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                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, 1998.

                         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)

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        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 )

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  based on the closing  sale price of such stock at $4.00 on March 25,
1999 was $37,339,240.  Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding  Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

Number of shares outstanding of the Registrant's Common Stock on March 25, 1999:
                                   13,383,010

                       DOCUMENTS INCORPORATED BY REFERENCE

Registrant's   definitive  Proxy  Statement  for  its  1999  Annual  Meeting  of
Shareholders  is  incorporated by reference into Part III (Items 10, 11, 12, and
13) hereof.




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This report  consists of 74 sequentially  numbered  pages.  The exhibit index is
contained on page 44 of this report.

<PAGE>


                               CIDCO INCORPORATED

                                      INDEX

PART I.                                                                     Page

  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..........................  14

  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 .......  26

  Item 8.  Financial Statements and Supplementary Data .....................  27

  Item 9.  Changes in and Disagreements with Accountants on Accounting
                       and Financial Disclosure ............................  43


PART III.

  Item 10. Directors and Executive Officers of the Registrant ..............  43

  Item 11. Executive Compensation ..........................................  43

  Item 12. Security Ownership of Certain Beneficial Owners and Management ..  43

  Item 13. Certain Relationships and Related Transactions ..................  43


PART IV.

  Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .  44


SIGNATURES .................................................................  45




<PAGE>






 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 and Network Service  equipment to
Internet-enabled  appliances - which  support  Caller ID, Voice Mail,  Three-way
Caller Conferencing,  Caller ID on Call Waiting and/or other intelligent Network
("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"). The Company
is a leading  supplier of Caller ID equipment in the United  States and has sold
over 28 million  products,  including  Caller ID display units,  Network feature
telephones,    advanced   cordless   telephones,   smart   screen   phones   and
Internet-enabled  devices.  The  Company's  products  are  provided to telephone
subscribers primarily through distribution arrangements with leading Telcos. 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 under the symbol "CDCO".

         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. A third type of
Caller ID product was introduced in 1998 - Caller ID Deluxe or Caller ID on Call
Waiting with call disposition.  Call disposition  allows the user to make use of
the following functions while already engaged in a telephone  conversation:  put
the original  call on hold and answer the new call,  conference in the new call,
play a short message and put the new call on hold, send the caller to voice mail
or let the caller know the call will be returned later.

         CIDCO  sells its  products to  individual  subscribers  through  direct
marketing  relationships  with certain  Telcos  ("Direct  Marketing  Services"),
fulfillment  of  Telco-generated  orders  ("Fulfillment"),  wholesale  shipments
directly to Telcos  ("Direct to Telco"),  and to a lesser extent,  international
accounts,  retail stores ("Retail") and via its own direct marketing  activities
(telemarketing,  web  marketing,  direct  mail,  direct  response  advertising).
CIDCO's  customers  include,  among  others,  Bell Atlantic  Corporation  ("Bell
Atlantic"), GTE Corporation, Nippon Telegraph & Telephone ("NTT"), Pacific Bell,
Southwestern Bell, Southern New England Telecommunications Corporation ("SNET"),
Sprint Communications Company, L.P. ("Sprint") and U S WEST Communications, Inc.
("U S WEST").

         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 much of Canada,  Mexico and  numerous
European,  Asian,  African and South American countries.  During 1999, 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  Network  Feature
Services.  The Company's  products can be categorized into three primary product
families: accessory products, Network feature phones and Internet appliances.
 Accessory Products
         The  Company's  accessory  products  include a line of Network  Feature
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 that  essentially  provides  "visual call  waiting".  In 1998,  the Company
introduced a unit combining  Caller ID on Call Waiting with call disposition and
Voice Mail  review/control.  In 1999,  the Company  expects to introduce two new
adjuncts - one that handles  voice mail  Services  offered by the Telcos and one
that handles  Caller ID on Call Waiting calls with call  disposition.  Since the
introduction  of its first  Caller ID unit in 1989,  the  Company  has  become a
leading  provider of Network  Feature Service  equipment,  having sold more than
twenty-five million adjunct units.

 Network Feature Phones
         The Company  offers a line of Network  Feature  phones for existing and
future Services,  including a family of intelligent  Network feature  telephones
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 900mhz digital spread spectrum  cordless phone with a handset
display  capable  of  accommodating  Caller  ID, a 50 name and  number  personal
directory and call waiting disposition,  as well as a speakerphone equipped base
unit capable of handling Network Voice Mail Service.

 Internet Appliances
         In  1996,  the  Company  began  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  Network  Voice  Mail.  The  Company's  first such  product in the  Internet
appliances   market  was  the  CIDCO  i-Phone(R)1   ("i-Phone"),   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 i-Phone in the first  quarter of 1998. As a result of operating
losses incurred in 1998, the Company adopted a new business  strategy  primarily
focusing on its core telephony products and Services. The Company concluded that
its core business could not  successfully  fund the level of market  development
expense  required  over time for this  product to succeed and has  substantially
discontinued operation of its i-Phone division.

         To expand its product offerings for 1999 and beyond, CIDCO has plans to
introduce  appliances  that will use the  Internet/telephony  networks to enable
consumers to handle interpersonal  communication in a non-PC environment.  While
CIDCO's i-Phone product was ahead of its time,  selling it yielded some valuable
market feedback.  Management learned that the e-mail function on the i-Phone was
perceived as the most valuable  feature on the device and also the most commonly
used function by many of its early adopters. To tap into this opportunity, CIDCO
has plans to introduce in 1999 a simple,  inexpensive,  single-use e-mail device
that will  finally  bring e-mail to the masses,  especially  to those who do not
have access to or the need for a personal computer in their homes.


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 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 the FCC has
not yet issued all final  regulations.  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 second
lines and  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 to accommodate  new signaling  technologies
have enabled the rapid  introduction  of Services  known as CLASS  (custom local
area signaling services). These include:

     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.

         The ability of Telcos to achieve high  penetration  levels for Services
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.  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  adding  a  mid-level  and  lower-end   cordless
telephone, a Network voice mail product and an e-mail appliance. Adding such new
products is expected to broaden the  Company's  product  line and is 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 and other alternate  distribution  channels in areas
that do not conflict with its Telco  partners,  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 1998,  the Company
implemented a state-of-the-art, enterprise-wide accounting and resource planning
system  which has  improved  the  Company's  ability to better  manage  business
processes and systems which,  in turn, will improve  customer  retention and new
customer acquisition.

 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  Fulfillment  relationships with certain Telcos, which
expand its ability to market its  equipment  to those  Telcos and  leverage  the
efforts of the Telcos to market these Services.  CIDCO has  experienced  greater
acceptance   for  its  products  in  regions  where  it  maintains   Fulfillment
relationships.  These  Fulfillment  arrangements  differ by Telco, but typically
allow  subscribers to purchase both Network  equipment and Services  through one
phone call to a Telco sales representative. In general, the Telco representative
takes the customer's order for a CIDCO product and relays the information to the
Company for product  fulfillment.  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 continue
to leverage existing and future  Fulfillment  relationships as it introduces new
products.

 Continued Cooperative Marketing Efforts
         The Company has ongoing Direct Marketing  Services programs with Telcos
to  attract  new  subscribers  and  sell  new  product  and  Services  to  those
subscribers.  Direct Marketing  Services programs are sales campaigns run by the
Company  involving  the  use of  consumer  mailings  and  telemarketing  to sell
Services  for the  Telcos,  which  Services,  in  turn,  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, on behalf of the
Telco,  ships an adjunct product or a phone product to each customer  "acquired"
through the  campaign.  The Company  intends to  leverage  its Direct  Marketing
Services programs as it introduces new products.

 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 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 and
other customer 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  particularly
more demanding in this regard over the past two years.

 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. The
Company  believes that its experience  and acquired  knowledge will permit it to
achieve  low  manufacturing  costs  for  its  products,   under  current  market
conditions.


Products

         The Company  introduced  its first Caller ID unit in 1989.  Since then,
the Company  has  broadened  its  product  family to include a variety of models
including  stand-alone  Caller ID display units and Network  Feature Phones with
Caller ID capability built in. Through 1998,  substantially all of the Company's
sales were generated from its Caller ID based and Network Feature Phone products
and Direct Marketing Services to Telcos.

         CIDCO's  Caller ID and  Network  feature  phone  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,  a "message waiting
alert" light that  indicates to a Network voice mail  subscriber  that new voice
mail  messages have been received and call  disposition.  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,  some of
the Company's  latest  products  include  Caller ID on Call Waiting or Caller ID
Deluxe  (Caller ID on Call  Waiting  with call  disposition).  Caller ID on Call
Waiting  allows the caller to utilize  Caller ID Service to identify an incoming
call while already engaged in another telephone  conversation.  Call disposition
allows the user to make use of the following  functions while already engaged in
a telephone conversation: put the original call on hold and answer the new call,
conference  in the new call,  play a short message and put the new call on hold,
send the caller to voice mail or let the caller  know the call will be  returned
later.  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 products  includes  the  following  principal
models:

            Memory                                                   Typical
Model No.  Capacity                Product Features               Retail Price
---------  --------  ----------------------------------------  -----------------
PA-25      25 Calls  OTV(R)(One-Time Viewing); Bilingual;      $  9.95 - $ 19.99
                     New Call/Blocked Call Light;
                     LCD Contrast Adjustment; Compact Design.

SA-100     99 Calls  OTV(R); 2 Line Capable; Bilingual;        $ 49.95 - $ 59.99
                     New Call/Blocked Call Light;
                     LCD Contrast Adjustment; Compact Design.

CW-99      99 Calls  OTV(R); MEC(Multi-extension capability);  $ 29.95 - $ 39.99
(Type II             Type II Caller ID(CallerID/Call Waiting);
CallerID             New Call/Blocked Call Light; Bilingual;
Adjunct)             LCD Contrast Adjustment; Message Waiting
                     Alert Light.

DB-99      99 Calls  OTV(R), Type II CallerID; MEC; Bilingual  $ 34.95 - $ 49.99
(CW-99 w/            New Call/Blocked Call Light; Backlit LCD
dialback             with Contrast Adjustment; One-Touch 
key)                 Dialback Key.

DM-80      80 Calls  OTV(R), Type II Caller ID, Voice Mail;    $ 49.95 - $ 69.99
(Type II             Trilight Alert; Bilingual; Message Waiting
CallerID             Alert Light; Pre-programmed Caller ID;
Adjunct w/           Call Waiting Deluxe(Call Disposition)
Call                 and Central Office Voice Mail Keys; 
Disposition)         60 Number Directory; One-Touch Dialback Key.

CT5        50 Calls  Type I CallerID; Message Waiting Alert    $ 39.95 - $ 49.95
(CallerID            Light; Call Hold; Dial Number Displayed;
Feature              Dedicated Central Office Voice Mail Access
Phone)               Key; Redial Key.

CT15       40 Calls  Type II CallerID; Message Waiting Alert   $ 59.95 - $ 69.95
(CallerID            Light; Dial Number Displayed; Dedicated
Feature              Central Office Voice Mail Access Key;
Phone)               Redial Key.

CT250      50 Calls  OTV(R), New Call/Blocked Call Light;      $109.95 - $129.95
(CallerID            Message Waiting Alert Light; LCD Contrast
/Call Waiting        Adjustment; 9 Programmable Class Feature
Speakerphone)        Keys; Volume Adjustment; Busy Redial;
                     50 Number Personal Directory; Speakerphone;
                     Bilingual English/Spanish, English/French.

CL980      40 Calls  OTV(R); Bilingual; One-touch access to    $239.95 - $249.99
(CallerID            Central Office Voice Mail; Repeat Dialing;
/Call                Call  Forwarding; Type II CallerID; CallerID
Waiting              Deluxe; 50 Number Personal Directory; Message
Cordless             Waiting Indication/Visual Message Waiting;
Phone)               Line in Use Indicator Light; Charge Indicator
                     Light; Last Number Redial; One Way Page.

CST2100    50 Calls  Message Waiting Display; Platform for     $239.95 - $249.99
(ADSI                Visual Central Office Voice Mail,
Screenphone)         Home Banking, Stock 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.


Distribution

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

 Direct Marketing Services Arrangements
         In 1998, the Company  continued its cooperative  marketing efforts with
Southwestern Bell, Bell Atlantic,  Pacific Bell, SNET, Sprint and U S WEST. With
these efforts,  the Company  coordinates  sales  campaigns  involving the use of
consumer  mailings and  telemarketing  to sell Telco  Services  that utilize the
Company's products.

 Fulfillment Arrangements
         In 1998, the Company had Fulfillment  arrangements  with Bell Atlantic,
Cincinnati Bell, Pacific Bell, Southwestern Bell and US WEST. 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 Feature 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  Feature  Service  and  equipment  are more  successful  when the
customer can purchase both Feature  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 Feature  Service is enhanced  when the customer  receives the
equipment promptly after ordering the Service and is provided a toll free number
for after-sales service and support.

 Direct Sales to Telcos
         Through its direct  sales  force,  the Company  sells  Network  Feature
Service products 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.

 Direct Marketing Sales
         In 1997,  the Company  developed  direct  marketing  programs for CIDCO
branded Network Feature Phones.  These programs  involve  catalog,  direct mail,
telemarketing,  web commerce  and direct  response  advertising  directly to end
users. In 1998, sales from these programs were $10.1 million.  However, the cost
of   acquisition   continues  to  increase  as   penetration   rates   increase.
Consequently,  the  Company  has  decided to pursue  this  avenue of selling its
products only to the extent that it can be done  profitably and does not compete
with its Telco partners.

 Retail Sales
         The Company maintains a minimal retail presence nationally.  All of the
Company's  retail  sales  are made  through  manufacturers'  representatives  or
distributors with the support of the Company's sales personnel.

 Significant Customers
         For the year ended December 31, 1998, sales to Southwestern  Bell, Bell
Atlantic and U S WEST represented 21.6%, 18.1% and 11.6%,  respectively,  of the
Company's  sales.  In  1997,  sales  to  Southwestern  Bell,  GTE  and U S  WEST
represented 25.5%, 23.5% and 14.6%, 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   messaging,  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 1998, the Company  organized  product  development  into two primary
product categories:

 Accessory Products and Network Feature Phones
         The Company's Accessory Products include a full line of Network Feature
Service products aimed at the consumer  residential market. In 1998, the Company
focused its engineering  efforts on making the current adjunct product line more
cost effective. The Company offers a line of Network feature phones that deliver
simplified and convenient access to Services. In 1998, 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 Appliances
         The Company's i-Phone division has been substantially  discontinued due
to the level of market  development  expense required over time for success with
this product.

         To expand its product offerings for 1999 and beyond, CIDCO has plans to
introduce  appliances  that will use the  Internet/telephony  networks to enable
consumers to handle interpersonal  communication in a non-PC environment.  While
CIDCO's i-Phone product was ahead of its time,  selling it yielded some valuable
market feedback.  Management learned that the e-mail function on the i-Phone was
perceived as the most valuable  feature on the device and also the most commonly
used function by many of its early adopters. To tap into this opportunity, CIDCO
has plans to introduce in 1999 a simple,  inexpensive,  single-use e-mail device
that will  finally  bring e-mail to the masses,  especially  to those who do not
have access to or the need for a personal computer in their homes.

         The Company's product development groups are experienced in engineering
products in the  telecommunications  industry.  The Company's  products  utilize
proprietary  electrical,  mechanical and software designs. 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  1998,  1997  and  1996,  the  Company's  research  and  development
expenditures were $10.8 million, $16.9 million and $13.2 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, 1998, 32 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  that are  primarily  located  in  Malaysia,  China  and  Thailand.  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
for display  units are Bell South  Products,  Northern  Telecom  and  GE/Thomson
("GE"). The Company's Network Feature telephones compete with those manufactured
by Lucent/Phillips,  Northern Telecom,  Panasonic, Sony, GE/Thomson,  V-Tech and
others.  Certain  of these  companies  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
companies  such  as,  Innotrac,   offering  specific   services.   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 elect to perform the customer
acquisition  services  currently  undertaken  by the Company  through its Direct
Marketing  Services  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.

 Government Regulation
         The sale of Network Feature 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
concerns 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 U.S.  patent  related to core Caller ID
technology,  has two U.S.  patents  issued  on its new  Caller  ID/Call  Waiting
extension protocol, and has a number of additional patents which address certain
features and functions of the Company's  products.  The Company  currently has a
number  of  patent  applications  on file  with the  United  States  Patent  and
Trademark Office.

         A portion of the messaging technology used in the Company's products is
based on a patent licensed from Lucent on a non-exclusive basis. Lucent reserved
the right to use the  technology  for all  purposes  relating to  businesses  of
Lucent and its subsidiaries,  and receives royalties from sales of the Company's
products  other than to itself or the RBOCs.  The Company paid royalties of $0.9
million,  $2.0  million  and $1.2  million  to  Lucent  in 1998,  1997 and 1996,
respectively.  The  Lucent  license  agreement  has no  expiration  date  but is
terminable by either party for breach.  If the Lucent 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  products in the United
States which fall within the scope of the Lucent patent,  other than to RBOCs or
Lucent.

         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.  Royalties  incurred  after January 1,
1997 are  payable at a variable  rate based on product  type and number of units
sold.  Total Northern Telecom royalty expense incurred in 1998 and 1997 was $1.8
million and $0.6 million, respectively.

         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 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 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 they believe the Company may be  infringing  patents or other
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 other 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.



Employees

         At December 31, 1998, the Company  employed 250 full-time  persons,  of
whom 32 were engaged in product development,  21 in sales and marketing,  126 in
customer  service/call center, 26 in operations,  15 in information services and
30 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, 1999, the executive officers of the Company are as follows:

 Name               Age Position
 -----------------  --- --------------------------------------------------------
 Paul G. Locklin    53  President, Chief Executive Officer and Chairman 
                             of the Board of Directors
 Richard D. Kent    42  Chief Financial Officer, Chief Operating Officer
                             and Corporate Secretary
 William A. Sole    41  Executive Vice President, Worldwide Sales and Marketing
                                                             
 Ian G. A. Laing    41  Executive Vice President, Network Phones and 
                             Accessory Products
 Timothy J. Dooley  43  Executive Vice President, Strategic Business Development


 Paul G. Locklin,  President and Chief Executive Officer and Chairman of the
                       Board of Directors
        Paul G. Locklin returned to  CIDCO  in  July of  1998.  Mr.  Locklin,  a
co-founder of CIDCO, was President,  Chief Executive Officer,  and a Director of
the Company from 1989 to 1997.  Prior to founding  the Company  with Mr.  Robert
Diamond, Mr. Locklin established PCI, an international  electronics manufacturer
that  specialized  in liquid crystal  displays,  wire bondable  printed  circuit
substrates,  and high-volume contract assembly. While at PCI, Mr. Locklin served
as President and CEO.  Previous to his time at PCI, Mr.  Locklin held a research
position  for the Color and  Chemical  Division of  Hercules  Inc.  Mr.  Locklin
received a Bachelor of Science in Marketing from California  State University at
Hayward.

 Richard D. Kent, Chief Financial Officer, Chief Operating Officer, 
                      and Corporate Secretary
         Richard  D. Kent  joined  CIDCO in June 1994 as  Corporate  Controller.
After being  promoted in January  1997,  Mr.  Kent served as Vice  President  of
Finance  and Chief  Financial  Officer.  In July of 1998,  Mr.  Kent took on the
additional duties of Chief Operating Officer and Corporate  Secretary.  Prior to
joining  CIDCO,  he served as Corporate  Controller of Radius,  Inc., a computer
peripheral  manufacturer,  and Wiltron  Company,  an  automated  test  equipment
manufacturer. Mr. Kent is a Certified Public Accountant and received Bachelor of
Science in Business  Administration  with an emphasis in Finance and  Accounting
from University of California at Berkeley.

 William A. Sole, Executive Vice President, Worldwide Sales and Marketing
         William A. Sole joined CIDCO in April 1998 and serves as the  Executive
Vice  President of Worldwide  Sales and Marketing.  Prior to joining CIDCO,  Mr.
Sole  served as Vice  President  of Sales at Voysys,  a maker of small  business
voice mail systems and integrated voice  communication  systems.  During the two
years prior to employment  with Voysys,  Mr. Sole held various  senior sales and
marketing  positions at Wyse Technology.  Mr. Sole received a B. A. in Materials
Logistics  Management  from Michigan State  University and a MBA from Pepperdine
University.

 Ian G.A. Laing, Executive Vice President, Network Phones and Accessory Products
         Ian G. A. Laing joined  CIDCO in July 1996 and serves as the  Executive
Vice President,  Network Phones and Accessory Products.  Prior to joining CIDCO,
Mr.  Laing  spent  over  16  years  at  AT&T in R & D,  and  general  management
assignments.  He served as Director of Product  Development  for AT&T's consumer
products,  after  holding  the  position  of General  Manager  of AT&T's  corded
telephone  business unit. Mr. Laing received a Bachelor of Science in Electrical
Engineering  from  Rutgers  University  and a Masters of  Science in  Electrical
Engineering from Stanford University.

 Timothy J. Dooley, Executive Vice President, Strategic Business Development
         Timothy J. Dooley joined CIDCO  initially in September 1994, and served
as Vice President, Sales, and later as Vice President and General Manager of the
Accessory  Products  Division.  Mr.  Dooley now serves CIDCO as  Executive  Vice
President of Strategic Business  Development.  Previously,  he served in various
capacities at GTE. Mr.  Dooley  received a B. A. in Business with an emphasis in
Marketing from Washington State University.


Item 2.   Properties

         The Company's principal administrative,  development,  distribution and
support  facility is located in Morgan Hill,  California  and consists of a four
building  campus of  approximately  111,000 square feet under leases that expire
between October 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 that  expires in June
1999.  The Company is currently  renegotiating  this lease.  The Company  leases
approximately 1,100 square feet of office space in Palo Alto, California under a
lease that expires in November 2002. In addition,  the Company  retains  storage
space in  Salinas,  California  based on square  footage  used  during the month
payable on a month-to-month basis.


Item 3.   Legal Proceedings

         PhoneTel  Communications,  Inc.  filed a  complaint  in August  1998 in
Federal  District  Court in Texas,  alleging  that  CIDCO  Worldwide,  Inc.  (an
affiliate  of the  Company)  and 14  other  defendants  violated  one or more of
PhoneTel's  telephony patents.  The complaint has not been served on the Company
pending the completion of current  discussions between PhoneTel and the Company,
and thus  litigation  has not  commenced.  Although  this  matter is at an early
stage,  management believes that the Company has not infringed any of PhoneTel's
patents,  and that it will prevail in any litigation which may proceed from this
complaint. Management of the Company currently believes that the outcome of this
matter and the ultimate effect, if any, on the Company's  consolidated financial
position, results of operations, or cash flows will be immaterial.

         In the  ordinary  course of  business,  the  Company may be involved in
other legal  proceedings.  As of the date hereof,  the Company is not a party to
any other pending legal  proceedings that 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.

         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:

1997                                                         High          Low
----                                                       -------       -------
1st Quarter ........................................       $ 18.06       $ 12.00
2nd Quarter.........................................       $ 15.88       $ 12.75
3rd Quarter.........................................       $ 22.07       $ 12.81
4th Quarter.........................................       $ 22.38       $ 17.00

1998
----
1st Quarter.........................................       $ 20.25       $  9.25
2nd Quarter.........................................       $  9.44       $  4.63
3rd Quarter.........................................       $  5.00       $  1.78
4th Quarter.........................................       $  3.50       $  1.38

         As of  December  31,  1998,  there  were 144  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.

         The Company's loan agreements prohibit the payment of dividends without
the lender's  consent.  The  Company's  policy is to utilize  available  cash in
operations and accordingly does not expect to pay dividends.

         On January 27, 1999, the Company  announced plans to purchase up to two
million shares of its outstanding Common Stock. As of March 3, 1999, the Company
had repurchased 698,000 shares at an aggregate purchase price of $3.1 million.






Item 6.  Selected Financial Data
(in thousands, except per share data)
                                           Year ended December 31,
                               -----------------------------------------------
                                 1998      1997      1996      1995      1994
                               --------  --------  --------  --------  --------
Statement of Operations Data:
  Sales ...................... $174,703  $257,033  $215,197  $193,668  $100,290
  Research and development ...   10,821    16,859    13,170     9,709     5,175
  Income(loss) from
     operations(1) ...........  (62,052)   18,363    27,236    36,491    19,124
  Net income(loss)(1) ........  (51,439)   12,910    18,523    22,613    11,657
  Basic earnings(loss)
     per share(2) ............ $  (3.66) $   0.93  $   1.30  $   1.60  $   0.93
  Diluted earnings(loss)
     per share(2) ............ $  (3.66) $   0.90  $   1.21  $   1.51  $   0.87
  Common shares outstanding(2)   14,049    13,948    14,284    14,135    11,922
  Common shares assuming 
     dilution(2) .............   14,049    14,340    16,893    14,979    12,833
  Dividends .................. $    --   $    --   $    --   $    --   $    --


                                               As of December 31,
                               ------------------------------------------------
                                 1998      1997      1996      1995      1994
                               --------  --------  --------  --------  --------
Balance Sheet Data:
  Cash and cash equivalents .. $ 12,349  $ 48,253  $ 26,509  $ 19,290  $ 28,224
  Short-term investments .....   13,975    26,486    38,560    21,342    19,936
  Working capital ............   70,238   112,980   110,469    91,355    74,003
  Total assets ...............  107,667   173,428   152,613   127,151   108,598
  Stockholders' equity ....... $ 80,402  $130,730  $128,846  $106,214  $ 81,306



QUARTERLY DATA:
(in thousands, except per share data; unaudited)

                                             Year ended December 31, 1998
                                      -----------------------------------------
                                        First     Second      Third     Fourth
                                       Quarter    Quarter    Quarter    Quarter
                                      --------   --------   --------   --------
  Sales ............................  $ 69,354   $ 43,387   $ 31,338   $ 30,624
  Gross margin .....................    17,299     10,397     (3,481)     6,712
  Loss from operations(1) ..........   (10,094)   (10,639)   (36,339)    (4,980)
  Net loss(1) ......................    (5,361)    (5,987)   (35,333)    (4,758)
  Basic loss per share(2) ..........  $  (0.38)  $  (0.43)  $  (2.51)  $  (0.34)
  Diluted loss per share(2) ........  $  (0.38)  $  (0.43)  $  (2.51)  $  (0.34)

                                             Year ended December 31, 1997
                                      -----------------------------------------
                                        First     Second      Third     Fourth
                                       Quarter    Quarter    Quarter    Quarter
                                      --------   --------   --------   --------
  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

(1)  1998 Operating Loss includes  one-time  charges of $29.2 million  primarily
     for restructuring  and obsolete  inventory  write-offs.  First quarter 1998
     loss includes  one-time  charges of $2.7  million.  Third quarter 1998 loss
     includes one-time charges of $26.5 million.
(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 that
     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.





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 Direct Marketing  Services,  Fulfillment,  Direct to Telco,  and, to a
lesser  extent,  international  accounts,  Retail,  and  OEM  customers.  Direct
Marketing Services 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 on the Telco's  behalf an adjunct  product or a phone product to each
customer  "acquired"  through  the  campaign.  Fulfillment  sales occur when the
Company  receives  an order and  ships the  requested  product  directly  to the
customer.  In the case of  Fulfillment  sales,  the  Telcos  generate  orders by
performing the marketing activities themselves rather than retaining the Company
to perform such  services,  as in Direct  Marketing  Services  programs.  Direct
Marketing  Services  sales totaled 32%, 49%, and 25% of sales in 1998,  1997 and
1996,  respectively.  Fulfillment sales accounted for 34%, 35%, and 43% of sales
in 1998, 1997 and 1996, respectively.

         As a result of  operating  losses  incurred  in the first six months of
1998, the Company adopted a new business strategy focusing on its core telephony
products  and  services.  The  Company  decided  that its core  business  cannot
successfully fund the level of market development expense required over time for
success in marketing the i-Phone and has substantially discontinued operation of
its i-Phone  division,  taking a  restructuring  charge in the third  quarter of
$19.9  million.  As part of the Company's  change in direction,  Co-Founder  and
Chairman of the Board of Directors,  Paul G. Locklin, returned to the Company as
its President and Chief Executive Officer in the third quarter of 1998.

         This  Report  contains  forward-looking  statements  that  reflect  the
Company's  current  views  with  respect  to future  events  that 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.






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:

                                                         Year ended December 31,
                                                        ------------------------
                                                         1998     1997     1996
                                                        ------   ------   ------
 Sales ..............................................   100.0%   100.0%   100.0%
 Cost of sales ......................................    82.3     55.1     55.7
                                                        -----    -----    -----
 Gross margin .......................................    17.7     44.9     44.3
 
 Operating expenses:
   Research and development .........................     6.2      6.6      6.1
   Selling and marketing ............................    30.6     27.6     22.2
   General and administrative .......................     5.0      3.6      3.4
   Restructuring ....................................    11.4      --       --
                                                        -----    -----    -----
                                                         53.2     37.8     31.7
                                                        -----    -----    -----
 Income (loss) from operations ......................   (35.5)     7.1     12.6
 
 Other income (expense):
 Interest income ....................................     2.1      1.1      3.1
 Interest expense ...................................     --       --      (1.4)
                                                        -----    -----    -----
                                                          2.1      1.1      1.7
                                                        -----    -----    -----
 Income (loss) before income taxes ..................   (33.4)     8.2     14.3
 Provision (benefit) for income taxes ...............    (4.0)     3.2      5.7
                                                        -----    -----    -----
 Net income (loss) ..................................   (29.4)%    5.0%     8.6%
                                                        =====    =====    =====


1998 Compared to 1997

 Sales
         Sales are recognized  upon shipment of the product to the customer less
reserves for anticipated  returns or, in the case of Direct Marketing  Services,
less reserves for non-retention of certain Services provided by the Telcos,  and
customer credit  worthiness.  Sales decreased 32% to $174.7 million in 1998 from
$257.0 million in 1997, primarily due to the 33% decrease in average sales price
per adjunct unit. This pricing decrease was due to competitive pricing pressures
from both Asian  suppliers  to the United  States  market and  certain  domestic
suppliers  as well as a  decline  in  Direct  Marketing  programs.  Prices  have
stabilized since Asian  currencies  stopped their decline against the US Dollar.
It is expected that future price declines will be dependant on currency exchange
rates and the health of the Asian economy.  Additionally,  the Company's adjunct
unit sales  decreased 25% to 5.4 million units in 1998 from 7.2 million units in
1997,  primarily  arising  from the decline in  Fulfillment  sales and the Telco
customers  shifting focus from adjuncts to integrated  Network  Service  phones.
These declines were partially  offset by the increase in phone unit sales to 0.9
million units in 1998 from 0.4 million units in 1997. Direct Marketing  Services
programs  decreased  to 32% of sales in 1998 from 49% in 1997.  This  decline in
Direct Marketing Services business results from increased  penetration levels in
feature Services in various marketing areas making new subscribers  increasingly
difficult and expensive to acquire.  Also,  the Company chose not to participate
in risky low margin  agency  programs.  While the  Company  expects  this Agency
business  trend to continue  with respect to adjunct sales into 1999 and beyond,
the Company also  believes  that sales of Network  Feature  phones will increase
thereby mitigating the effect of this trend.

 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. Gross margin as a percentage of sales
decreased  to 17.7% in 1998 from 44.9% in 1997 due to the  overall  decrease  in
average sales prices and the extensive  liquidation  of  discontinued  products.
One-time charges attributable to inventory liquidation were $9.3 million in 1998
or 5.3% as a percentage of sales.  These were offset by royalty  expense,  which
declined in 1998 to $2.9 million  compared with $3.9 million in 1997, due to the
renegotiation of a component  licensing agreement such that there was no royalty
payable  in  1998.   Royalties   payable  to  other  patent   holders   remained
approximately  the same in 1998 as in 1997.  Although  gross margins vary due to
changes in sales mix by  distribution  channel  and  product  mix,  the  Company
expects that gross margins will range from 20% to 30% in 1999.

 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  decreased 36% to $10.8 million in 1998 from $16.9 million
in 1997 due primarily to decreased spending on new development  projects and the
decline  of  equity  losses  in  InfoGear,   Inc.   Additionally,   the  Company
discontinued  the i-Phone  division in the last  quarter of 1998,  resulting  in
research  and   development   personnel   reductions  and  the   writing-off  of
substantially  all  related  assets.  Research  and  development  expenses  as a
percentage  of sales  decreased  to 6.2% in 1998 from 6.6% in 1997.  The Company
expects research and development  expenses will range between 5% and 6% of sales
in 1999.

 Selling and Marketing Expenses
         Selling and marketing  expenses include  acquisition  costs,  personnel
costs,  telephone and electronic data exchange  expenses,  promotional costs and
travel expenses.  Selling and marketing  expenses  decreased to $53.6 million in
1998 from $70.9 million in 1997 and as a percentage of sales  increased to 30.6%
in 1998 from 27.6% in 1997. The absolute dollar decrease in selling expenses was
due  principally to the lower levels of advertising and  telemarketing  expenses
associated with the decrease in the Company's Direct  Marketing  Services sales.
The Company  anticipates that selling and marketing  expenses as a percentage of
sales  will  decline  in 1999 due to  planned  reduction  in  acquisition  sales
programs.

 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 decreased to $8.7 million in 1998
from $9.3 million in 1997 and as a percentage of sales increased to 5.0% in 1998
from 3.6% in 1997. The absolute  dollar  decrease  reflects  decreased legal and
human  resources  costs.  The Company  believes that general and  administrative
expenses will decrease in 1999.

 Restructuring
The Company incurred a pretax  restructuring charge of $2.7 million in the first
quarter  of 1998 as it  implemented  several  streamlining  programs,  including
combining certain marketing and operations functions, restructuring research and
development  activities and discontinuing  certain products,  resulting in asset
write-downs  and the  elimination of  approximately  100 positions.  On July 22,
1998, the Company implemented a new business strategy focusing on core telephony
products  and  services,  and a  restructuring  plan that  resulted  in one-time
charges  of  $17.2  million  in  the  third  quarter  of  1998.   The  Company's
restructuring  plan has  significantly  reduced its personnel and resource costs
throughout the core business.  As part of this strategy and restructuring  plan,
during the second half of 1998, the Company explored strategic alternatives with
regard  to its  i-Phone  Division,  including  the  possible  spin-out,  sale or
wind-down  of  the  division  in  significant  part  due to the  high  level  of
marketing,  sales and research and development expense that would be required to
develop the market for these products and services. As of December 31, 1998, the
Company  sold a relatively  minor  amount of these  assets and has  discontinued
operation  of  the  Division,  including  laying-off  substantially  all  of the
Division's  employees.  The Company  will  continue  to attempt to sell  certain
assets of the Division and will continue to sell its i-Phone inventory until the
current stock and related components are depleted. The restructuring has reduced
permanent  headcount  from the prior  year's level by  approximately  41% as the
Company focuses on its core telephony products and services business.

 Other Income (Expense)
         Other income in 1998 includes  interest  income from the  investment of
available cash balances, royalties from the licensing of technology and proceeds
from the sale of future production rights to a next-development-model i-Phone.

     Provision  for  Income  Taxes The  provision  (benefit)  for  income  taxes
reflects an effective  tax rate of (11.9)% in 1998 and 39% in 1997.  The Company
expects no tax provision in 1999 due to a loss carry-forward from 1998.



1997 Compared to 1996

 Sales
         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 Direct Marketing  Services programs for Caller ID Services
on  behalf  of GTE  and  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.,
Direct Marketing  Services plus  Fulfillment)  grew to 84% of sales in 1997 from
70% of sales in 1996.  This was  primarily  due to growth  in  Direct  Marketing
Services programs that increased to 49% of sales in 1997 from 26% in 1996.

 Gross Margin
         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 Direct  Marketing  Services  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.

 Research and Development Expenses
         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  developed  software for the
Company's  initial  i-Phone  product.  Research  and  development  expenses as a
percentage of sales increased to 6.6% in 1997 from 6.1% in 1996.

 Selling and Marketing 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  Direct
Marketing  Services  sales and, to a lesser  extent,  the  Company's  own direct
marketing for its screen phone products.

 General and Administrative Expenses
         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.

 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.



Liquidity and Capital Resources

         The Company's cash and cash equivalents  decreased $35.9 million during
1998 primarily from cash used by operations of $39.2 million and the purchase of
property  and  equipment  of $10.3  million,  offset  by the sale of  short-term
investments  and the Company's  treasury  stock of $13.6  million.  Cash used by
operations  of  $39.2  million  resulted  primarily  from  the net loss of $51.4
million,  an  increase  in taxes  receivable  of $18.4  million,  a decrease  in
accounts  payable of $17.4, an increase in inventory and other current assets of
$10.3  million  and a decrease  in taxes  payable of $1.6  million,  offset by a
decrease in accounts  receivable of $30.4 million,  a decrease in deferred taxes
of $11.1  million,  retirement  of property and equipment of $10.3  million,  an
increase in accrued liabilities of $3.6 million,  non-cash  depreciation of $2.9
million and write-off of investment in affiliate of $1.6 million.

         The Company had working  capital of $70.2 million at December 31, 1998,
as compared to $112.9  million at December 31, 1997. The decrease in the working
capital  was due to the  decreases  in cash  and  cash  equivalents,  short-term
investments and accounts receivable, offset by the decrease in accounts payable.
The Company's  current ratio  decreased to 3.6:1,  as of December 31, 1998, from
3.7:1, as of December 31, 1997.

         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  7.75% per annum at
December 31, 1998.  Borrowings under the line are unsecured.  As of December 31,
1998,  the  Company  had not  borrowed  any funds  under  the line.  The line is
primarily used as security for letters of credit used to purchase inventory from
international  suppliers.  Letters of credit secured by this line totaled $8,600
as of December  31,  1998.  As of the end of 1998,  the Company had violated the
covenant of  profitability.  The bank has waived this  violation and the line is
currently being  renegotiated to $15 million and secured by substantially all of
the Company's assets bearing interest at the banks base rate.

         On January 27, 1999, the Company  announced plans to purchase up to two
million shares of its outstanding Common Stock. As of March 3, 1999, the Company
had repurchased 698,000 shares at an aggregate purchase price of $3.1 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 1999 capital  expenditures will
be approximately $5.0 million.  The 1999 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  65%, 84% and 68% of the Company's  revenues during 1998,
1997 and 1996,  respectively,  came from the Company's Direct Marketing Services
and  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  leveling off 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 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 Direct Marketing Services arrangements
to obtain incremental end user adoption of Caller ID Services  increases,  which
may result in pressures on the Company's profitability.

 Dependence on Telcos; Concentrated Customer Base
         A significant portion of the Company's revenues is derived from a small
number of Telcos.  During 1998,  1997 and 1996  respectively,  the percentage of
revenue derived by the Company from its  significant  (greater than 10% of total
sales) customers was 62% (four  customers),  77% (four customers) and 68% (three
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  for  themselves  the  customer
acquisition  services  currently  undertaken  by the Company  through its Direct
Marketing 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 the  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  products 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 new business area,  Internet/E-Mail  Appliances,  and expects to devote a
significant  portion of its research and development  resources on developing an
"e-mail  appliance"  which would allow  electronic  messaging via an easy-to-use
device.  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  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.

 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 operating
expenses;  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 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 and
other  alternate  distribution  channels  to the  extent  such  channels  do not
conflict  with current  Telco  partnerships,  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 that 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,  tariffs 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 Latin
America,  Asia-Pacific and Europe, 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  Latin  America,  Japan  and  elsewhere  in the
Asia-Pacific  region, and in Europe, 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 Network  Feature  Services  in areas  outside of the
United States is highly uncertain.  There can be no assurance that the Company's
Network  Feature  products will gain  meaningful  market  penetration  in target
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 Network Feature  Services,
or other  factors.  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 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  continue  to  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
manage 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  Network  Feature  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 companies offering
specific  services and large firms. In addition to U.S.  companies,  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 Direct  Marketing  Services
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 secret  protection,  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 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 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 that 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

     The  information   provided  below   constitutes  a  "Year  2000  Readiness
Disclosure" for purposes of the Year 2000  Information and Readiness  Disclosure
Act.

     The Year 2000 problem arises from the use of a two-digit  field to identify
years in computer  programs  (for  example,  98=1998),  and the  assumption of a
single  century,  namely the 1900s. A program  created with this  assumption may
read or  attempt  to read "00" as the year  1900.  If  computer  or  information
systems do not correctly  recognize  date  information  when the year changes to
2000, there could be an adverse impact to the operations of a company who is not
sufficiently  prepared. To minimize the possibility and extent of such an impact
to CIDCO's  operation,  CIDCO has put into place a formal  Year 2000  Compliance
Project  that  focuses  on four key  readiness  areas:  (1)  product  readiness,
addressing CIDCO's product functionality; (2) internal infrastructure readiness,
addressing internal information systems and non-information  technology systems;
(3) supplier  readiness,  addressing the  preparedness of our supplier base; and
(4) customer readiness;  addressing the preparedness of our customer base. CIDCO
has appointed a Year 2000  Compliance  Officer,  and for each readiness  area, a
task  force  is  systematically  performing  company-wide  risk  assessment  and
contingency planning, conducting testing and remediation, and communicating with
employees,  suppliers,  customers and third-party  business  partners to uncover
problem areas and develop  action plans related to the Year 2000 problem.  Below
are overviews of each readiness area and CIDCO's  progress  thereon for becoming
ready for the Year 2000.

Product Readiness
         The Company has  completed  its review of Year 2000 issues with respect
to  its  product  line.  The  Company's   telephones,   telephone  adjuncts  and
accessories,  and other such communication  products,  with the exception of one
PBX product, do not calculate dates or rely upon software that calculates dates.
Any  date  information  that is  displayed  on all but  one of our  products  is
provided by the telephone company Service provider over the provider's  Network,
and only month and day  information  is sent by the Network and displayed by the
products.  Additionally, the user can set the date information in two (2) of our
current  products.  In  other  words,  our  products  simply  display  the  date
information  that the telephone  company  provides,  or in some cases,  the date
information that a user inputs.  Accordingly,  Year 2000 issues are not relevant
to the  functionality  of these  products.  For the one product that  calculates
dates,  the Voysconnect PBX System,  for the purpose of time stamping  telephone
calls received,  the related software will, under normal use, record and process
calendar dates falling on or after January 1, 2000 with the same  functionality,
data integrity and  performance as the software  records and processes  calendar
dates on or before December 31, 1999. In any future products developed by or for
the Company that may  calculate or utilize  date  information,  the Company will
take steps to require Year 2000 compliance.

Internal Infrastructure Readiness
         An assessment of internal information systems, hardware and software is
in  process.  The  Company  has  migrated  to a new  software  platform  for its
enterprise-wide  accounting and management system, which is warranted to be Year
2000 compliant.  For other systems, the Company is in the process of identifying
non-compliant  systems,  has  established  a  schedule  for  prioritized  system
compliance,  and is in the  process of  executing  the  Compliance  Project.  In
addition to applications  and  information  technology  systems,  the Company is
testing and developing  remediation plans for embedded  systems,  facilities and
other operations. One particular area of activity will be in examining,  testing
and reviewing the interfaces  between the Company's  various  internal  systems,
some of which may not currently be Year 2000 compliant.  The Company expects all
systems to be compliant by no later than July 1999.

Supplier Readiness
         This  program  is  focused  on  minimizing  the  risk  associated  with
suppliers in two areas: (1) a supplier's  ability to continue providing products
and services,  and (2) the Year 2000  compliance of suppliers in their  internal
operations.  The Company is contacting all its material  suppliers.  The Company
has received responses from many of its preferred suppliers and anticipates that
the  majority of  suppliers  will  respond  and  provide  the  Company  with the
requested  information.  Supplier issues that  potentially  affect the Company's
operations  and products  are targeted to be resolved by July 1999.  The Company
has informed its suppliers  that it will  reevaluate  its business  relationship
with any supplier who either fails to respond or cooperate with this project, or
who fails to certify as to Year 2000 compliance by July 1999.

Customer Readiness
         This  program is focused on  minimizing  the risk  associated  with our
customers  in two areas:  (1) a  customer's  ability to  continue  ordering  and
utilizing the Company's products and services,  and (2) the Year 2000 compliance
of customers in their internal operations, especially with respect to Electronic
Data  Interchange  ("EDI") with the Company.  The Company is contacting  all its
significant  customers.  The Company  has  received  responses  from some of its
customers  and  anticipates  that the  majority of  customers  will  respond and
provide  the  Company  with the  requested  information.  Customer  issues  that
potentially  affect the Company's sales of products and services are targeted to
be resolved by September 1999.

     Risk Factors,  Costs and  Contingency  Planning:  The  Company's  Year 2000
project  is  currently  in the  assessment  phase and,  with  respect to certain
information  systems,  in the remediation and contingency  planning phases.  The
Company  believes  that its greatest  potential  risks are  associated  with the
systems of the Company's  suppliers,  and secondarily,  problems associated with
the Company's  information  systems and systems  embedded in its  operations and
infrastructure.  Additionally,  it is possible that one or more of the Company's
Telco customers may choose to defer the commencement of programs that they would
ordinarily  start in the last quarter of 1999 or the first quarter of 2000. Such
a decision could have a detrimental  impact upon the Company's revenue for those
quarters.

     With respect to suppliers and  information  systems,  the Company is at the
intermediate stage of assessment and cannot predict whether significant problems
will  be  identified.  Accordingly,  the  Company  is not yet in a  position  to
determine  the extent of  contingency  planning that may be required and has not
yet developed contingency plans for many systems.  However,  based on the status
of the  assessment  made and  remediation  plans  developed to date, the Company
currently  does not  believe  that  problems  identified  will pose  significant
issues,  or that  such  costs  will  exceed  $1,000,000.  Once the  Company  has
completed  its  assessments,  developed  remediation  plans  for  all  problems,
developed   contingency  plans,  and  completely   implemented  and  tested  its
remediation plans, it will be better able to estimate  remediation costs, and it
will provide such estimates at that time.

     As the Year 2000  Compliance  Project  continues,  the Company may discover
additional Year 2000 problems,  may not be able to develop,  implement,  or test
remediation  or  contingency  plans in time, or may find that the costs of these
activities exceed current expectations.  In many cases, the Company will be in a
position  of  relying  on  assurances  from  suppliers  that  new  and  upgraded
information systems and other products will be Year 2000 compliant.  The Company
plans to test such third-party products,  but cannot be sure that its tests will
be adequate or that, if problems are  identified,  they will be addressed by the
supplier in a timely and satisfactory way. Because the Company uses a variety of
information  systems and has additional  systems  embedded in its operations and
infrastructure,  it cannot be sure that all of its systems will work together in
a Year 2000-compliant fashion.  Furthermore,  the Company cannot be sure that it
will not  suffer  business  interruptions,  either  because of its own Year 2000
problems or those of its  customers  or suppliers  whose Year 2000  problems may
make it difficult or  impossible  for them to fulfill their  commitments  to the
Company.  If the  Company  fails to  resolve  Year 2000  issues  related  to its
products in a timely manner, it could be exposed to liability to third parties.



Item 7A     Quantitative and Qualitative Disclosure About Market Risk

         Management  believes that the market risk associated with the Company's
market risk sensitive  instruments as of December 31, 1998 is not material,  and
therefore, disclosure is not required.


<PAGE>


Item   8.   Financial Statements and Supplementary Data

Index to Financial Statements:

Financial Statements:                                                       Page

    Report of Independent Accountants ........................................27
    Balance Sheet at December 31, 1998 and 1997 ..............................28
    Statement of Operations for the three years
        ended December 31, 1998 ..............................................29
    Statement of Stockholders' Equity for
        the three years ended December 31, 1998 ..............................30
    Statement of Cash Flows for
        the three years ended December 31, 1998 ..............................31
    Notes to Financial Statements ............................................32

Financial Statement Schedule:

    Schedule II - Valuation and Qualifying Accounts ..........................42

     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.











                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of CIDCO Incorporated

In our opinion,  the financial  statements in the above index present fairly, in
all material respects,  the financial position of CIDCO Incorporated at December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended  December 31, 1998,  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.



PricewaterhouseCoopers LLP
San Jose, California
January 26, 1999





                               CIDCO INCORPORATED
                                  BALANCE SHEET
                      (in thousands, except per share data)

                                                              December 31,   
                                                        -----------------------
                                                           1998          1997
                                                        ---------     ---------
ASSETS
Current assets:
Cash and cash equivalents ........................      $  12,349     $  48,253
Short-term investments ...........................         13,975        26,486
Accounts receivable, net of allowances for
     doubtful accountsof $1,885 and $3,301 .......         27,689        58,082
Inventories ......................................         22,086        12,904
Deferred tax asset ...............................          1,490        11,808
Income tax refund receivable .....................         18,367           --
Other current assets .............................          1,547         1,306
                                                        ---------     ---------
   Total current assets ..........................         97,503       158,839

Property and equipment, net ......................          9,691        12,591
Other assets .....................................            473         1,998
                                                        ---------     ---------
                                                        $ 107,667     $ 173,428
                                                        =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................      $  12,446     $  29,868
Accrued liabilities ..............................         14,585        10,955
Accrued taxes payable ............................            234         1,875
                                                        ---------     ---------
   Total current liabilities .....................         27,265        42,698

Commitments and contingencies (Notes 7 and 8)

Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
    authorized, 14,418 and 14,418 shares issued ..            144           144
Treasury Stock, at cost (339 and 463 shares) .....         (4,600)       (6,163)
Additional paid-in capital .......................         (4,058)       47,986
                                                        ---------     ---------
   Total stockholders' equity ....................         80,402       130,730
                                                        ---------     ---------
                                                        $ 107,667     $ 173,428
                                                        =========     =========



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


                               CIDCO INCORPORATED
                             Statement of Operations
                      (in thousands, except per share data)

                                                    Year ended December 31,
                                              ---------------------------------
                                                 1998        1997        1996
                                              ---------   ---------   ---------
Sales ..................................      $ 174,703   $ 257,033   $ 215,197
Cost of sales ..........................        143,776     141,672     119,817
                                              ---------   ---------   ---------
Gross margin ...........................         30,927     115,361      95,380

Operating expenses:
    Research and development ...........         10,821      16,859      13,170
    Selling and marketing ..............         53,577      70,851      47,720
    General and administrative .........          8,723       9,288       7,254
    Restructuring ......................         19,858         --          --
                                              ---------   ---------   ---------
                                                 92,979      96,998      68,144
                                              ---------   ---------   ---------
Income (loss) from operations ..........        (62,052)     18,363      27,236

Other income (expense), net:
Other income ...........................          3,658       2,793       6,729
Interest expense .......................            --          --       (3,093)
                                              ---------   ---------   ---------
                                                  3,658       2,793       3,636
                                              ---------   ---------   ---------
Income (loss) before income taxes ......        (58,394)     21,156      30,872
Provision (benefit) for income taxes ...         (6,955)      8,246      12,349
                                              ---------   ---------   ---------
Net income (loss) ......................      $ (51,439)  $  12,910   $  18,523
                                              =========   =========   =========

Basic earnings per share ...............      $   (3.66)  $    0.93   $    1.30
                                              =========   =========   =========
Diluted earnings per share .............      $   (3.66)  $    0.90   $    1.21
                                              =========   =========   =========
Common shares outstanding ..............         14,049      13,948      14,284
                                              =========   =========   =========
Common shares assuming dilution ........         14,049      14,340      16,893
                                              =========   =========   =========



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


                               CIDCO INCORPORATED
                        STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)

                                                             Retained   Total
                        Common Stock Treasury Stock  Add'l.  Earnings   Stock-
                        ------------ -------------- Paid-in  (Accum.   holders'
                        Shares  Amt. Shares  Amount Capital  Deficit)  Equity
                        ------ ----- ------ ------- -------- -------- ---------
Balance at
   December 31, 1995 .. 14,133 $ 141     -- $   --  $ 83,449 $ 22,624 $ 106,214

Unrealized gains 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 losses 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 ..........      3   --     521   6,577       21   (5,914)      684
Employee stock
   purchase plan ......     16   --      16     202      230      (15)      417
                                                                              
Net income ............                                        12,910    12,910
                        ------ ----- ------ ------- -------- -------- ---------
Balance at
   December 31, 1997 .. 14,418   144   (463) (6,163)  88,763   47,986   130,730

Unrealized gains from
   investments ........                                           (31)      (31)
Tax benefit from
   exercise of
   stock options ......                                  153                153
Employee stock options
   exercised ..........    --    --      61     773              (198)      575
Employee stock
   purchase plan ......    --    --      63     790              (376)      414
Net income (loss) .....                                       (51,439)  (51,439)
                        ------ ----- ------ ------- -------- -------- ---------
Balance at
   December 31, 1998 .. 14,418 $ 144   (339)$(4,600)$ 88,916   (4,058)$  80,402
                        ====== ===== ====== ======= ======== ======== =========


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


                               CIDCO INCORPORATED
                             STATEMENT OF CASH FLOWS
                                 (in thousands)

                                                     Year ended December 31,
                                                 -------------------------------
                                                   1998       1997       1996
                                                 --------   --------   --------
Cash flows provided by (used in)
                   operating activities:
   Net income (loss) ........................... $(51,439)  $ 12,910   $ 18,523
 Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
   Depreciation and amortization ...............    2,880      5,933      5,525
  Equity in losses of affiliate ................    1,605      2,369        428
   Property and equipment retirements ..........   10,300        --         --
   Deferred income taxes .......................   11,100     (6,477)    (2,584)
   Changes in assets and liabilities:
      Accounts receivable ......................   30,393     (9,840)     1,382
      Inventories ..............................   (9,182)     1,651      3,361
      Income tax refund receivable .............  (18,367)       --         --
      Other current assets .....................     (241)       (22)      (138)
      Other assets .............................     (862)      (353)      (468)
      Accounts payable .........................  (17,422)    12,988      5,507
      Accrued liabilities ......................    3,630      4,744     (2,211)
      Accrued taxes payable ....................   (1,641)     1,199       (466)
                                                 --------   --------   --------
        Net cash provided (used in)
                   by operating activities .....  (39,246)    25,102     28,859

Cash flows provided by investing activities:
   Acquisition of property and equipment .......  (10,280)    (4,406)    (5,531)
   Purchase of equity interest in affiliate ....      --         --      (3,000)
   Sale (Purchase) of short-term
                    investments, net ...........   12,480     12,102    (17,388)
                                                 --------   --------   --------
        Net cash provided by (used in)
                      investing activities .....    2,200      7,696    (25,919)

Cash flows provided by (used in)
                   financing activities:
   Issuance of Common Stock, 
                net of issuance costs ..........      989      1,101      2,451
   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 ..      153        787      1,828
                                                 --------   --------   --------
        Net cash provided by (used in)
                    financing activities .......    1,142    (11,054)     4,279

Net increase (decrease) in 
                   cash and cash equivalents ...  (35,904)    21,744      7,219
Cash and cash equivalents at beginning of year .   48,253     26,509     19,290
                                                 --------   --------   --------
Cash and cash equivalents at end of year ....... $ 12,349   $ 48,253   $ 26,509
                                                 ========   ========   ========
Supplemental disclosure of cash flow information:
   Cash paid during the year for interest ...... $    --    $    --    $  3,093
                                                 ========   ========   ========
   Cash paid during the year for income taxes .. $  1,855   $ 10,973   $ 13,625
                                                 ========   ========   ========


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





                          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  Marketing  and
Fulfillment   relationships  with  certain  Regional  Bell  Operating  Companies
("RBOC"), to Telcos directly, and to major national and regional retail chains.


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).  The  Company's  inventories  consist of finished  goods and raw materials
purchased for the manufacture 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.  In accordance with the
provisions  of  FAS  130,  the  Company  has  determined   that  the  impact  of
comprehensive income is not material for disclosure.

     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.  In  accordance  with the  provisions  of FAS 131,  the  Company  has
determined that it does not have separately reportable operating segments.

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 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 1998,
1997  and  1996  were  $32.5  million,   $32.4   million,   and  $20.7  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
         Basic  Earnings  Per Share  ("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. Basic EPS
excludes the dilutive  effect of stock options.  Diluted EPS 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.

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

                                                      Year ended December 31,
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
Net income (loss) used to compute
   basic earning per common share ..............   $(51,439) $ 12,910  $ 18,523
     Adjustment to net income (loss)
        due to convertible note ................        --        --      1,856
                                                   --------  --------  --------
Net income used to compute diluted
   earnings (loss) per common share ............   $(51,439) $ 12,910  $ 20,379
                                                   ========  ========  ========
Denominator used to compute basic
   earnings (loss) per common share ............     14,049    13,948    14,284
     Shares issuable on exercise of options(1)..        --        392       750
     Shares issuable on conversion of note .....        --        --      1,859
                                                   --------  --------  --------
Denominator used to compute diluted 
   earnings (loss) per common share ............     14,049    14,340    16,893
                                                   ========  ========  ========
Basic earnings (loss) per share ................   $  (3.66) $   0.93  $   1.30
                                                   ========  ========  ========
Diluted earnings (loss) per share ..............   $  (3.66) $   0.90  $   1.21
                                                   ========  ========  ========


(1)  Potential  common stock  equivalents  issuable  upon exercise of options to
purchase  232,256  shares of common stock priced at $1.00 to $2.75 per share was
excluded  because  their  inclusion  would be  anti-dilutive  for the year ended
December 31, 1998.

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.

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.

Reclassifications
     Certain  amounts  in 1997 have been  reclassified  to  conform  to the 1998
presentation.


NOTE 3.  BALANCE SHEET COMPONENTS

                                                                December 31,
                                                            -------------------
                                                              1998        1997
                                                            --------   --------
                                                               (in thousands)
   Inventories, net of reserves:
      Finished Goods ....................................   $ 14,005   $ 12,904
      Raw Materials (1)  ................................      8,081        --
                                                            --------   --------
                                                            $ 22,086   $ 12,904
                                                            ========   ========
   Property and equipment, net:
      Land ..............................................   $    866   $    866
      Computers and office equipment ....................     23,055     18,775
      Furniture and fixtures ............................      2,134      2,036
      Leasehold improvements ............................      2,648      7,078
                                                            --------   --------
                                                              28,703     28,755
      Less accumulated depreciation and amortization ....    (19,012)   (16,164)
                                                            --------   --------
                                                            $  9,691   $ 12,591
                                                            ========   ========
   Accrued liabilities:
      Accrued compensation ..............................   $  1,619   $  3,587
      Accrued Restructuring .............................      3,883        --
      Sales Taxes Payable ...............................      2,004      2,804
      Other .............................................      7,079      4,564
                                                            --------   --------
                                                            $ 14,585   $ 10,955
                                                            ========   ========

(1) An  additional  reserve of $3,935  (in  thousands)  related  to i-Phone  raw
materials has been included in restructuring. See Note 6.


NOTE 4.  SHORT-TERM INVESTMENTS

     The Company's short-term  investments consist primarily of municipal bonds.
As of December 31, 1998,  approximately  $4.6  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):
                                                                December 31,
                                                            -------------------
                                                              1998       1997
                                                            --------   --------
Fair value .............................................    $ 13,975   $ 26,486
Cost ...................................................      13,873     26,302
                                                            --------   --------
Unrealized gains .......................................    $    102   $    184
                                                            ========   ========


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  has been  included as a component  of research and
development expense for the years ended December 31, 1998 and 1997, $0.6 million
and $2.4 million,  respectively.  In 1998,  the Company  invested and additional
$1.4 million in Infogear  that the Company wrote off as worthless as part of the
restructuring costs. See Note 6 below.

NOTE 6.  RESTRUCTURING

     The Company incurred a pretax  restructuring  charge of $2.7 million in the
first  quarter of 1998 as it  announced  and  implemented  several  streamlining
programs,  including  combining  certain  marketing  and  operations  functions,
restructuring  research and  development  activities and  discontinuing  certain
products,  resulting in asset  write-downs and the elimination of  approximately
100 positions.  Approximately $0.2 million of the restructuring  charge requires
cash outlays and should be paid out over the next 6 months.  The remaining  $2.1
million  represents asset write-downs of inventory of $1.1 million and leasehold
improvements of $1.0 million related to discontinued  products and relocation of
the  Company's  distribution  center  from  California  to  Texas.  The  Company
determined that moving the distribution center has not produced the cost savings
and relocated the distribution  center back to California where the distribution
function can be fully integrated with the rest of the Company.

     On July 22, 1998, the Company announced a new business strategy focusing on
core telephony  products and services,  and a restructuring  plan implemented in
the second half of 1998,  which resulted in one-time charges of $17.2 million in
the third  quarter  of 1998.  The  Company's  restructuring  plan  significantly
reduced its personnel and resource costs  throughout the core business.  As part
of this  strategy and  restructuring  plan,  the Company has explored  strategic
alternatives  with regard to its Internet  appliances  Division,  including  the
possible spin-out,  sale or wind-down of the division in significant part due to
the high level of  marketing,  sales and research and  development  expense that
would be required to develop the market for these  products and services.  As of
December  31, 1998,  the Company sold a relatively  minor amount of these assets
and  has   discontinued   operation  of  the  Division,   including   laying-off
substantially  all of the  Division's  employees.  The Company will  continue to
attempt to sell certain  assets of the  Division  and will  continue to sell its
i-Phone until present  finished goods and  components are depleted.  The Company
employed 250 regular  employees  and  approximately  123  temporary and contract
workers as of December 31, 1998. The restructuring  reduced permanent  headcount
from the prior year's level by  approximately  41% as the Company focuses on its
core telephony products and services business.  The restructuring is expected to
require cash outlays of approximately  $5.9 million that should be substantially
paid out over the next 3 months.  The remaining $11.2 million  represents  asset
write-downs  of inventory  of $5.9  million and  write-offs  of  investments  in
intangible  assets  including  a Sun  Microsystems  license of $3.0  million and
equity in InfoGear Technologies Corporation of $1.4 million.

     The following table lists the components of the  restructuring  accrual for
the year ended December 31, 1998 (in thousands):

                                    Employee     Asset
                                     Costs     Write-downs   Leases     Total
                                    --------   -----------   ------   ---------
Reserve provided ................   $    437     $   2,080   $  155   $   2,672
Reserve utilized in Q1 ..........        --         (1,020)     --       (1,020)
                                    --------     ---------   ------   ---------
Balance at March 31, 1998 .......        437         1,060      155       1,652
Reserve utilized in Q2 ..........       (304)          --       (25)       (329)
                                    --------     ---------   ------   ---------
Balance at June 30, 1998 ........        133         1,060      130       1,323
Additional reserve provided .....      3,616        13,506       65      17,187
Reserve utilized in Q3 ..........     (2,636)      (10,032)      54     (12,614)
                                    --------     ---------   ------   ---------
Balance at September 30, 1998 ...      1,113         4,534      249       5,896
Reserve utilized in Q4 ..........     (1,053)         (599)    (361)     (2,013)
                                    --------     ---------   ------   ---------
Balance at December 31, 1998 ....   $     60     $   3,935   $ (112)  $   3,883
                                    ========     =========   ======   =========


NOTE 7.   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 7.75% per annum at December 31, 1998.
Borrowings  under the line are  unsecured.  As of December 31, 1998, the Company
had not  borrowed  any  funds  under  the line.  The line is  primarily  used as
security  for letters of credit used to purchase  inventory  from  international
suppliers.  Letters of credit secured by this line totaled $8,600 as of December
31,  1998.  As of the end of 1998,  the Company  had  violated  the  covenant of
profitability.  The bank has waived  this  violation  and the line is  currently
being  renegotiated  to $15  million  and  secured by  substantially  all of the
Company's assets bearing interest at the banks base rate.


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 also leases office space in Palo Alto, California
under an operating lease that expires in 2002.

     Future minimum lease payments under  non-cancelable  leases at December 31,
1998 were as follows (in thousands):

Year ending December 31,
1999 ............................................................       $ 1,174
2000 ............................................................           913
2001 ............................................................           871
2002 ............................................................           837
2003 ............................................................           840
Thereafter ......................................................         1,911
                                                                        -------
Total minimum lease payments ....................................       $ 6,546
                                                                        =======

     Rent expense for 1998,  1997 and 1996 was $0.9 million,  $1.4 million,  and
$1.1 million, respectively.


Licenses
     The Company has a  nontransferable,  nonexclusive  license  agreement  with
Lucent to utilize Lucent's patent related to data display  devices.  The Company
pays royalties to Lucent for each licensed product sold,  leased or put into use
by the Company other than direct sales to Lucent,  the Regional  Bell  Operating
Companies and other Lucent licensees under the patent.  Royalties are payable at
a rate of one dollar per unit.  Total Lucent royalty  expense  incurred in 1998,
1997 and 1996 was $0.9 million, $2.0 million, and $1.2 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 royalties
on all units  incorporating  Northern  Telecom's  patents  that 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 1998 and 1997 was $1.8 million and $0.6 million, respectively.

     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 $0.4 million, 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 15% 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  $526,000,  $298,000,  and  $76,000 to the 401(k) Plan for the
years ended December 31, 1998, 1997, and 1996, respectively.


Pending Litigation
         PhoneTel  Communications,  Inc.  filed a  complaint  in August  1998 in
Federal  District  Court in Texas,  alleging  that  CIDCO  Worldwide,  Inc.  (an
affiliate  of the  Company)  and 14  other  defendants  violated  one or more of
PhoneTel's  telephony patents.  The complaint has not been served on the Company
pending the completion of current  discussions between PhoneTel and the Company,
and thus  litigation  has not  commenced.  Although  this  matter is at an early
stage,  management believes that the Company has not infringed any of PhoneTel's
patents,  and that it will prevail in any litigation which may proceed from this
complaint. Management of the Company currently believes that the outcome of this
matter and the ultimate effect, if any, on the Company's  consolidated financial
position, results of operations, or cash flows will be immaterial.

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


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 Directors'  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 Directors'
Option Plan to purchase a total of 93,325  shares of Common  Stock at an average
exercise  price of $16.23 per share.  In 1998,  the  Company  granted a director
options  under  the  Directors'  Option  Plan to  purchase  30,000  shares at an
exercise  price of $4.75 per  share.  This  option  vests in four  equal  annual
installments  commencing one year after the date of grant.  An option for 33,325
shares was cancelled in 1998. Stock Grant to Former Executive Officer
     In March 1997, the Company's then  President and Chief  Executive  Officer,
Daniel L. Eilers,  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 was scheduled to vest 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  filed  a Form  S-8  Registration  Statement  with  the
Securities and Exchange Commission covering the shares issuable upon exercise of
the stock option. In September 1998, a Separation  Agreement and Mutual Release,
was  executed  which  enables a total of up to 300,000  of these  shares to vest
subject to certain time limits,  and  reprices  120,000 of the vested  shares at
$3.00 per share.

Stock Option Plans
     In May 1993,  the Company  adopted a stock option plan (the  "Plan")  under
which the  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 1993 Stock Option Plan. In April
1998 the Company  adopted a second  stock  option plan (the "1998  Plan")  under
which  employees and  consultants  may be granted  options to purchase shares of
Common  Stock at an exercise  price no less than  eighty-five  (85%) of the fair
market  value of the  Company's  Common  Stock on the date of grant.  A total of
700,000  shares were reserved for issuance under this plan (400,000 at inception
in April and 300,000  shares added in October  1998).  Options  under both plans
expire ten years from the date of grant.  Generally,  options  granted  prior to
August 1, 1997 vested in three equal  annual  installments  commencing  one year
from the date of grant.  Effective  on August 2,  1997,  the Board of  Directors
changed the  standard  vesting  period for future  options to vest 25% after one
year, and an additional 2.1% each month thereafter until fully vested. The Stock
Option  Plans are  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.  The stock option plans were amended
in  October  1998  by the  Company's  Board  of  Directors  to  make  the  Plans
competitive with plans offered by other companies in the Company's market.

     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.
Due to the broad decline in market price of the Company's  stock,  a substantial
amount of outstanding stock options had exercise prices  considerably  above the
current  market price.  In an effort to provide  incentives  and retain  current
employees,  on August 17, 1998 eligible employees participating in the Company's
Stock Option Plans were offered the opportunity to elect to exchange outstanding
"underwater"  options for options at an exercise  price of $3.00 per share,  the
closing  market  price on such date.  As a  provision  of the  repricing  offer,
electing employees are not allowed to exercise their vested options until August
17, 1999.

     The following table summarizes stock option activity under the Stock Option
Plans:
                                                            Options Outstanding
                                                           --------------------
                                                                       Weighted
                                               Shares                   Average
                                              Available                Exercise
                                              for Grant      Shares     Price
                                              ---------    ---------   --------
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
   Additional shares
      authorized, April 1998 ..............     400,000           --         --
   Additional shares
      authorized, October 1998 ............     300,000           --         --
   Options granted ........................  (2,706,798)   2,706,798   $   4.19
   Options exercised ......................          --      (61,278)  $   9.32
   Options canceled .......................   2,336,318   (2,336,318)  $  11.45
                                              ---------    ---------   --------
Balance at December 31, 1998 ..............     729,795    1,874,962   $   2.71
                                              =========    =========   ========

     The following table summarizes  information  concerning all outstanding and
exercisable  stock  options as of December 31, 1998,  including a stock grant to
the former  Executive  Officer of 300,000  shares and  Directors  Option Plan of
190,000 shares:
                      Options Outstanding             Options Exercisable
                  ---------------------------  ---------------------------------
                                Weighted Avg.  Weighted                 Weighted
                                  Remaining    Average                  Average
   Range of         Number       Contractual   Exercise      Number     Exercise
Exercise Prices   Outstanding       Life        Price     Exercisable    Price
---------------   -----------   ------------   --------   -----------   --------
$ 1.00 - $ 1.00       106,138       4.35       $  1.00      106,138     $  1.00
$ 1.88 - $ 3.00     1,870,490       9.62       $  2.70      120,000     $  3.00
$ 4.75 - $24.95       388,334       5.62       $ 14.14      175,472     $ 14.41
$ 1.00 - $24.95     2,364,962       8.72       $  4.51      401,610     $  7.46

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  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 or
last trading day of each six month offering  period.  Offerings will commence on
the first  trading day on or after  January 1 and July 1 of each year and end on
the last  trading  day of the period  six (6)  months  later.  The  Company  has
reserved  200,000  shares of Common Stock for issuance  under the stock Purchase
Plan.

Stockholder's 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,  1998,  1997 and 1996 would have been as follows (in
thousands):

                                                   1998       1997       1996
                                                 --------   --------   --------
Net income (loss) as reported ................   $(51,439)  $ 12,910   $ 18,523
Pro forma net income (loss) ..................   $(56,794)  $  9,725   $ 16,219
Basic earnings per share as reported .........   $  (3.66)  $   0.93   $   1.30
Diluted earnings per share as reported .......   $  (3.66)  $   0.90   $   1.21
Pro forma basic earnings per share ...........   $  (4.04)  $   0.70   $   1.15
Pro forma diluted earnings per share .........   $  (4.04)  $   0.67   $   1.08

     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:
                                                        1998     1997     1996
                                                       ------   ------   ------
Stock option plan:
   Expected dividend yield ..........................   0.0%     0.0%     0.0%
   Expected stock price volatility ..................  118%      65%      65%
   Risk free interest rate ..........................    5.27%    6.11%    5.78%
   Expected life of options (years) .................    3.1      2.7      2.3
Stock purchase plan:
   Expected dividend yield ..........................    0.0%     0.0%     0.0%
   Expected stock price volatility ..................  227%      65%      71%
   Risk free interest rate ..........................    4.87%    5.37%    5.29%
   Expected life of option (years) ..................    0.5      0.5      0.5

     The weighted  average  estimated  grant date fair value, as defined by SFAS
123, for options  granted under the Stock Option Plan during 1998, 1997 and 1996
was $2.91, $5.64 and $10.62, respectively.  The weighted average estimated grant
date fair value,  as defined by SFAS 123, for purchase  rights granted under the
Stock  Purchase  Plan during  1998,  1997 and 1996 was $5.60,  $5.23 and $10.88,
respectively.


NOTE 10. PROVISION FOR INCOME TAXES

     The provision for income taxes consists of the following (in thousands):

                                                     Year ended December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                 --------   --------   --------
 Current:
   Federal ..................................    $(18,230)  $ 11,767   $ 12,229
   State ....................................         175      2,956      2,704
                                                 --------   --------   --------
                                                  (18,055)    14,723     14,933
 Deferred:
   Federal ..................................       8,750     (5,206)    (2,002)
   State ....................................       2,350     (1,271)      (582)
                                                 --------   --------   --------
                                                   11,100     (6,477)    (2,584)
                                                 --------   --------   --------
                                                 $ (6,955)  $  8,246   $ 12,349
                                                 ========   ========   ========

     The  difference  between  income taxes at the statutory  federal income tax
rate and income taxes reported in the income statement are as follows:

                                                         Year ended December 31,
                                                         ----------------------
                                                         1998     1997     1996
                                                         ----     ----     ----
 Federal statutory tax rate ........................    (35.0)%   35.0%    35.0%
 State income taxes, net of federal benefit ........      2.8      5.1      4.5
 Research and development tax credits ..............     (0.0)    (2.4)    (0.7)
 Permanent differences .............................      0.2       --       --
 Valuation allowance ...............................     25.0       --       --
 Other .............................................     (4.9)     1.3      1.2
                                                         ----     ----     ----
                                                        (11.9)%   39.0%    40.0%
                                                         ====     ====     ====



     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):

                                                             As of December 31,
                                                          ---------------------
                                                            1998         1997
                                                          --------     --------
  Deferred Tax Assets:
      State taxes ..................................      $    --      $    724
      Non-deductible reserves ......................        13,131       10,493
      Inventory basis difference ...................           113           89
      Depreciation .................................         2,373        1,388
      Other ........................................           563          --
                                                          --------     --------
  Gross deferred tax asset .........................        16,180       12,694
  Deferred tax liabilities .........................          (104)        (104)
                                                          --------     --------
  Net deferred tax assets ..........................        16,076       12,590
  Less Valuation Allowance .........................       (14,586)         --
                                                          --------     --------
                                                          $  1,490     $ 12,590
                                                          ========     ========


NOTE 11. SIGNIFICANT CUSTOMERS

     The Company's sales to significant customers as a percentage of total sales
are as follows:

                                                         Year ended December 31,
                                                         ----------------------
   Customer                                              1998     1997     1996
   -------------------------------------------------     ----     ----     ----
   A ...............................................     21.6%    25.5%    36.5%
   B ...............................................     18.1%    14.0%    11.8%
   C ...............................................     11.6%    14.6%      *
   D ...............................................     10.8%      *        *
   E ...............................................       *      23.3%      *
   F ...............................................       *        *      19.2%


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

                                                                   December 31,
                                                                  ------------- 
   Customer                                                        1998     1997
   ----------------------------------------------------------     ----     ----
   A ........................................................     37.8%    43.9%
   B ........................................................     11.2%    14.8%
   C ........................................................       *      11.7%


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






SCHEDULE II:  Valuation and Qualifying Accounts

                                    Balance at                        Balance at
                                    beginning                            end
(in thousands)                       of year   Additions  Deductions   of year
---------------------------------   ---------  ---------  ----------  ----------
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
Year ended December 31, 1998
  Allowance for doubtful accounts     $ 3,301   $  4,236   $ (5,652)   $ 1,885






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 1999 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 26, 1999 (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.





                                    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.

Exhibits                                                                    Page
 3.1   Amended and Restated Certificate of Incorporation.(1)                 --
 3.2   Second Amended and Restated By-laws.                                  47
 4.1   Second Amendment to Revolving Credit Loan Agreement dated October
          13, 1995 between Registrant andComerica Bank.(3)                   --
 4.2   Rights Agreement dated as of January 27, 1997, between the Registrant
          and United States Trust Companyof New York, as Rights Agent.(4)    --
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)                                 --
10.17  Sublease dated Nov. 18, 1994, between Thoits Bros. and the 
          Registrant for 180 Cochrane Circle. (2)                            --
10.18  Lease dated Nov. 1, 1994, between Thoits Bros., Inc. and the
          Registrant for 105 Cochrane Circle,Units A, B, C, D, and E.(2)     --
10.20  Registrant's 1994 Directors' Stock Option Plan (2)                    --
10.21  Registrant's 1994 Employee Stock Purchase Plan.(2)                    --
10.24  Employment Agreement dated June 28, 1996 between Registrant
          and Ian Laing.(5)                                                  --
10.29  1997 Annual Executive Incentive Plan.(5)                              --
10.30  Registrant's Second Amended and Restated 1993 Stock Option Plan.(6)   --
10.31  Registrant's Amended and Restated 1998 Stock Option Plan.(6)          --
10.32  Employment Agreement dated June 1, 1998 between Registrant
          and Richard D. Kent.(6)                                            --
10.33  Employment Termination Agreement dated Nov. 12, 1998 between
          Registrant and Daniel L. Eilers.(6)                                --
10.34  Employment Agreement dated Sept. 30, 1998 between Registrant
          and Paul G. Locklin.                                               60
10.35  Employment Agreement dated Sept. 30, 1994 between Registrant
          and Timothy J. Dooley.                                             64
10.36  Separation Agreement dated Sept. 20, 1998 between Registrant
          and Marv Tseu.                                                     69
10.37  Separation Agreement dated Sept. 20, 1998 between Registrant
          and Jim Hindmarch.                                                 71
10.38  Separation Agreement dated Nov. 20, 1998 between Registrant
           and Ho Leung Cheung.                                              73

----------------------------
(1) Incorporated herein by reference to the Company's registration statement on
        Form S-1, File No. 33-74114.  
(2)  Incorporated herein by reference to the Company's Form 10-K for the year 
        ended December 31, 1994.  
(3)  Incorporated herein by reference to the Company's Form 10-Q for the quarter
        ended September 30, 1995. 
(4)  Incorporated herein by reference to the Company's Form 10-Q for the quarter
        ended March 31, 1997. 
(5)  Incorporated herein by reference to the Company's Form 10-Q for the quarter
        ended June 30,  1997.  
(6)  Incorporated herein by reference to the Company's Form 10-Q for the quarter
        ended  September 30, 1998.

         (b)  Reports on Form 8-K.
              None.


<PAGE>


                                   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 26th day of March
1999.

                                           CIDCO INCORPORATED


                                           By: /s/    Paul G. Locklin           
                                           President and Chief Executive Officer
                                              Chairman of the Board of Directors


         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 26th day of March 1999.




/s/      Richard D. Kent    Chief Financial Officer, Chief Operating Officer,
Richard D. Kent             Corporate Secretary and Principal Accounting Officer


/s/      Daniel L. Eilers   Director
Daniel L. Eilers


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


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







                                                                      Exhibit 23


                       CONSENT OF INDEPENDENT ACCOUNTANTS


         We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No.  333-71649) of CIDCO Incorporated of our report dated
January 26, 1999  appearing on page 27 of the  Company's  Annual  Report on Form
10-K for the year ended December 31, 1998.



/s/
PricewaterhouseCoopers LLP
San Jose, California
March 30, 1999