales representative. In general, the
Telco representative takes the customer's order for a CIDCO product.
Collectively, these relationships permit the Company to design products to meet
emerging standards and to respond to new intelligent network services being
introduced. The Company intends to leverage existing and future fulfillment
relationships as it introduces new products.

Continued Cooperative Marketing Efforts
The Company has initiated Agency Fulfillment programs with Telcos to
attract new subscribers. Agency Fulfillment programs are sales campaigns run by
the Company involving the use of consumer mailings and telemarketing to sell
Services for the Telcos which utilize the Company's products. As part of these
programs the Company, acting as the Telco's "agent," generates an order for
Services, such as Caller ID, and then ships an adjunct product (or, less
frequently, a phone product) to each customer "acquired" through the campaign.
The Company intends to leverage its Agency Fulfillment programs as it
introduces new products.

Direct Marketing of CIDCO Branded Products
In 1997, the Company developed direct marketing programs for CIDCO
branded SmartPhones. The Company intends to develop direct marketing programs
in the future for Internet Solutions products. These programs involve catalog
direct mail, telemarketing, web commerce and direct response advertising
directly to end users.

Design High Quality, Innovative Products
Besides requiring compatibility with the Telcos' networks, CIDCO's
customers also demand high quality products that are innovative, easy to use
and have consumer appeal. The design, functionality and aesthetic
characteristics of advanced telephone products can impact acceptance of
Services by customers and have become important criteria to the Telcos in
choosing companies with which to develop direct fulfillment relationships. The
Company intends to continue to emphasize quality, innovation and ease of use in
its product design.

Provide High Quality Support and Service
The Company believes its ability to provide high quality support and
service is fundamental to its success in developing and retaining its Telco
relationships. The Company intends to improve the quality of its support and
service to Telco subscribers, who expect the same level of support and service
that they receive from the Telcos. Telcos have become more demanding in this
regard over the past two years particularly.

Be a Low Cost Producer of Intelligent Network Subscriber Telephone Equipment
The Company intends to benefit from its ability to reduce
manufacturing costs by engineering products for high volume assembly and by
stressing low cost manufacturing design while maintaining quality, consistency
and reliability.

<PAGE> 7

The Company has sold more than twenty million Caller ID products to date, and
believes that its acquired knowledge will permit it to achieve low
manufacturing costs for its products, in the current market conditions.

PRODUCTS

The Company introduced its first Caller ID unit in 1989. Since 1989,
the Company has broadened its Caller ID product family to include a variety of
models including stand-alone display units and SmartPhones with Caller ID
capability built in. Through 1997, all of the Company's sales were generated
from its Caller ID based products and Agency Fulfillment services to Telcos.

CIDCO's Caller ID and SmartPhone products display all transmitted
information before the incoming phone call is answered and store the call
information in memory. Among the features available on the Company's products
are backlit screens for easy viewing, memory capacity for up to 100 calls, a
"blocked call/new call" light, bilingual display and a "message waiting alert"
light that indicates to a network voice mail subscriber that new voice mail
messages have been received. The Company pioneered OTV(R) (one-time viewing),
which allows the screen on the Company's Caller ID units to display all Caller
ID information at one time. Additionally, the Company's latest product includes
Caller ID on Call Waiting. This allows the caller to utilize Caller ID service
to identify an incoming call while already engaged in another telephone
conversation. The Company's Caller ID units are intended to be compatible with
the major switches currently in use in the United States, including those
manufactured by AT&T, Northern Telecom, Siemens A.G. and L.M. Ericsson.

The Company's family of Caller ID products includes the following
principal models:

<TABLE>
<CAPTION>
Memory Typical
Model No. Capacity Product Features Retail Price
- ------------ --------- --------------------------------------------------- ----------------
<S> <C> <C> <C>
PA-25 25 Calls OTV(R) (One-Time Viewing); New Call/Blocked $19.95 - $29.95
Call Light; LCD Contrast Adjustment; Bilingual;
Compact Design.

JA-60 60 Calls OTV(R), New Call/Blocked Call Light; LCD Contrast $29.95 - $39.95
Adjustment; Bilingual; Compact Design.

SA-100 99 Calls OTV(R), 2 Line Capable; New Call/Blocked Call $39.95 - $49.95
Light; Bilingual; LCD Contrast Adjustment;
Compact Design.

CW-99 99 Calls OTV(R), Caller ID/Call Waiting; MEC (Multiple $39.95 - $49.95
(Caller ID Extension Capability); New Call/Blocked Call Light;
on Call Bilingual English/Spanish; LCD Contrast Adjustment;
Waiting Message Waiting Alert Light.
Adjunct)

DB-99 99 Calls OTV(R), Caller ID/Call Waiting; MEC; $49.95 - $59.95
New Call/Blocked Call Light; Bilingual
English/Spanish; Backlit LCD with Contrast
Adjustment; One-Touch Dialback Key.

DM-80 80 Calls OTV(R), Caller ID/Call Waiting Deluxe, Voice Mail; $69.95 - $79.95
Trilight Alert; Bilingual English/Spanish; Message
Waiting Alert Light; Pre-programmed Caller ID, Call
Waiting Deluxe (Call Disposition) and Central
Office Voice Mail Keys; 60 Number Directory; One-
Touch Dialback Key.

CT05 40 Calls Type I Caller ID; Message Waiting Alert Light; Dial $59.95 - $69.95
(Caller ID Number Displayed; Nine User Programmable Speed Keys
Feature Phone) or Telco Feature Keys; Hold and Redial Keys.
</TABLE>

7
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
CT10 40 Calls Type II Caller ID; Message Waiting Alert Light; $79.95 - $89.95
(Caller ID Dial Number Displayed; Dedicated Central
Feature Phone) Office Voice Mail Access Key; Redial Key.

CT250 50 Calls OTV(R), New Call/Blocked Call Light; Message $129.95 - $139.95
(Caller ID/Call Waiting Alert Light; LCD Contrast Adjustment; 9
Waiting Programmable CLASS Feature Keys; Volume Adjustment;
Speakerphone) Busy Redial; 50 Number Personal Directory;
Speakerphone; Bilingual English/Spanish,
English/French.

CL900 40 Calls OTV(R); Bilingual English/Spanish; One-touch access $169.95 - $179.95
(Caller ID/Call to Central Office Voice Mail; Repeat Dialing; Call
Waiting Forwarding; Caller ID/Call Waiting; Message Waiting
Cordless Phone) Indication/Visual Message Waiting; Line in Use
Indicator Light; Charge Indicator Light; Last
Number Redial; One Way Page.

CST2100 50 Calls Message Waiting Display; Platform for Visual $239.95 - $249.95
(ADSI Central Office Voice Mail, Home Banking, Stock
Screenphone) Quotes, etc.; 14 One-Touch Speed Dial Keys;
Directory Stores 100 Entries Alphabetically; Redial
List Saves and Redials Last 7 Dialed Numbers; Auto
Name-Matching from Directory or Speed Dial List.

CIDCO iPhone 100 Calls Caller ID; Integrated E-mail and Internet Access; $479.95 - $499.95
(Internet Large 7.4" (640x480) Grayscale Display; Touch
Screenphone) Screen Interface; Brightness/Contrast Slider
Controls; Volume Control; Message Waiting Light
E-mail, Voice Mail); 14.4 Kbps Modem; QWERTY
Keyboard; Speakerphone; Personal Directory stores
200 entries.
</TABLE>

DISTRIBUTION

The Company's distribution strategy is to make its products available
to potential end users through multiple distribution channels. These channels
are:

Agency Fulfillment Arrangements
In 1997, the Company expanded its cooperative marketing efforts with
Southwestern Bell, Bell Atlantic, U S WEST, Sprint and GTE. Under these
efforts, the Company coordinates sales campaigns involving the use of consumer
mailings and telemarketing to sell Telco Services which utilize the Company's
products. Sales attributed to these Agency Fulfillment efforts are an
increasing portion of adjunct business. However, several Telcos have stated an
intention to bring such demand creation programs in-house in 1998 and 1999.

Non-Agency Fulfillment Arrangements
The Company currently has Non-Agency Fulfillment arrangements with
Southwestern Bell, Bell Atlantic, U S WEST and Pacific Bell. In most instances,
the Telco sales representatives sell both network Services and CIDCO equipment
to customers and transmit equipment orders to CIDCO electronically on a daily
basis. The Company then ships its equipment directly to the customers and bills
the Telco, which in turn, bills its customers. As part of these fulfillment
relationships, CIDCO provides toll free after-sales service and support to help
the customer understand how to utilize the Caller ID service and equipment.

The Company continually seeks to strengthen its current Telco marketing
alliances and to develop new alliances. The Company has found through
experience that sales of Caller ID service and equipment are more successful
when the customer can purchase both Caller ID service and equipment from a
single source, especially when payment for equipment can be made on an
installment basis through the customer's phone bill. The Company has found
that customer satisfaction with Caller ID service is enhanced when the customer
receives Caller ID equipment promptly after ordering the service and is provided
a toll free number of after-sales service and support.

<PAGE> 9

Direct Sales to Telcos
Through its direct sales force, the Company sells Caller ID units in
quantity to a number of Telcos, either under the CIDCO name or the respective
Telcos' logo. The Company sells its products directly to most of the major
independent Telcos in the United States; as well as to certain Canadian and
international telephone companies.

Retail/OEM Sales
The Company sells to national, regional and local retailers and OEM
customers. A substantial portion of the Company's retail sales are made through
manufacturers' representatives or distributors with the support of the
Company's sales personnel. RadioShack is CIDCO's sole OEM customer. The
Company's major U.S. retail customers include Kmart, Office Depot and Office
Max.

Significant Customers
For the year ended December 31, 1997, sales to Southwestern Bell, GTE
and U S WEST represented 25.5%, 23.5% and 14.6%, respectively, of the Company's
sales. In 1996, sales to Southwestern Bell, Ameritech and Bell Atlantic
represented 36.5%, 19.2% and 11.8%, respectively, of the Company's sales.

PRODUCT DEVELOPMENT

The Company's product development efforts are focused on new products
that support additional Services, Internet/electronic commerce, product
enhancements, international standards compliance and the continued improvement
of hardware components to reduce manufacturing costs. The Company believes that
product and technology leadership along with a low-cost offering are keys to
long-term success in an industry that evolves as rapidly as the Telco equipment
market does today. Furthermore, the Company believes that its future operating
results will depend on its ability to continue to enhance existing products as
well as to develop and bring new products to market in a timely manner, that
meet market and customer requirements.

In 1997, the Company organized product development into three primary
product categories:

Accessory Products
The Company's Accessory Products include a full line of Caller ID
products aimed at the consumer residential market. In 1997, the Company
introduced a Call Director Display Unit (DM80) which integrates Caller ID on
Call Waiting, Voice Mail, and call disposition options.

SmartPhones
The Company offers a line of SmartPhones that deliver simplified and
convenient access to Services. In 1997, the Company introduced an ADSI screen
telephone, a Caller ID on Call Waiting corded telephone and a cordless Caller
ID on Call Waiting telephone.

Internet Solutions
The Company's Internet Solutions development efforts are focused on
next-generation telephony hardware and software. In 1996, the Company invested
in InfoGear. The Company also entered into a joint development agreement with
InfoGear to develop the iPhone. The iPhone is a high-end telephone that
combines access to advanced telephone services, the Internet and E-mail in a
single, easy-to-use platform. Under the agreement, the Company contributed
advanced telephony technology and manufacturing and marketing expertise, while
InfoGear provided the client/server software. The iPhone was conceived by
National Semiconductor Corporation, which has licensed the technology to
InfoGear.

9
<PAGE> 10
The Company's product development groups are experienced in engineering
products in the telecommunications and personal computer industries. The
Company's products utilize proprietary electrical, mechanical and software
design. The Company's ability to emulate various telephone switch-signaling
characteristics through specially designed test equipment in its development
facility, together with its field test program, enable it to develop products
that are compatible with the various telephone networks.

In 1995, 1996 and 1997, the Company's research and development
expenditures were $9.7 million, $13.2 million and $16.9 million, respectively.
Research and development expenses primarily have represented salaries for
research and development personnel, associated personnel benefits and tooling
and supplies for research and development activities.

At December 31, 1997, 71 employees were engaged in product development.
There can be no assurance that the Company's product development efforts will
result in commercially successful products, or that the Company's products will
not be rendered obsolete by changing technology or new product introductions by
others.

MANUFACTURING

The Company's products are manufactured for the Company by third
parties which are primarily located in Malaysia, China and Thailand. The use of
third parties to manufacture products involves a number of risks, including
limited control over production facilities and schedules and the management of
supply chains for the manufactured products. Moreover, reliance on contract
manufacturers in foreign countries subjects the Company to risks of political
instability, financial instability, expropriation, currency controls and
exchange fluctuations, and changes in tax laws, tariff and rules. See "Risks
Relating to International Sales." The Company's manufacturing operations are
limited to the testing, quality control and shipping of finished products. All
of the Company's contract manufacturers have been certified pursuant to ISO
9002. The Company's manufacturers perform comprehensive inspection, testing and
statistical process control testing, utilizing the Company's internally designed
automated testing equipment. To date, the Company has not experienced
significant product warranty returns. Many of the key components used in the
Company's products are available either only from single sources or, even if
potentially available from multiple sources, involve relatively long lead times
to manufacture, such that the Company cannot quickly obtain additional supply
without incurring significant incremental costs. In general, the Company does
not have supply contracts with its suppliers and orders parts on a purchase
order basis. The Company's inability to obtain sufficient quantities of
components required, or to develop alternative manufacturing capability if and
as required in the future, could result in delays or reductions in product
shipments that could materially and adversely affect the Company's business,
results of operations and financial condition.

COMPETITION

The market for the Company's products is highly competitive and subject
to rapid technological change. At present, the Company's principal competitors
in the market for Caller ID and display units are InteliData Technologies
Corporation, Bell South Products, Northern Telecom, Southwestern Bell and
Thomson ("GE"). The Company's Caller ID products also compete with Caller ID
telephones manufactured by Lucent/Phillips, Northern Telecom, Panasonic, Sony,
Thomson, and others. Certain of these vendors have significantly more financial
and technical resources than the Company. The Company's competitors also include
in-house divisions of the Company's current and potential customers, as well as
small companies offering specific services and large firms. In addition,
competitors for the Company's phone products include both large Asian and
European consumer electronics companies and smaller Asian and European
manufacturers. If the Company's existing customers perform directly the customer
acquisition services currently undertaken by the Company through its Agency
Fulfillment programs, or if potential customers retain or increase internal
capabilities to provide such services, the Company's business, results of
operation and financial condition could be adversely affected. The introduction
of new competitive products into one or more of the Company's various markets
could have a material adverse effect on the Company's business, results of
operations or financial condition. The Company expects competition to increase
in the future from existing and new competitors, possibly including current
customers. The Company believes that the principal competitive factors in its
market are knowledge of the requirements of the various Telcos, product
reliability, product design, customer service and support, and product price
relative to performance. The Company believes it presently competes favorably
with respect to each of these factors.

10
<PAGE> 11
GOVERNMENT REGULATION

The sale of Caller ID services by Telcos is subject to regulation by
state public utilities commissions and other regulatory authorities. Protests
from special interest groups that object to Caller ID on the basis of privacy
have been effective in slowing down the regulatory approval process. To
facilitate the implementation of Caller ID service, many telephone companies
already offer or plan to offer a "call blocking" service. Under call blocking,
callers can block the display of their numbers on a per-line or per-call basis.
To date, all 50 states and Washington D.C. have implemented Caller ID
regulations with per-call blocking, per-line blocking or both.

PATENTS, PROPRIETARY RIGHTS AND LICENSES

The Company has acquired one patent related to core Caller ID
technology, and has two patents issued on its new Caller ID/Call Waiting
extension protocol. The Company currently has a number of patent applications on
file with the United States Patent and Trademark Office and several foreign
filed patent applications based on its United States filings.

A portion of the messaging technology used in the Company's Caller ID
products is based on a patent licensed from AT&T on a non-exclusive basis. AT&T
reserved the right to use the technology for all purposes relating to businesses
of AT&T and its subsidiaries, and receives royalties from sales of the Company's
Caller ID products other than to itself or the RBOCs. The Company paid royalties
of $1.9 million, $1.2 million and $2.0 million to AT&T in 1995, 1996 and 1997,
respectively. The AT&T license agreement has no expiration date but is
terminable by either party. If the AT&T license was terminated and the Company
was unable to negotiate a new patent license agreement, the Company would no
longer be authorized to manufacture or sell Caller ID products in the United
States which fall within the scope of the AT&T patent, other than to RBOCs or
AT&T.

The Company has a non-transferable, non-exclusive license agreement
with Northern Telecom to utilize Northern Telecom's patents for Caller ID on
Call Waiting technology. Under the agreement, the Company pays royalties to
Northern Telecom for each licensed product sold, leased or put into use by the
Company other than direct sales to Northern Telecom beginning January 1, 1997.
The agreement also provided for a one-time payment in full satisfaction of
royalties on all units incorporating Northern Telecom's patents which were sold
by the Company prior to January 1, 1997. Future royalties are payable at a
variable rate based on product type and number of units sold. Total Northern
Telecom royalty expense incurred in 1997 was $583,000.

The Company relies to a certain extent on trade secret laws to
establish and maintain those proprietary rights which it believes are not
reverse engineerable by third parties. Although the Company has obtained
confidentiality agreements from all of its employees, including its key
executives and engineers in its product development group, there can be no
assurance that third parties will not independently develop the same or similar
technology, obtain unauthorized access to the Company's proprietary technology
or misuse the technology to which the Company has granted access. It is for
this reason the Company has organized an internal legal department and is
actively pursuing patent protection for its Research and Development efforts.

The Company has patent protection on certain aspects of its existing
technology and also relies on trade secrets, copyrights, trademarks and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights, that others have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Moreover, there can be no assurance
that the rights granted under any such patents will provide competitive
advantages to the Company or be adequate to safeguard and maintain the Company's
proprietary rights. In addition, the laws of certain countries in which the
Company's products may from time-to-time be sold may not protect intellectual
property rights to the same extent as the laws of the United States.

The telecommunications industry, like many technology-based industries,
is characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time-to-time may be notified by
third parties that the Company may be infringing patents owned by or proprietary
rights of third parties. The Company has in the past and may in the future have
to seek a license under such patent or proprietary rights, or redesign or modify
their products and processes in order to avoid infringement of such patent or
proprietary rights. There can be no assurance that such a license would be
available on acceptable terms, if at all, or that the Company could so avoid
infringement of such patent or proprietary rights, in which case the Company's
business, financial condition and results of operations could be materially and
adversely affected. Additionally, litigation may be necessary to protect the
Company's proprietary rights. Any claims or litigation involving the Company's
owned or licensed patents or other intellectual property rights may be time
consuming and costly, or cause product shipment delays, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

11
<PAGE> 12
EMPLOYEES

At December 31, 1997, the Company employed 422 full-time persons, of
whom 71 were engaged in product development, 32 in sales and marketing, 202 in
customer service/call center, 75 in operations and 42 in management, finance
and administration. The Company has no collective bargaining agreement with its
employees and believes that its relationship with its employees is good.

EXECUTIVE OFFICERS

As of March 26, 1998, the executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Daniel L. Eilers ....................................... 42 President, Chief Executive Officer and Director
Ho Leung Cheung ........................................ 40 Vice President and General Manager, Internet Solutions
Division
Timothy J. Dooley ...................................... 41 Vice President and General Manager, Accessory Products
Division
Daniel A. Dorosin ...................................... 37 Vice President, General Counsel and Secretary
Terry A. Dyckman ....................................... 55 Vice President, Human Resources
James R. Hindmarch ..................................... 54 Vice President, Worldwide Operations
Richard D. Kent ........................................ 41 Vice President Finance and Chief Financial Officer
Ian G. A. Laing ....................................... 40 Executive Vice President and General Manager,
SmartPhones Division
Marv Tseu ............................................. 49 Executive Vice President, Sales and Marketing
</TABLE>

Mr. Eilers has been president and chief executive officer and a
director of the Company since March 1997. From 1986 to 1996, Mr. Eilers held
various executive positions at Apple Computer, Inc. such as as senior vice
president of worldwide marketing and vice president of strategy and corporate
development. Mr. Eilers has also served for five years as the president and
chief executive officer of Claris Corporation. Mr. Eilers received a B.A.
degree in Economics from the University of Washington and an MBA degree from
Stanford University.

Mr. Cheung joined CIDCO in June 1997 and currently serves as vice
president and general manager of the Internet Solutions Division. From 1981 to
1996, Mr. Cheung held various management roles at Apple Computer, Inc. most
recently as senior vice president in charge of Apple Computer, Inc.'s Performa
division. Mr. Cheung is a graduate of the University of Birmingham, United
Kingdom. He holds a B.S. in Electrical Engineering.

Mr. Dooley joined CIDCO in July 1991 to serve as director of business
development. In April 1994, he was appointed vice president of sales. In 1997,
he was appointed vice president and general manager, Accessory Products
Division. Prior to joining CIDCO, Mr. Dooley served in product and marketing
positions for GTE. Mr. Dooley is a graduate of Washington State University and
holds a B.A. degree in Business Administration.

Mr. Dorosin joined CIDCO in July 1997 and currently serves as vice
president, general counsel and secretary. Prior to joining CIDCO, from March
1994 to February 1997, Mr. Dorosin was senior vice president of business
affairs, general counsel and secretary at Crystal Dynamics, Inc. Previously,
from June 1987 to March 1994, he was an attorney at the law firm of Gray Cary
Ware & Freidenrich, most recently as a partner. Mr. Dorosin received a B.A.
degree in Economics from Stanford University and a J.D. degree from UCLA.

Mr. Dyckman joined CIDCO in June 1997 and currently serves as vice
president, human resources. Prior to joining CIDCO, Mr. Dyckman served as vice
president, human resources for Auspex Systems. From 1989 to 1996, Dyckman held a
number of management positions at Apple Computer, Inc. Mr. Dyckman received an
M.A. in Counseling Psychology from Santa Clara University and a B.A. in
Psychology from San Jose State University.

12
<PAGE> 13

Mr. Hindmarch joined CIDCO in August 1997 and currently serves as vice
president of worldwide operations. Prior to joining CIDCO, from 1996 to 1997,
Mr. Hindmarch served as vice president, worldwide operations for Power
Computing, Inc. From 1995 to 1996, he served as vice president, worldwide
operations and manufacturing for Plantronics, Inc. From 1993 to 1994, Mr.
Hindmarch was senior vice president, operations for Supermac Technology. From
1989 to 1993, he served as vice president, manufacturing for Dell Computer
Corporation. Mr. Hindmarch holds a B.S. degree in Industrial Management from San
Jose State University.

Mr. Kent joined the Company in June 1994 as corporate controller and in
June 1995, became chief accounting officer as well. In December 1996, Mr. Kent
was promoted to chief financial officer and vice president of finance and
administration. From October 1990 until starting at CIDCO, he served as
corporate controller of Radius, Inc., a computer peripheral manufacturer. Mr.
Kent is a Certified Public Accountant. He holds a B.S. degree in Business from
the University of California at Berkeley and graduated with honors.

Mr. Laing joined CIDCO in June 1996 to serve as executive vice
president of research and development. In 1997, he was appointed executive vice
president and general manager, SmartPhones Division. Prior to joining CIDCO, Mr.
Laing served as director of product development for consumer products at AT&T
where he spent most of his career. He attended the Sloan Fellowship Management
Program at Stanford University, where he earned his M.S. degree in electrical
engineering.

Mr. Tseu joined CIDCO in July 1996 to serve as executive vice president
of sales and marketing. Prior to joining CIDCO, from 1984 to 1996, Mr. Tseu
served in various executive management positions, most recently as vice
president of marketing and sales at Plantronics, Inc. Previously, Mr. Tseu was
an area manager for AT&T Consumer Products Division and spent twelve years with
Pacific Telephone Company (now Pacific Bell). He earned his B.S. degree in
economics from Stanford University.

ITEM 2. PROPERTIES

The Company's principal administrative, development, distribution and
support facility is located in Morgan Hill, California and consists of a five
building campus of approximately 123,000 square feet under leases which expire
between January 1999 and March 2006. The Company owns a 3.24 acre parcel in the
same business park. The Company also leases approximately 6,500 square feet of
storage space in Morgan Hill, California under a lease which expires in June
1999.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, the Company may be involved in
legal proceedings. As of the date hereof, the Company is not a party to any
pending legal proceedings which it believes will materially affect its
financial condition or results of operations.

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

Not applicable.
PART II.

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

The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol CDCO.

13
<PAGE> 14
The following table sets forth for the periods indicated the high and
low closing sales price per share of Common Stock on The Nasdaq Stock Market as
reported by Nasdaq:

<TABLE>
<CAPTION>
1996 High Low
- ---- --------- ---------
<S> <C> <C>
1st Quarter ....................... $ 38.00 $ 25.88
2nd Quarter ....................... $ 41.00 $ 30.50
3rd Quarter ....................... $ 36.00 $ 15.75
4th Quarter ....................... $ 20.13 $ 16.81
</TABLE>

<TABLE>
<CAPTION>
1997
- ----
<S> <C> <C>
1st Quarter ....................... $ 18.06 $ 12.00
2nd Quarter ....................... $ 15.88 $ 12.75
3rd Quarter ....................... $ 22.07 $ 12.81
4th Quarter ....................... $ 22.38 $ 17.00
</TABLE>

As of December 31, 1997, there were 109 holders of record of the
Company's Common Stock, which does not include those beneficial owners whose
shares are held in street or nominee name.

14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
----------------------------------------------------------------
Statement of Operations Data: 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales ................................... $257,033 $215,197 $193,668 $100,290 $ 34,993
Research and development(1) ............ 16,859 13,170 9,709 5,175 3,740
Income from operations(1) .............. 18,363 27,236 36,491 19,124 6,772
Net income ............................. 12,910 18,523 22,613 11,657 4,145
Basic earnings per share(2) ............ $ .93 $ 1.30 $ 1.60 $ 0.93 $ 0.25
Diluted earnings per share(2) .......... $ .90 $ 1.21 $ 1.51 $ 0.87 $ 0.23
Common shares outstanding(2)............ 13,948 14,284 14,135 11,922 9,000
Common shares assuming dilution(2) ..... 14,340 16,893 14,979 12,833 9,497

Dividends ............................... $ -- $ -- $ -- $ -- $ 2,389

As of December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................ $ 48,253 $ 26,509 $ 19,290 $ 28,224 $ 475
Short-term investments.................... 26,486 38,560 21,342 19,936 --
Working capital .......................... 112,980 110,469 91,355 74,003 6,257

Total assets ............................. 173,428 152,613 127,151 108,598 15,423
Mandatorily redeemable Preferred Stock ... -- -- -- -- 18,740
Stockholders' equity (deficit) ........... $130,730 $128,846 $106,214 $ 81,306 $(11,258)

QUARTERLY DATA:
Year ended December 31, 1997
----------------------------------------------
(in thousands, except per share data; unaudited) First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales ................................................. $77,030 $58,288 $51,079 $70,635
Gross margin .......................................... 34,247 27,049 22,662 31,402
Income from operations ................................ 6,869 4,210 2,005 5,279
Net income ............................................ 4,397 3,041 1,746 3,727
Basic earnings per share(2) ........................... $ 0.31 $ 0.22 $ 0.13 $ 0.27
Diluted earnings per share(2) ......................... $ 0.30 $ 0.22 $ 0.12 $ 0.26

Year ended December 31, 1996
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales .................................................. $ 51,686 $ 60,446 $ 45,959 $ 57,106
Gross margin ........................................... 22,623 26,526 22,892 23,339
Income (loss) from operations .......................... 10,550 10,051 7,600 (965)
Net income ............................................. 6,570 6,365 5,340 248
Basic earnings per share(2) ............................ $ 0.46 $ 0.45 $ 0.37 $ 0.02
Diluted earnings per share(2) .......................... $ 0.44 $ 0.42 $ 0.33 $ 0.02
</TABLE>

(1) Research and development includes a one-time charge of $1,770,000 in May
1993 related to the settlement of an engineering contract.

(2) For an explanation of the number of shares used to compute earnings per
share, see Note 2 of Notes to Financial Statements. All earnings per share
data have been computed in accordance with the provisions of FAS 128 which
the Company was required to adopt in the quarter ended December 31, 1997.
Prior periods have been restated to conform to the provisions of FAS 128.

15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following information should be read in conjunction with the financial
statements and supplementary information thereto in Part II, Item 8 of this
Annual Report.

HISTORICAL BACKGROUND

CIDCO was incorporated in July 1988 to design, develop and market
subscriber telephone equipment that would support Caller ID, Caller ID on Call
Waiting and other Services then being introduced by Telcos. The Company began
operations in 1989, initially funding its business with a capital investment
made by its founders. Prior to its initial public offering, the Company financed
its growth principally through internally generated funds and short-term
borrowings. In March 1994, the Company completed its initial public offering of
Common Stock and had two subsequent public offerings in 1994 resulting in
capital infusions to the Company totaling approximately $59.4 million.

Historically, the Company's primary sales and distribution channels
have been Agency Fulfillment, Non-Agency Fulfillment, Direct to Telco, and, to
a lesser extent, international accounts, Retail, and OEM customers. Agency
Fulfillment programs are sales campaigns run by the Company involving the use
of consumer mailings and telemarketing to sell Services for the Telcos which
utilize the Company's products. As part of these programs the Company, acting
as the Telco's "agent," generates an order for Services, such as Caller ID, and
then ships an adjunct product (or, less frequently, a phone product) to each
customer "acquired" through the campaign. In 1997, the Company's own direct
marketing of its telephone products and Agency Fulfillment resulted in net
sales of $127 million. Non-Agency Fulfillment sales occur when the Company
receives an order and ships the requested product directly to the customer. In
the case of Non-Agency Fulfillment sales, the Telco generates the order by
performing the marketing activities themselves rather than retaining the
Company to perform such services, as in Agency Fulfillment programs. Agency
Fulfillment sales totaled 49%, 25%, and 2% of sales in 1997, 1996 and 1995,
respectively. Non-Agency Fulfillment sales accounted for 35%, 43%, and 68% of
sales in 1997, 1996 and 1995, respectively.

This Report contains forward-looking statements which reflect the
Company's current views with respect to future events which may impact the
Company's results of operations and financial condition. In this report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
those set forth below under the caption "Factors Which May Affect Future
Results," which could cause actual future results to differ materially from
historical results or those described in the forward looking statements. The
forward-looking statements contained in this Report should be considered in
light of these factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.

16
<PAGE> 17
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the
percentage of sales represented by certain line items in the Company's income
statement:

<TABLE>
<CAPTION>
Year ended December 31,
----- ----- -----
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Sales ................................................................. 100.0% 100.0% 100.0%
Cost of sales ......................................................... 55.1 55.7 55.8
----- ----- -----
Gross margin .......................................................... 44.9 44.3 44.2
----- ----- -----
Operating expenses:
Research and development ............................................. 6.6 6.1 5.0
Selling and marketing ................................................ 27.6 22.2 17.4
General and administrative ........................................... 3.6 3.4 3.0
----- ----- -----
37.8 31.7 25.4
----- ----- -----
Income from operations ................................................ 7.1 12.6 18.8
----- ----- -----
Other income (expense), net:
Interest income ...................................................... 1.1 3.1 0.6
Interest expense ..................................................... -- (1.4) --
----- ----- -----
1.1 1.7 0.6
----- ----- -----
Income before income taxes ............................................ 8.2 14.3 19.4
Provision for income taxes ............................................ 3.2 5.7 7.7
----- ----- -----
Net income ............................................................ 5.0% 8.6% 11.7%
===== ===== =====
</TABLE>

17
<PAGE> 18
1997 COMPARED TO 1996

Sales
Sales are recognized upon shipment of the product to the customer less
reserves for anticipated returns or, in the case of Agency Fulfillment,
non-retention of certain services provided by the Telcos, and customer credit
worthiness. Sales increased 20% to $257.0 million in 1997 from $215.2 million
in 1996, primarily due to higher unit sales of the Company's adjunct products
through the Company's Agency Fulfillment programs for Caller ID services on
behalf of GTE and Non-Agency Fulfillment sales to U S WEST and Nynex customers.
Additionally, the Company's introduction of its CST-2000, a large format screen
phone, contributed to sales growth in the second half of 1997. These increases
were partially offset by a decrease in unit sales of phones sold to Ameritech
and lower average selling prices across the Company's product line due to
competitive pricing pressures from both Asian suppliers to the United States
market and certain domestic suppliers. The total fulfillment business (i.e.,
Agency Fulfillment plus Non-Agency Fulfillment) grew to 84% of sales in 1997
from 70% of sales in 1996. This was primarily due to growth in Agency
Fulfillment programs which increased to 49% of sales in 1997 from 26% in 1996.
The Company believes that the annual market for new Caller ID subscribers in
the United States may have peaked during 1997, with a possible slowdown in
Caller ID sales to new subscribers expected in 1998 and beyond. Ameritech, the
Company's second largest customer in 1996, discontinued selling the Company's
products in the second quarter of 1997. The Company believes that Ameritech
will not make any significant purchases of product in 1998.

Gross Margin
Cost of sales includes the cost of finished goods purchased from the
Company's offshore contract manufacturers, all costs associated with procuring
and warehousing the Company's inventory, and royalties payable on licensed
technology used in the Company's products. Royalty expense in 1997 was $3.9
million compared with $2.1 million in 1996 due to the increased volume of
adjunct sales to non-RBOC Telcos. Gross margin as a percentage of sales
increased nominally to 44.9% in 1997 from 44.3% in 1996. Higher gross margins
for Agency Fulfillment programs were partially offset by declines in average
selling prices of adjunct units and the liquidation of inventory of several
older model telephones through aggressive price reductions. The Company expects
gross margins to vary in the future due to changes in sales mix by distribution
channel and product mix. In addition, the Company believes gross margins will
decline as a result of competitive pricing pressures.

Research and Development Expenses
Research and development expenses include salaries for personnel,
associated benefits, and tooling and supplies for research and development
activities. The Company's policy is to expense all research and development
expenditures as incurred except for certain investments in tooling. Research
and development expenses increased 28% to $16.9 million in 1997 from $13.2
million in 1996, due primarily to increased spending on personnel and new
development projects such as the ADSI large format screen phone, cordless
telephones and advanced screen phones which provide access to the Internet. The
Company recognized $2.4 million of expense in 1997 related to the Company's
equity in losses of InfoGear, which is developing software for the Company's
initial Internet product. The Company expects equity in losses in InfoGear to
decline significantly in 1998. Research and development expenses as a
percentage of sales increased to 6.6% in 1997 from 6.1% in 1996. The Company
expects that research and development expenses as a percentage of sales will
continue at current levels in 1998.

Selling and Marketing Expenses
Selling and marketing expenses include personnel costs, telephone and
electronic data exchange expenses, promotional costs and travel expenses.
Selling and marketing expenses increased to $70.9 million in 1997 from $47.7
million in 1996 and as a percentage of sales increased to 27.6% in 1997 from
22.2% in 1996. These increases were due principally to the higher levels of
advertising and telemarketing expenses associated with the Company's Agency
Fulfillment sales and, to a lesser extent, the Company's own direct marketing
for its screen phone products. The Company anticipates that selling and
marketing expenses as a percentage of sales will remain at these higher levels
in 1998 due to the anticipated continued reliance on both Agency Fulfillment
and the Company's own direct marketing activities. Additionally, as penetration
rates for adoption of Caller ID services increase towards projected saturation
levels, the Company expects that the expenses, or "cost per order," the Company
must incur in its Agency Fulfillment arrangements may increase, thereby
increasing selling and marketing expenses in absolute dollars and as a
percentage of sales.

18
<PAGE> 19

General and Administrative Expenses
General and administrative expenses include salaries, benefits and
other expenses associated with the finance and administrative functions of the
Company. General and administrative expenses increased to $9.3 million in 1997
from $7.3 million in 1996 and as a percentage of sales increased to 3.6% in
1997 from 3.4% in 1996. These increases reflect increased legal, human
resources, relocation and information systems costs. The 1997 results also
reflect a one-time charge for contractually obligated expenses incurred as a
part of the relinquishment of day to day duties of certain executives that
occurred in the first quarter of 1997. The Company believes that general and
administrative expenses will increase in the first quarter of 1998, and
approximate 1997 levels for the remainder of 1998.

Other Income (Expense)
Other income in 1997 includes interest income from the investment of
available cash balances, which were substantially lower on average in 1997 than
in 1996 due to the repayment of long-term debt at the end of 1996. Other
expense consists of interest expense related to the issuance of long-term debt,
which was outstanding during 1996.

Provision for Income Taxes
The provision for income taxes reflects an effective tax rate of 39% in
1997 and 40% in 1996.

1996 COMPARED TO 1995

Sales
The Company's sales increased 11% to $215.2 million in 1996 from
$193.7 million in 1995, primarily due to higher unit sales of the Company's
integrated corded and cordless feature phones, which were sold primarily
through Ameritech and Southwestern Bell. The average selling price of units
sold increased slightly, as unit sales of phones increased as a percentage of
sales, while adjunct volumes remained relatively constant. The fulfillment
business (Agency Fulfillment and Non-Agency Fulfillment) remained constant at
approximately 70% of sales. The Company's Agency Fulfillment accounted for 37%
of the Fulfillment sales channel in 1996. In 1995, the Company's Agency
Fulfillment accounted for only 2% of the Fulfillment sales channel.

Gross Margin
Gross margin as a percentage of sales increased nominally to 44.3% in
1996 from 44.2% in 1995. In 1996, the Company's own direct marketing program
sales increased gross margins; however, this increase was offset by a $2.5
million provision for bad debt recorded in the fourth quarter of 1996 when the
Company became aware of the additional reserves needed in excess of the
original estimates. Royalty expense in 1996 was $2.1 million compared with $1.9
million in 1995.

Research and Development Expenses
Research and development expenses increased 36% to $13.2 million in
1996 from $9.7 million in 1995, due primarily to increased spending on
personnel and new development projects such as ADSI, cordless telephones and
advanced screen phones which provide access to the Internet. Research and
development expenses as a percentage of sales increased to 6.1% in 1996 from
5.0% in 1995.

Selling and Marketing Expenses
Selling and marketing expenses increased to $47.7 million in 1996 from
$33.6 million in 1995 and as a percentage of sales increased to 22.2% in 1996
from 17.4% in 1995. These increases were due principally to the Company
significantly expanding its Agency Fulfillment programs resulting in increased
advertising and telemarketing agency costs.

General and Administrative Expenses
General and administrative expenses increased to $7.3 million in 1996
from $5.8 million in 1995. General and administrative expenses increased as a
percentage of sales to 3.4% in 1996 from 3.0% in 1995. These increases reflect
higher spending on legal costs, information systems and administrative staff
required to support the Company's growth.

Other Income (Expense)
Other income in 1996 includes interest income from the investment of
available cash balances which were substantially higher on average in 1996 than
in 1995. Other expense consists of interest expense related to the issuance of
long-term debt, which was repaid at the end of 1996.

19
<PAGE> 20
Provision for Income Taxes
The provision for income taxes in 1996 and 1995 reflects an effective
tax rate of 40%.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents increased $21.7 million during 1997
primarily from cash generated from operations of $25.1 million and the sale of
short-term investments of $12.1 million, offset by the purchase of one million
shares of its Common Stock for $12.9 million and the acquisition of property
and equipment of $4.4 million. Cash generated from operations of $25.1 million
resulted primarily from earnings of $12.9 million, non-cash depreciation and
amortization of $5.9 million and an increase in accounts payable of $13.0
million offset by an increase in accounts receivable of $9.8 million.

The Company had working capital of $112.9 million at December 31,
1997, as compared to $110.5 million at December 31, 1996. The Company's current
ratio decreased to 3.7:1, as of December 31, 1997, from 5.6:1, as of December
31, 1996. The decrease in the current ratio was due to the repurchase of one
million shares of the Company's common stock and an increase in accounts
payable for inventory received and shipped in December of 1997.

The Company has a bank line of credit agreement which provides for
borrowings of up to $25 million. The interest rate on the line of credit is
prime less 0.25%. The line is secured by substantially all of the Company's
assets. The line is primarily used as security for letters of credit used to
purchase inventory from international suppliers. As of December 31, 1997, the
Company had not borrowed any funds under the line. Letters of credit secured
by this line totaled $2.7 million as of December 31, 1997.

The Company issued $150 million of 3.75% convertible subordinated
notes due June 30, 2003. The notes were convertible into the Company's Common
Stock at a conversion rate of one share of Common Stock for each $41.00 in
principal amount of the notes. The note agreement contained covenants which,
among other matters, restricted or limited the ability of the Company to pay
dividends or incur indebtedness. Interest on the notes was payable quarterly
commencing September 30, 1996. The notes were fully redeemed on December 30,
1996.

On January 27, 1997, the Company announced plans to purchase up to
one million shares of its outstanding Common Stock. The Company subsequently
repurchased one million shares at an aggregate purchase price of $12.9 million.

The Company plans to continue to invest in its infrastructure,
including information systems, to gain efficiencies and meet the demands of its
markets and customers. The Company believes its 1998 capital expenditures will
be approximately $7.0 million. The 1998 capital expenditures are expected to be
funded from available working capital. The planned expenditure level is subject
to adjustment as changing economic conditions necessitate. The Company believes
its current cash, cash equivalents, short-term investments, and borrowing
capacity will satisfy the Company's working capital and capital expenditure
requirements for the next twelve months.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Dependence on Caller ID and Maturation of Market. Approximately 84%,
68% and 70% of the Company's revenues during 1997, 1996 and 1995, respectively,
came from the Company's Agency Fulfillment and Non-Agency Fulfillment programs
for Caller ID adjunct and, to a lesser extent, telephone products and customer
acquisition services through Telcos. The size of the overall market for Caller
ID products and services is a function of the total number of potential
subscribers with Caller ID-enabled telephone lines and the rate of adoption of
Caller ID services, or the "penetration rate," among those subscribers. Based
upon the Company's projections of penetration rates, the Company believes that
the annual market for new Caller ID subscribers in the United States may have
peaked in 1997, with a resulting slowdown in Caller ID sales to new subscribers
expected in 1998 and beyond. Customer adoption of Caller ID services has been
in the past, and likely will be in the future, dependent on a variety of
factors, including the rate at which Telcos from time-to-time elect to promote
Caller ID, the perceived value of the services to end users, including the
extent to which other end users have also adopted and/or not blocked Caller ID
services, and the end user cost for the services. There can be no assurances
that Telcos will continue to promote Caller ID, that Caller ID services will
gain market acceptance or that, in areas where the services are accepted, those
markets will not become saturated. In addition, even if peak market
penetration for Caller ID service has not been achieved for the entire domestic
United States market, one or more regional markets may become saturated.
Further, the market for Caller ID adjunct products may be eroded as Caller ID
functionality is designed into competitively priced phone products as a

20
<PAGE> 21
standard feature. Declines in demand for or revenues from Caller ID, whether due
to reduced promotion of such services by Telcos, competition, market saturation,
price reduction, technological change or otherwise, could have a material
adverse affect on the Company's business, operating results or financial
condition. In addition, as penetration rates for adoption of Caller ID services
increase towards projected saturation levels, the expenses, or "cost per order,"
the Company must incur in its Agency Fulfillment arrangements to obtain
incremental end user adoption of Caller ID services increases, which may result
in pressures on the Company's profitability. Further, the Company is also
experiencing pricing pressures as a result of both increased domestic
competition and the effects of Asian currency devaluations which have resulted
in the supply by Asian vendors of relatively lower priced adjunct and phone
products into the United States.

Dependence on Telcos; Concentrated Customer Base. A significant portion of the
Company's revenues are derived from a small number of Telcos. During 1997, 1996
and 1995 respectively, the percentage of revenue derived by the Company from its
significant (greater than 10% of total sales) customers was 77% (four
customers), 68% (three customers) and 64% (two customers). There can be no
assurance that the Company will retain its current Telco customers or that it
will be able to attract additional customers. The Company generally does not
enter into long term contracts with its Telco or other customers and no on-going
minimum purchases are required. Moreover, the arrangements are typically both
nonexclusive and terminable at will following a specified notice period,
generally 20 to 60 days. In addition, these Telco customers may have significant
leverage over the Company and may try to obtain terms relatively favorable to
the customer and/or subsequently change the terms, including pricing, on which
the Company and such customers do business. If the Company is forced to accept
such terms and/or change the terms, including pricing, on which it does
business, the Company's operating margins may decline and such decline may have
a material adverse affect on the Company's business, results of operations or
financial condition.

The Company's sales and operating results are substantially dependent
on the extent of, and the timing of, this relatively small number of Telcos'
respective decisions to implement and from time-to-time promote Caller ID,
Caller ID on Call Waiting and other Services on a system-wide or regional basis.
The extent to which the Telcos determine to implement and/or from time-to-time
promote Services may be affected by a wide variety of factors, including
regulatory approvals, technical requirements, budgetary constraints at the
Telcos, consolidation among Telcos, market saturation for the Services, the
profitability of the Services to the Telcos, market acceptance for the Services
and other factors. The Company typically has little control over any of these
factors. There can be no assurances that the Telcos will continue to implement
and/or promote Caller ID or other Services, or that the Company's product and
program offerings will be selected by the Telcos. Moreover, the Company believes
that certain Telcos have begun to perform directly themselves the customer
acquisition services currently undertaken by the Company through its agency
programs, rather than through third parties such as the Company. The
continuation of this trend among the Telcos could have a material adverse affect
on the Company's business, results of operations and financial condition. The
Company operates with little or no backlog and its quarterly results are
substantially dependent on these Telcos' implementation and/or promotion of
Services on a system wide or regional basis during each quarter. The Company's
operating expenses are based on anticipated sales levels, and a high percentage
of such expenses are relatively fixed. As result, to the extent that the Telcos
delay the implementation and/or promotion of these Services which were
anticipated for a particular quarter, the Company's sales and operating results
in that quarter may be materially and adversely affected.

New Product Introduction; Technological Change. The telecommunications industry
is subject to rapid technological change, changing customer requirements,
frequent new product introductions and changing industry standards which may
render existing products and services obsolete. The Company's future success
will depend in large part on its ability to timely develop and introduce new
products and services which keep pace with, and correctly anticipate, these
changes and which meet new, evolving market standards and changing customer
requirements, as well as its ability to enhance and improve existing product and
services. Product introductions and short product life cycles necessitate high
levels of expenditure for research and development. There can be no assurance
that the Company's existing markets will not be eroded or that the Company will
be able to correctly anticipate and/or timely develop and introduce products and
services which meet the requirements of the changing marketplace or which
achieve market acceptance. If the Company is unable to develop and introduce
products and services which timely meet the changing requirements of the
marketplace and achieve market acceptance, the Company's business, results of
operations or financial condition may be materially and adversely affected.

In particular, the Company is seeking to expand its product offerings
into a number of new business areas including the Internet and electronic
commerce, and expects to devote the substantial majority of its research and

21
<PAGE> 22
development resources on developing telephone-based "information appliances"
which allow access to the World Wide Web via telephone-based, or telephone-like,
devices. Certain of such devices would also be intended to enable electronic
commerce and services-based business models. These are significantly new areas
for the Company and its existing research and development, sales and marketing
personnel. There can be no assurances that the Company will be successful in
timely developing such products or that, if developed, there will be a market
for such products. Moreover, there can be no assurances that the Company's
existing personnel will have the skills necessary to timely develop, market and
sell products for this market or that, if it becomes necessary to do so, the
Company will be able to hire the necessary skilled personnel to develop, market
and/or sell products in these new areas.

Significant undetected errors or delays in new products or releases
may affect market acceptance of the Company's products and could have a
material adverse effect on the Company's business, results of operations or
financial condition. There can be no assurances that, despite testing by the
Company or its Telco customers, errors will not be found in new products or
releases after commencement of commercial shipments, resulting in loss of
market share or failure to achieve market acceptance. Any such occurrences
could have a material adverse effect on the Company's business, results of
operations or financial condition. Further, if the Company were to experience
delays in the commercialization and introduction of new or enhanced products,
if customers were to experience significant problems with products or if
customers were dissatisfied with product functionality or performance, this
could have a material adverse effect on the Company's business, results of
operations or financial condition.

Viability of Internet and Electronic Commerce as New Business Areas. The
Company has recently begun to promote the adoption and sale of telephone-based
devices which allow access to the World Wide Web and which also may be designed
to enable electronic commerce and services-based business models. The market
for such Internet phones is very new and currently unproven, with several
competing technological platform standards available. Both the extent and/or
timing of consumer acceptance for Internet phones, and the particular
technology platform(s) for such phones which may ultimately gain market
acceptance, is highly uncertain. A viable market for Internet phones and/or
electronic commerce may not develop for a number of reasons, including customer
preference and usage patterns, the cost of the device to end users, potentially
inadequate development of the necessary Internet infrastructure, delayed
development of Internet enabling technologies, inadequate Internet performance
improvements, changing Internet standards and protocols and increased
government regulation. Changes in, or insufficient availability of,
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet generally and
Internet phones and electronic commerce in particular. Moreover, adverse
publicity and consumer concern about the security of transactions conducted on
the Internet and the privacy of users may also inhibit the growth of the market
for Internet telephones and electronic commerce. If the use of the Internet
does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet does not effectively support growth that may
occur, if end user costs for Internet phones are not reduced whether through
manufacturing cost reductions, subsidy-based business models or otherwise, or
if concerns about Internet security do not abate, the Company's ability to
profit from Internet phones and electronic commerce would be materially
adversely affected. Moreover, there can be no assurances that this market will
develop or that, if a market develops, the Company will be able to timely
develop and bring to market products which gain market acceptance or which
generate significant revenues or profits.

Fluctuations in Quarterly Revenues and Operating Results. The Company
has experienced in the past, and may experience in the future, significant
fluctuations in sales and operating results from quarter to quarter as a result
of a variety of factors, including the timing of orders for the Company's
products from Telcos and other customers; the success of the Company's own
direct marketing programs, in particular, deriving adequate sales volumes while
controlling related costs; the addition or loss of distribution channels or
outlets; the impact on adoption rates of changes in monthly end-user charges
for Services; the timing and market acceptance of new product introductions by
the Company or its competitors; increases in the cost of acquiring end-user
customers for Services and the resulting effects on profitability; technical
difficulties with Telco networks; changes in the Company's product mix or sales
mix by distribution channel that may affect sales prices, margins or both;
technological difficulties and resource constraints encountered in developing,
testing and introducing new products; uncertainties involved in the Company's
entry into markets for new Services; disruption in sources of supply,
manufacturing and product delivery; changes in material costs; regulatory
changes; general economic conditions, competitive pressures, including
reductions in average selling prices and resulting erosions of margins; and
other factors. Accordingly, the Company's quarterly results are difficult to
predict until the end of each particular quarter, and delays in product
delivery or closing of expected sales near the end of a quarter can cause
quarterly revenues and net income to fall significantly short of anticipated
levels. Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and

22
<PAGE> 23
that such comparisons should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.

Need to Develop Alternative Distribution Channels. Historically, the
Company's Telco customers have been the primary distribution channel for the
Company's products. However, the Company is seeking to diversify its
distribution channels toward direct-to-end-user, retail, targeted vertical
market segments and other alternate distribution channels, with the goals of
broadening the Company's market opportunities and adding predictability to the
Company's quarter-by-quarter revenues. Moving into these new channels may
involve a number of risks, including, among other things, the establishment of
new channel relationships and presence, the cost of creating brand awareness
and end-user demand in the new channels, the viability of the Company's product
offerings in the new channels and managing conflicts among different channels
offering the Company's products. There can be no assurance that the Company
will be successful in identifying and exploiting alternate distribution
channels or in addressing any one or more of these risks. If the Company is
not successful, it may lose significant sales opportunities and will continue
to be substantially dependent upon the Telco channel for sales of its products.

Risks Related to Contract Manufacturing; Limited Sources of Supply.
The Company's products are manufactured for the Company by third parties which
are primarily located in Malaysia, China and Thailand. The use of third
parties to manufacture products involves a number of risks, including limited
control over production facilities and schedules and the management of supply
chains for the manufactured products. Moreover, reliance on contract
manufacturers in foreign countries subjects the Company to risks of political
instability, financial instability, expropriation, currency controls and
exchange fluctuations, and changes in tax laws, tariff and rules. See "Risks
Relating to International Sales." Many of the key components used in the
Company's products are available either only from single sources or, even if
potentially available from multiple sources, involve relatively long lead times
to manufacture, such that the Company cannot quickly obtain additional supply
without incurring significant incremental costs. In general, the Company does
not have supply contracts with its suppliers and orders parts on a purchase
order basis. The Company's inability to obtain sufficient quantities of
components required, or to develop alternative manufacturing capability if and
as required in the future, could result in delays or reductions in product
shipments that could materially and adversely affect the Company's business,
results of operations and financial condition.

Dependence on Key Personnel; Hiring and Retention of Employees. The
Company's continued growth and success depend to a significant extent on the
continued services of its senior management and other key employees and its
ability to attract and retain highly skilled technical, managerial, sales and
marketing personnel. Competition for such personnel is intense. There can be
no assurance that the Company will be successful in continuously recruiting new
personnel or in retaining existing personnel. None of the Company's employees
is subject to a long-term employment agreement. The loss of one or more key
employees or the Company's inability to attract additional qualified employees
or retain other employees could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company may experience increased compensation costs in order to attract and
retain skilled employees.

Risks Relating to International Sales. The Company has had relatively
limited international sales to date. However, the Company believes that
international sales, particularly in Asia, may represent an increasing
percentage of the Company's sales in the future. The Company's future success
will depend in part on its ability to compete in Japan and elsewhere in Asia
and this will depend on the continuation of favorable trading relationships
between the region and the United States. The Company's entry into
international markets will likely require significant management attention and
may require significant engineering efforts to adapt the Company's products to
such countries' telephone systems. Moreover, the rate of customer acceptance
of Caller ID in areas outside of the United States is highly uncertain. There
can be no assurance that the Company's Caller ID or other products will gain
meaningful market penetration in any foreign jurisdictions, whether due to
local consumer preferences, local regulatory requirements, technological
constraints in the local networks, the extent to which the local Telcos
determine to promote Caller ID, or other factors. In particular, the Company
believes that technological constraints in the Japanese telephone networks
could delay the scope of the introduction of Caller ID in the Japanese market.
Dependence on revenues from international sales involves a number of inherent
risks, including new or different regulations, economic slowdown and/or
downturn in the general economy in one or more local markets, international
currency fluctuations, general strikes or other disruptions in working
conditions, political instability, trade restrictions, changes in tariffs, the
difficulties associated with staffing and managing international operations,
generally longer receivables collection periods, unexpected changes in or

<PAGE> 24
impositions of legislative or regulatory requirements, reduced protection for
intellectual property rights in some countries, potentially adverse taxes,
delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers. International sales will also be impacted
by the specific economic conditions in each country.

Management of Infrastructure. The Company's future success will
require, among other things, that the Company improve its operating and
information systems. In particular, the Company must constantly seek to
improve its order entry and tracking and product fulfillment service
capabilities and systems in order to retain and/or obtain Telco customers The
failure of the Company to successfully implement and improve its operating and
information systems may adversely affect both the Company's ability to obtain
and/or retain its Telco customers and accordingly, could have a material
adverse effect on the Company's business, results of operations or financial
condition.

Competition. The telecommunications industry is an intensely
competitive industry with several large vendors that develop and market Caller
ID adjunct display units and screen phone products. Certain of these vendors
have significantly more financial and technical resources than the Company.
The Company's competitors include in-house divisions of the Company's current
and potential customers, as well as small companies offering specific services
and large firms. In addition, competitors for the Company's phone products
include both large Asian and European consumer electronics companies and
smaller Asian and European manufacturers. If the Company's existing customers
perform directly the customer acquisition services currently undertaken by the
Company through its Agency Fulfillment programs, or if potential customers
retain or increase internal capabilities to provide such services, the
Company's business, results of operation and financial condition could be
adversely affected. The introduction of new competitive products into one or
more of the Company's various markets could have a material adverse effect on
the Company's business, results of operations or financial condition.

Limited Protection of Intellectual Property; Risk of Third-Party Claims
of Infringement. The Company has patent protection on certain aspects of its
existing technology and also relies on trade secrets, copyrights, trademarks and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights, that others have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Moreover, there can be no assurance
that the rights granted under any such patents will provide competitive
advantages to the Company or be adequate to safeguard and maintain the Company's
proprietary rights. In addition, the laws of certain countries in which the
Company's products may from time-to-time be sold may not protect intellectual
property rights to the same extent as the laws of the United States.

The telecommunications industry, like many technology-based industries,
is characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time to time may be notified by
third parties that the Company may be infringing patents owned by or proprietary
rights of third parties. The Company has in the past and may in the future have
to seek a license under such patent or proprietary rights, or redesign or modify
their products and processes in order to avoid infringement of such patent or
proprietary rights. There can be no assurance that such a license would be
available on acceptable terms, if at all, or that the Company could so avoid
infringement of such patent or proprietary rights, in which case the Company's
business, financial condition and results of operations could be materially and
adversely affected. Additionally, litigation may be necessary to protect the
Company's proprietary rights. Any claims or litigation involving the Company's
owned or licensed patents or other intellectual property rights may be time
consuming and costly, or cause product shipment delays, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Possible Volatility of Stock Price. The market price of the Company's
Common Stock has experienced significant fluctuations and may continue to
fluctuate significantly. The market price of the Common Stock may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological
innovation by the Company or its competitors, quarterly variations in the
Company's or its competitors' products and services, changes in revenue and
revenue growth rates for the Company as a whole or for specific geographic
areas, business units, products or product categories, changes in earnings
estimates by market analysts, speculation in the press or analyst community

24
<PAGE> 25
and general market conditions or market conditions specific to the technology
industry or the telecommunications industry in particular. The stock prices for
many companies in the technology sector have experienced wide fluctuations which
often have been unrelated to their operating performance. Such fluctuations may
adversely affect the market price of the Company's Common Stock.

Year 2000 Compliance. Although the Company believes that its products will
record, store, process, calculate and present calendar dates falling on or
after (and if applicable, spans of time including) January 1, 2000, and will
calculate any information dependent on or relating to such dates in the same
manner, and with the same functionality, data integrity and performance, as
such products record, store, process, calculate and present calendar dates on
or before December 31, 1999, or calculate any information dependent on or
relating to such dates (collectively, "Year 2000 Compliant"), Year 2000
Compliant issues may arise with respect to products furnished by third-party
suppliers that may result in unforeseen costs or delays to the Company and
therefore may have a material adverse effect on the Company.

The Company is reviewing its computer systems to identify the systems
that could be affected by Year 2000 Compliant issues and is developing an
implementation plan to attempt to address these issues. Any of the programs
and/or systems which the Company currently utilizes and that have time sensitive
software may not be Year 2000 Compliant. This could result in a major systems
failure or miscalculations. The Company presently believes that, with
modifications to existing software, Year 2000 Compliant issues should not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modification or conversions are not
completed, the Year 2000 Compliant problem could have a material adverse effect
on the operations of the Company.

Risks Relating to Acquisitions. As part of its overall business
plans, the Company may from time-to-time consider and ultimately consummate
acquisitions of other companies or businesses or invest in joint ventures or
independent companies. Acquisitions require significant financial and
management resources both at the time of the transaction and during the process
of integrating the newly-acquired business into the Company's operations. The
Company's operating results could be adversely affected if it is unable to
successfully integrate such new businesses into its operations. There can be
no assurance that any acquired products, technologies or businesses will
contribute at anticipated levels to the Company's sales or earnings, or that
sales and earnings from combined businesses will not be adversely affected by
the integration process. Certain acquisitions or strategic transactions may be
subject to approval by the other party's board of directors or stockholders,
domestic or foreign governmental agencies, or other third parties. In
addition, there is a risk that proposed acquisitions or transactions could
either fail to be concluded as planned or not be concluded at all, in which
latter case the Company's results of operations could nonetheless be adversely
effected as a result of expenses incurred in negotiating the proposed
acquisitions or transactions. Future acquisitions by the Company could also
result in the issuance of equity securities or the rights associated with the
equity securities, which could potentially dilute earnings per share. In
addition, future acquisitions could result in the incurrence of debt, taxes,
contingent liabilities, amortization expenses related to goodwill and other
intangible assets and expenses incurred to align the accounting policies and
practices of the acquired companies with those of the Company. These factors
could adversely affect the Company's future operating results, financial
position and cash flows.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements:

<TABLE>
<CAPTION>
Financial Statements: Page
----
<S> <C>
Report of Independent Accountants ............................................ 26
Balance Sheet at December 31, 1997 and 1996 .................................. 27
Income Statement for the three years
ended December 31, 1997 .................................................... 28
Statement of Stockholders' Equity for
the three years ended December 31, 1997 .................................... 29
Statement of Cash Flows for
the three years ended December 31, 1997 .................................... 30
Notes to Financial Statements ................................................ 31

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts .............................. 40

All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to
require submission of the schedules or because the information is
shown either in the financial statements or the notes thereto.

</TABLE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of CIDCO Incorporated

In our opinion, the financial statements listed in the above index present
fairly, in all material respects, the financial position of CIDCO Incorporated
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

PRICE WATERHOUSE LLP
San Jose, California
January 19, 1998

26
<PAGE> 27
CIDCO INCORPORATED

BALANCE SHEET
(in thousands, except per share data)

<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 48,253 $ 26,509
Short-term investments ................................................ 26,486 38,560
Accounts receivable, net of allowances for doubtful accounts
of $3,301 and $2,966 ................................................ 58,082 48,242
Inventories ........................................................... 12,904 14,555
Deferred tax asset .................................................... 11,808 5,086
Other current assets .................................................. 1,306 1,284
--------- ---------
Total current assets ................................................ 158,839 134,236

Property and equipment, net .............................................. 12,591 14,118
Other assets ............................................................. 1,998 4,259
--------- ---------
$ 173,428 $ 152,613
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 29,868 $ 16,880
Accrued liabilities ................................................... 10,955 6,211
Accrued taxes payable ................................................. 1,875 676
--------- ---------

Total current liabilities ........................................... 42,698 23,767
--------- ---------

Commitments and contingencies (Notes 6 and 8)

Stockholders' equity:
Common stock, $.01 par value; 35,000 shares authorized,
14,955 and 14,399 shares issued ...................................... 149 144
Additional paid-in capital ............................................ 89,608 87,725
Treasury Stock, at cost (1,000 shares) ............................ (12,942) --

Retained earnings ..................................................... 53,915 40,977

Total stockholders' equity ......................... 130,730 128,846
--------- ---------
$ 173,428 $ 152,613
========= =========
</TABLE>

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

27
<PAGE> 28

CIDCO INCORPORATED

INCOME STATEMENT
(in thousands, except per share data)

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales ............................ $ 257,033 $ 215,197 $ 193,668
Cost of sales .................... 141,672 119,817 108,072
--------- --------- ---------
Gross margin ..................... 115,361 95,380 85,596
--------- --------- ---------
Operating expenses:
Research and development ...... 16,859 13,170 9,709
Selling and marketing ......... 70,851 47,720 33,634
General and administrative .... 9,288 7,254 5,762
--------- --------- ---------
96,998 68,144 49,105
--------- --------- ---------
Income from operations ........... 18,363 27,236 36,491
--------- --------- ---------
Interest income (expense), net:
Interest income .............. 2,793 6,729 1,197
Interest expense ............. -- (3,093) --
--------- --------- ---------
2,793 3,636 1,197
--------- --------- ---------
Income before income taxes ....... 21,156 30,872 37,688
Provision for income taxes ....... 8,246 12,349 15,075
--------- --------- ---------
Net income ..................... $ 12,910 $ 18,523 $ 22,613
========= ========= =========

Basic earnings per share ........ $ 0.93 $ 1.30 $ 1.60
========= ========= =========

Diluted earnings per share ...... $ 0.90 $ 1.21 $ 1.51
========= ========= =========

Common shares outstanding ........ 13,948 14,284 14,155
========= ========= =========

Common shares assuming dilution .. 14,340 16,893 14,979
========= ========= =========
</TABLE>

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

28
<PAGE> 29
CIDCO INCORPORATED

STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)

Retained
Common Stock Treasury Stock Additional Earnings Total
--------------------- --------------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........ 14,033 $ 140 $ 81,601 $ (435) $ 81,306

Unrealized gains from investments 446 446
Tax benefit from exercise of stock
options ........................ 1,114 1,114
Employee stock options exercised . 85 1 445 446
Employee stock purchase plan ..... 15 -- 289 289
Net income ....................... 22,613 22,613
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ........ 14,133 141 -- -- 83,449 22,624 106,214
Unrealized losses from investments (170) (170)
Tax benefit from exercise of stock
options ........................ 1,828 1,828
Employee stock options exercised . 241 3 1,883 1,886
Employee stock purchase plan ..... 25 -- 565 565
Net income ....................... 18,523 18,523
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........ 14,399 144 -- -- 87,725 40,977 128,846

Unrealized gains from investments 28 28
Tax benefit from exercise of stock
options ........................ 787 787
Treasury stock purchased ......... (1,000) $(12,942) (12,942)
Employee stock options exercised . 524 5 679 684
Employee stock purchase plan ..... 32 -- 417 417
Net income ....................... 12,910 12,910
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ........ 14,955 $ 149 (1,000) $(12,942) $ 89,608 $ 53,915 $130,730
======== ======== ======== ======== ======== ======== ========
</TABLE>

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

29
<PAGE> 30
CIDCO INCORPORATED

STATEMENT OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income .................................................. $ 12,910 $ 18,523 $ 22,613
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 5,933 5,525 3,597
Equity in losses of affiliate ............................. 2,369 428 --
Deferred income taxes ..................................... (6,477) (2,584) (1,830)
Changes in assets and liabilities:
Accounts receivable .................................... (9,840) 1,382 (14,744)
Inventories ............................................ 1,651 3,361 (3,425)
Other current assets ................................... (22) (138) 702
Other assets ........................................... (353) (468) 145
Accounts payable ....................................... 12,988 5,507 (8,381)
Accrued liabilities .................................... 4,744 (2,211) 3,010
Accrued taxes payable .................................. 1,199 (466) (984)
--------- --------- ---------
Net cash provided by operating activities ......... 25,102 28,859 703
--------- --------- ---------
Cash flows provided by investing activities:
Acquisition of property and equipment ....................... (4,406) (5,531) (10,526)
Purchase of equity interest in affiliate .................... -- (3,000) --
Sale (Purchase) of short-term investments, net .............. 12,102 (17,388) (960)
--------- --------- ---------
Net cash provided by (used in) investing activities 7,696 (25,919) (11,486)
--------- --------- ---------
Cash flows provided by (used in) financing activities:
Issuance of Common Stock, net of issuance costs ............. 1,101 2,451 735
Purchase of Treasury Stock ................................. (12,942) -- --
Proceeds from issuance of long-term debt .................... -- 150,000 --
Repayment of long-term debt ................................. -- (150,000) --
Tax benefit from exercise of stock options .................. 787 1,828 1,114
--------- --------- ---------
Net cash provided by (used in) financing activities (11,054) 4,279 1,849
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 21,744 7,219 (8,934)
Cash and cash equivalents at beginning of year ................. 26,509 19,290 28,224
--------- --------- ---------

Cash and cash equivalents at end of year ....................... $ 48,253 $ 26,509 $ 19,290
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ...................... $ -- $ 3,093 $ 154
========= ========= =========
Cash paid during the year for income taxes .................. $ 10,973 $ 13,625 $ 17,117
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.
31
<PAGE> 31

NOTES TO FINANCIAL STATEMENTS

NOTE 1. THE COMPANY

CIDCO Incorporated (the "Company"), a Delaware corporation, designs,
develops and markets subscriber telephone equipment for use with intelligent
network services. The Company started its operations in June 1989. The Company
sells its products to individual customers through its direct fulfillment
relationships with certain Regional Bell Operating Companies ("RBOC"), to
Telcos directly, to major national and regional retail chains and to OEMs.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.

Short-Term Investments
The Company classifies its investment securities as available for sale.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except those unrealized losses that are deemed
to be other than temporary which are reflected in the income statement.

Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the standard cost method (which approximates first in, first
out). Substantially all of the Company's inventories consist of finished goods.

Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
ranging from three to five years. Leasehold improvements are stated at cost.
Amortization is computed using the straight-line method and the shorter of the
remaining lease term or the estimated useful lives of the improvements.

Investments in Affiliates
Investments in affiliates, where the Company owns more than 20 percent but
not in excess of 50 percent, are accounted for using the equity method.

New Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosure
prescribed by FAS 130 must be made beginning with the first quarter of calendar
1998.

In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by FAS 131 are effective for calendar
1998.

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

<PAGE> 32
Warranty Costs
Anticipated costs related to product warranties are charged to income as
sales are recognized. The Company has not experienced significant warranty
claims to date.

Revenue Recognition
Direct sales and sales through fulfillment arrangements are recognized upon
shipment of the product to the customer. Allowances are established to recognize
any risk related to the creditworthiness of customers and for estimated returns.
Sales through certain promotions aimed at direct fulfillment customers are
dependent on the customer's retention of certain services provided by the Telco.
The Company reserves for estimated non-retention of such services by these
customers.

Advertising Costs
Advertising costs are expensed as incurred as defined by Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for 1997,
1996 and 1995 were $32.4 million, $20.7 million, and $4.5 million,
respectively.

Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for expected tax consequences of temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.

Earnings per Share
The Company adopted Statement of Financial Accounting Standards No.128,
"Earnings per Share" ("SFAS 128") during the fourth quarter of 1997. SFAS 128
requires presentation of both basic and diluted earnings per share ("EPS") on
the face of the income statement. Basic EPS, which replaces primary EPS, is
computed by dividing net income available to common stockholders (numerator -
computed as net income adjusted for any accretion of dividends paid on
preferred stock) by the weighted average number of common shares outstanding
(denominator) during the period. Unlike the computation of primary EPS, basic
EPS excludes the dilutive effect of stock options. Diluted EPS replaces fully
diluted EPS and gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from exercise of stock options rather than the higher of the average
or ending stock price as used in the computation of fully diluted EPS.

Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS:

<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income used to compute basic earnings per common share ..... $12,910 $18,523 $22,613
Adjustment to net income due to convertible note ......... -- 1,856 --
------- ------- -------
Net income used to compute diluted earnings per common share ... $12,910 $20,379 $22,613
======= ======= =======
Denominator used to compute basic earnings per common share .... 13,948 14,284 14,135
Shares issuable on exercise of options ..................... 392 750 844
Shares issuable on conversion of note ...................... -- 1,859 --
------- ------- -------
Denominator used to compute diluted earnings per common share .. 14,340 16,893 14,979
======= ======= =======
Basic earnings per share ....................................... $ 0.93 $ 1.30 $ 1.60
======= ======= =======
Diluted earnings per share ..................................... $ 0.90 $ 1.21 $ 1.51
======= ======= =======
</TABLE>

Stock-Based Compensation
The Company accounts for stock-based employee compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The Company provides additional pro forma disclosures as
required under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." See Note 9.

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

<PAGE> 33
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company limits the amount
of credit exposure to any one financial institution and financial instrument.
The Company's trade accounts receivable are derived primarily from sales in the
United States and the Far East. The Company maintains reserves for potential
credit losses; historically, such losses have been within management's
expectations.

NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Property and equipment, net:
Land ......................................... $ 866 $ 866
Computers and office equipment ............... 18,775 14,432
Furniture and fixtures ....................... 2,036 2,123
Leasehold improvements ....................... 7,078 7,181
-------- --------

28,755 24,602
Less accumulated depreciation and amortization (16,164) (10,484)
-------- --------

$ 12,591 $ 14,118
======== ========
Accrued liabilities:
Accrued compensation ......................... $ 3,587 $ 1,799
Other ........................................ 7,368 4,412
-------- --------
$ 10,955 $ 6,211
======== ========
</TABLE>

NOTE 4. SHORT-TERM INVESTMENTS

The Company's short-term investments consist primarily of municipal bonds.
As of December 31, 1997, approximately $13 million of such investments had
maturities of greater than one year. However, all such securities mature within
three years. The cost and fair value of the Company's short-term investments
are as follows (in thousands):

<TABLE>
<CAPTION>
December 31,
--------------------------
<S> <C> <C>
1997 1996
------- -------
Fair value ............................... $26,486 $38,560
Cost ..................................... 26,302 38,426
------- -------
Unrealized gains ......................... $ 184 $ 134
======= =======
</TABLE>

NOTE 5. INVESTMENT IN AFFILIATE

During 1996, the Company acquired for $3 million in cash a 33% interest in
the outstanding stock of InfoGear Technology Corporation ("InfoGear"), a company
involved in the development of software for Internet phones. The Company's
equity in losses of InfoGear for the period ended December 31, 1997 was
approximately $2.4 million, which has been included as a component of research
and development expense for the year ended December 31, 1997. The Company has an
exclusive right to distribute through Telco channels any product developed by
InfoGear for the 18 month period beginning with the first commercial

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

33
<PAGE> 34
shipment of such product. As of December 31, 1997, the Company's net investment
in InfoGear totaled approximately $200,000, which is included as a component of
other assets.

NOTE 6. LINE OF CREDIT

The Company has a line of credit for up to $25 million. Borrowings under
the line bear interest at 0.25% below the bank's base rate and the interest is
payable monthly. The bank's base rate was 8.5% per annum at December 31, 1997.
Borrowings under the line are secured by substantially all of the Company's
assets. As of December 31, 1997, the Company had not borrowed any funds under
the line.

NOTE 7. LONG-TERM DEBT

On June 28, 1996, the Company issued $150 million of 3.75% convertible
subordinated notes due June 30, 2003. The notes were convertible into the
Company's Common Stock at a conversion rate of one share of Common Stock for
each $41.00 in principal amount of the notes. The note agreement contained
covenants which, among other matters, restricted or limited the ability of the
Company to pay dividends or incur indebtedness. Interest on the notes was
payable quarterly commencing September 30, 1996. The notes were fully redeemed
on December 30, 1996.

NOTE 8. LEASES AND COMMITMENTS

Leases
The Company leases its headquarters, call center and distribution
facilities in Morgan Hill, California, under operating leases which expire from
1999 through 2006. The Company closed its leased sales facilities in New York,
Illinois and Missouri during 1997 as the Company moved its sales force to home
offices.

Future minimum lease payments under non-cancelable leases at December 31,
1997 were as follows (in thousands):

<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 ................................................... $ 1,398

1999 ................................................... 863

2000 ................................................... 631

2001 ................................................... 375

2002 ................................................... 332

Thereafter ............................................. 1,521
--------

Total minimum lease payments ........................... $ 5,120
========
</TABLE>

Rent expense for 1997, 1996 and 1995 was $1.4 million, $1.4 million, and
$1.1 million, respectively.

Licenses
The Company has a nontransferable, nonexclusive license agreement with AT&T
to utilize AT&T's patent related to data display devices. The Company pays
royalties to AT&T for each licensed product sold, leased or put into use by the
Company other than direct sales to AT&T, the Regional Bell Operating Companies
and other AT&T licensees under the patent. Royalties are payable at a rate of
one dollar per unit. Total AT&T royalty expense incurred in 1997, 1996 and 1995
was $2.0 million, $1.2 million, and $1.9 million, respectively.

The Company has a nontransferable, nonexclusive license agreement with
Northern Telecom to utilize Northern Telecom's patents for Caller ID on Call
Waiting technology. Under the agreement, the Company pays royalties to Northern
Telecom for each licensed product sold, leased or put into use by the Company
other than direct sales to Northern Telecom beginning January 1, 1997. The
agreement also provided for a one-time payment in full satisfaction of

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

34
<PAGE> 35
royalties on all units incorporating Northern Telecom's patents which were sold
by the Company prior to January 1, 1997. Royalties are payable at a variable
rate based on product type and number of units sold. Total Northern Telecom
royalty expense incurred in 1997 was $583,000.

The Company has a nontransferable, exclusive license agreement with Focus
Semiconductor ("Focus") to utilize patents for Caller ID technology incorporated
in a part used in virtually all products sold by the Company. The Company paid
royalties to Focus for each part included in the Company's products beginning in
October 1996. Royalties were payable at a variable rate based on the number of
parts used. Total Focus royalty expense incurred in 1997 and 1996 was $1.3
million and $397,000, respectively. This agreement was renegotiated in June
1997, eliminating all future royalty payments.

401(k) Plan
Effective in 1993, the Company implemented a Savings and Profit Sharing
Plan (the "401(k) Plan") which qualifies as a thrift plan under section 401(k)
of the Internal Revenue Code. All employees who are 21 years of age or older on
or before the quarterly entry periods are eligible to participate in the 401(k)
Plan. The 401(k) Plan allows participants to contribute up to 12% of the total
compensation that would otherwise be paid to the participant, not to exceed the
amount allowed by applicable Internal Revenue Service guidelines. Effective
July 1, 1997, the Company contributed for each participant a matching
contribution equal to 50% of the participant's before-tax contributions for the
year not to exceed a $2,500 per year maximum per plan participant. Prior to
July 1, 1997, the Company contributed for each participant a matching
contribution equal to 25% of the participant's before-tax contributions for the
year not to exceed 1% of his or her compensation. In addition, the Company may
choose to make elective contributions to the 401(k) Plan for a particular plan
year. The Company made contributions of $298,000, $76,000, and $43,000 to the
401(k) Plan for the years ended December 31, 1997, 1996, and 1995,
respectively.

Pending Litigation
In the ordinary course of business, the Company may be involved in legal
proceedings. As of the date hereof, the Company is not a party to any pending
legal proceedings which it believes will materially affect its financial
condition or results of operations.

The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
NOTE 9. COMMON STOCK AND STOCK PLAN

Common Stock
The Company is authorized to issue up to 35 million shares of Common Stock,
each with a par value of $0.01 per share. Holders of Common Stock are entitled
to one vote per share on all matters voted on by the Company's stockholders. In
March 1994, the Company completed an initial public offering (the "Offering")
of 3.4 million shares of Common Stock and realized net proceeds of $45.9
million. In conjunction with the Offering, all outstanding shares of
mandatorily redeemable Preferred Stock were redeemed for $19.3 million. In
August 1994, the Company completed a second public offering of 3.5 million
shares of Common Stock at a price of $22 per share. Of such shares, selling
stockholders sold 3.4 million shares and the Company sold 100,000 shares and
realized net proceeds of $1.7 million. In December 1994, the Company completed
an additional public offering of 1.9 million shares of Common Stock at a price
of $23.75 per share. Of such shares, the Company sold 1.5 million shares for
net proceeds of $33.5 million and selling stockholders sold 375,650 shares.

Directors' Stock Option Plan
In January 1994, the Company's stockholders approved the 1994 Directors'
Stock Option Plan (the "Directors' Option Plan"). Initially, a total of 100,000
shares of Common Stock were reserved for issuance under the Directors' Option
Plan, which provides for the granting of stock options to non-employee
directors of the Company. Such options vest immediately with respect to 20% of
such shares, with the remainder vesting in four equal annual installments
commencing one year after the date of grant. In May 1997, the stockholders
approved an amendment to increase the number of shares authorized under the
Directors Stock Option Plan to 250,000 shares. In January 1994, the Company
granted one director an option under the Directors' Option Plan to purchase
33,350 shares of Common Stock at an exercise price of $11.20 per share. No
options were granted under the Director's Option Plan during 1995. In November
1996, the Company granted two directors 66,650 shares of Common Stock at an
exercise price of $18.55 per share. In 1997, the Company granted three
directors options under the Director's Option Plan to purchase a total of
93,325 shares of Common Stock at an average exercise price of $16.23 per share.

Stock Grant to Executive Officer
In March 1997, the Company's President and Chief Executive Officer was
granted a ten-year stock option to purchase up to 600,000 shares of the
Company's Common Stock at an exercise price of $14.25 per share. The option
vests in equal monthly installments over five years. This stock option was not
issued under either of the Company's stock option plans and the Company has
filed a Form S-8 Registration Statement with the Securities and Exchange
Commission covering the shares issuable upon exercise of the stock option.

Stock Option Plan
In May 1993, the Company adopted a stock option plan (the "Stock Option
Plan") under which employees and advisors may be granted options to purchase
shares of Common Stock at prices at least equal to the fair market value of the
Company's Common Stock on the date of grant. An aggregate of 2.9 million shares
of Common Stock have been reserved for issuance under the Stock Option Plan.
The options expire ten years from the date of grant. Generally, options granted
prior to August 1, 1997 vested in annual increments of 33 1/3% per year
commencing one year from the date of grant. Effective on August 2, 1997, the
Board of Directors changed the standard vesting period for future optionees to
vest 25% after one year, and an additional 2.1% each month thereafter until
fully vested. The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors, which determines the vesting provisions,
the form of payment for shares and all other terms of the options.

On January 21, 1997, the Company offered Stock Option Plan participants the
right to replace any remaining unexercised stock options with an equal number
of options at an exercise price of $12.43, the closing market price on such
date.

The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37

The following table summarizes stock option activity under the Stock Option
Plan:

<TABLE>
<CAPTION>
Shares Options Outstanding
--------- --------------------------
Available Weighted Average
for Grant Shares Exercise Price
--------- ------ --------------
<S> <C> <C> <C>
Balance at December 31, 1994 ........... 197,800 1,119,304 $ 5.54

Additional shares authorized, May 1995 750,000 -- --
Options granted ...................... (475,750) 475,750 $ 30.46
Options exercised .................... -- (85,183) $ 5.34
Options canceled ..................... 13,417 (13,417) $ 27.73
---------- --------- ---------
Balance at December 31, 1995 ........... 485,467 1,496,454 $ 13.27

Options granted ...................... (509,800) 509,800 $ 25.48
Options exercised .................... -- (240,465) $ 7.80
Options canceled ..................... 126,883 (126,883) $ 28.55
---------- --------- ---------
Balance at December 31, 1996 ........... 102,550 1,638,906 $ 16.69
Additional shares authorized, May 1997 750,000 -- --
Options granted ...................... (1,660,082) 1,660,082 $ 14.21
Options exercised .................... -- (525,421) $ 1.30
Options canceled ..................... 1,207,807 (1,207,807) $ 23.98
---------- --------- ---------
Balance at December 31, 1997 ........... 400,275 1,565,760 $ 14.57
========== ========= =========
</TABLE>

The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 1997:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ---------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 12.94 820,861 8.18 $ 10.72 150,884 $ 2.89
$ 13.13 - $ 14.25 849,700 9.30 $ 14.04 90,000 $ 14.25
$ 14.63 - $ 29.98 688,524 8.60 $ 17.56 78,907 $ 18.86
--------- -------
$ 1.00 - $ 29.98 2,359,085 8.70 $ 13.91 319,791 $ 10.03
========= =======
</TABLE>

Employee Stock Purchase Plan
The Company's 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was adopted by the Board of Directors and approved by the Company's
stockholders in January 1994. Under the Stock Purchase Plan, an eligible
employee may purchase shares of Common Stock from the Company through payroll
deductions of up to 10% of his or her base compensation, at a price per share
equal to 85% of the lesser of the fair market value of the Company's Common
Stock as of the first day or the last day of each six-month offering period.
Offering periods commence on January 1 and July 1 of each year. The Company has
reserved 200,000 shares of Common Stock for issuance under the Stock Purchase
Plan.

Stockholder Rights Plan
Effective January 27, 1997, the Company adopted a Stockholder's Rights Plan
wherein stock rights will be distributed as a dividend at the rate of one right
for each share of Common Stock held on February 14, 1997, the record date for
such dividend. The key terms of the Stockholder's Rights Plan will be activated
if any person acquires 15 percent or more of the Company's Common Stock without
the approval of the Company's Board of Directors. Once the Plan is activated,
each right will entitle the holder to purchase at a price of $95, a fraction of
a share of Preferred Stock which is equivalent to $190 worth of the Company's
Common Stock at the then current market value. Any person holding 15 percent or
more of the stock when the Stockholder's Rights Plan was adopted was
"grandfathered" for existing holdings. The Company's Board of Directors has
retained the right to amend the Stockholder's Rights Plan at any time prior to
its activation.

Pro Forma Net Income and Earnings Per Share
Had stock-based compensation cost for the Company's stock option and Stock
Purchase Plan been determined based on the fair value at the grant dates using
the Black-Scholes model as prescribed by SFAS 123, the Company's results for
the years ended December 31, 1997, 1996 and 1995 would have been as follows (in
thousands):

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

37
<PAGE> 38
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income as reported ............... $ 12,910 $ 18,523 $ 22,613
Pro forma net income ................. $ 9,725 $ 16,219 $ 21,424
Basic earnings per share as reported . $ 0.93 $ 1.30 $ 1.60
Diluted earnings per share as reported $ 0.90 $ 1.21 $ 1.51
Pro forma basic earnings per share ... $ 0.70 $ 1.15 $ 1.52
Pro forma diluted earnings per share . $ 0.67 $ 1.08 $ 1.44
</TABLE>

The pro forma effect on net income and earnings per share is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Stock option plan:
Expected dividend yield .................. 0.0% 0.0% 0.0%
Expected stock price volatility .......... 65% 65% 61%
Risk free interest rate .................. 6.11% 5.78% 6.13%
Expected life of options (years) ......... 2.7 2.3 2.3
Stock purchase plan:
Expected dividend yield .................. 0.0% 0.0% 0.0%
Expected stock price volatility .......... 65% 71% 59%
Risk free interest rate .................. 5.37% 5.29% 5.75%
Expected life of option (years) .......... 0.5 0.5 0.5
</TABLE>

The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the Stock Option Plan during 1997, 1996 and 1995
was $5.64, $10.62 and $12.58, respectively. The weighted average estimated grant
date fair value, as defined by SFAS 123, for purchase rights granted under the
Stock Purchase Plan during 1997, 1996 and 1995 was $5.23, $10.88 and $9.81,
respectively.

NOTE 10. PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following (in thousands):
Year ended December 31,

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal .................. $ 11,767 $ 12,229 $ 13,768
State .................... 2,956 2,704 3,137
-------- -------- --------
14,723 14,933 16,905
-------- -------- --------
Deferred:
Federal .................. (5,206) (2,002) (1,582)
State .................... (1,271) (582) (248)
-------- -------- --------
(6,477) (2,584) (1,830)
-------- -------- --------
$ 8,246 $ 12,349 $ 15,075
======== ======== ========
</TABLE>

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

38
<PAGE> 39
The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the income statement are as follows:

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate ....................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ....... 5.1 4.5 5.0
Research and development tax credits ............. (2.4) (0.7) (0.8)

Other ............................................ (1.3) 1.2 0.8
---- ---- ----
39.0% 40.0% 40.0%
==== ==== ====
</TABLE>

Deferred income taxes result from temporary differences in the recognition
of certain expenses for financial and income tax reporting purposes. The net
deferred tax asset consists of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax asset:
State taxes .............................. $ 724 $ 717
Non-deductible reserves .................. 10,493 3,887
Inventory basis difference ............... 89 577
Depreciation ............................. 1,388 1,027
Other .................................... -- 9
-------- --------
Gross deferred tax asset ................... 12,694 6,217
Gross deferred tax liability ............... (104) (104)
-------- --------
Net deferred tax asset ..................... $ 12,590 $ 6,113
======== ========
</TABLE>

NOTE 11. SIGNIFICANT CUSTOMERS

The Company's sales to significant customers as a percentage of total sales
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer
A ............................................... 25.5% 36.5% 32.1%
B ............................................... 23.3% * *
C ............................................... 14.6% * *
D ............................................... 14.0% 11.8% *
E ............................................... * 19.2% 32.3%
</TABLE>

The Company's accounts receivable from significant customers are as
follows:

<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Customer
A ................................ 43.9% 31.9%
B ................................ 14.8% 28.0%
C ................................ 11.7% 20.6%
</TABLE>

*Amounts less than 10% have been omitted from the above tables.

The accompanying notes are an integral part of these financial statements.
39
<PAGE> 40

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance at Balance at
beginning end
(in thousands) of year Additions Deductions of year
------- --------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts ................ $ 1,862 $ 12,084 $(10,796) $ 3,150

Year ended December 31, 1996
Allowance for doubtful accounts ................ $ 3,150 $ 11,768 $(11,952) $ 2,966

Year ended December 31, 1997
Allowance for doubtful accounts ................ $ 2,966 $ 9,490 $ (9,155) $ 3,301
</TABLE>

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

40
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item other than information regarding
executive officers is set forth under the section of the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders entitled "ELECTION OF
DIRECTORS" and "EXECUTIVE COMPENSATION AND OTHER MATTERS." Information
regarding the Company's executive officers may be found in the section entitled
"Executive Officers" in Part I of this 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information under the captions "Executive Compensation" and "Stock
Options and Bonuses" in the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 27, 1998 (the "Proxy Statement") is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Stock Ownership of Certain
Beneficial Owners" of the Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Transactions" of the Proxy
Statement is incorporated herein by reference.

With the exception of the information specifically stated as being
incorporated by reference from the Company's Proxy Statement in Part III of
this Annual Report on Form 10-K, the Company's Proxy Statement is not to be
deemed as filed as part of this report. The Proxy Statement will be filed with
the Securities and Exchange Commission within 120 days of the Company's fiscal
year end.

The accompanying notes are an integral part of these financial statements.
41
<PAGE> 42
PART IV.

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

(a) (1) FINANCIAL STATEMENTS

See Item 8 of this Report.

(2) FINANCIAL STATEMENT SCHEDULES

See Item 8 of this Report.

(3) INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.(1)

3.2 Amended and Restated By-Laws(8).

3.3 Form of Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional and Other
Special Rights and Qualifications, Limitations, Restrictions and Other Distinguishing Characteristics of the
Registrant's Series A Junior Participating Preferred Stock.(6)

4.1 Second Amendment to Revolving Credit Loan Agreement dated October 13, 1995 between Registrant and Comerica
Bank.(4)

4.2 Rights Agreement dated as of January 27, 1997, between the Registrant and United
States Trust Company of New York, as Rights Agent.(7)

10.4 Patent License Agreement dated as of May 1, 1989 between the Registrant and American Telephone and Telegraph
Company.(1)

10.5 Form of Indemnification Agreement.(1)

10.6 Employment Agreement dated as of January 11, 1994 between the Registrant and Robert L. Diamond.(1)

10.7 Employment Agreement dated as of January 11, 1994 between the Registrant and Paul G. Locklin.(1)

10.13 Agreement effective as of December 21, 1992 between the Registrant and SBC Communications, Inc.(1),(2)

10.14 Lease dated August 15, 1993 between Thoits Bros., Inc. and the Registrant for 220 Cochrane Circle.(1)

10.16 Lease dated May 31, 1994, between Thoits Bros., Inc. and the Registrant for 225 Cochrane Circle, Units A, B, C, D,
and E.(4)

10.17 Sublease dated November 18, 1994, between Thoits Bros. and the Registrant for 180 Cochrane Circle.(3)

10.18 Lease dated November 1, 1994, between Thoits Bros., Inc. and the Registrant for 105 Cochrane Circle, Units A, B, C,
D, and E.(3)
</TABLE>

The accompanying notes are an integral part of these financial statements.
42
<PAGE> 43

<TABLE>
<S> <C>
10.19 Registrant's Amended and Restated 1993 Stock Option Plan.(1)

10.20 Registrant's 1994 Directors' Stock Option Plan.(8)

10.21 Registrant's 1994 Employee Stock Purchase Plan.(1)

10.22 Agreement dated January 1, 1995 between the Registrant and Ameritech Services Inc.(5)

10.23 Standard Form of Office Lease between Registrant and 400 Columbus Avenue, LLC dated May 19, 1995.(5)

10.24 Employment Agreement dated June 28, 1996 between Registrant and Ian Laing.(7)

10.25 Employment Agreement dated June 29, 1996 between Registrant and Marv Tseu.(7)

10.26 Employment Agreement dated December 16, 1996 between Registrant and Richard D. Kent.(7)

10.27 Employment Agreement dated March 17, 1997 between Registrant and Daniel L. Eilers.(7)

10.28 Option Agreement dated March 17, 1997 between Registrant and Daniel L. Eilers.(7)

10.29 1997 Annual Executive Incentive Plan.(8)

23 Consent of Independent Accountants.

27 Financial Data Schedule
</TABLE>

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

(1) Incorporated herein by reference to the Company's registration
statement on Form S-1, File No. 33-74114.

(2) Confidential treatment has been granted with respect to
certain portions of this document.

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

(4) Incorporated herein by reference to the Company's Form 10-Q
for the quarter ended September 30, 1995.

(5) Incorporated herein by reference to the Company's Form 10-Q
for the quarter ended June 30, 1996.

(6) Incorporated herein by reference to the Company's Form 8-A
filed on February 4, 1992.

(7) Incorporated herein by reference to the Company's Form 10-Q
for the quarter ended March 31, 1997.

(8) Incorporated herein by reference to the Company's Form 10-Q
for the quarter ended June 30, 1997.

(b) REPORTS ON FORM 8-K.

None.

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

43
<PAGE> 44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on the 27th day of
March, 1998.

CIDCO INCORPORATED

By: /s/ Daniel L. Eilers
-------------------------------------
Daniel L. Eilers
President and Chief Executive Officer

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 indicated, each on the 27th day of March,
1998.

<TABLE>
<S> <C>
/s/ Richard D. Kent Vice President Finance, Chief Financial Officer
- ---------------------------------------- and Principal Accounting Officer
Richard D. Kent

/s/ Paul G. Locklin Director and Non-Executive Chairman of the Board
- ----------------------------------------
Paul G. Locklin

/s/ Scott C. McDonald Director
- ----------------------------------------
Scott C. McDonald

/s/ Richard M. Moley Director
- ----------------------------------------
Richard M. Moley

/s/ Ernest K. Jacquet Director
- ----------------------------------------
Ernest K. Jacquet

/s/ Joseph A. Graziano Director
- ----------------------------------------
Joseph A. Graziano
</TABLE>

The accompanying notes are an integral part of these financial statements.
44
<PAGE> 45

INDEX TO EXHIBITS
-----------------

<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.(1)

3.2 Amended and Restated By-Laws.(8)

4.1 Second Amendment to Revolving Credit Loan Agreement dated October 13, 1995 between Registrant and Comerica
Bank.(4)

4.2 Rights Agreement dated as of January 27, 1997, between the Registrant and United States Trust Company of New York,
as Rights Agent.(7)