PC TEL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K

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

FOR THE YEAR ENDED DECEMBER 31, 2003

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-27115

PCTEL, INC.
(Exact Name of Business Issuer as Specified in Its Charter)

DELAWARE 77-0364943
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

8725 W. HIGGINS ROAD, SUITE 400, 60631
CHICAGO IL (Zip Code)
(Address of Principal Executive Office)

(773) 243-3000
(Registrant's Telephone Number, Including Area Code)
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 Par Value Per Share.

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

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

Indicate by a check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

As of June 30, 2003, the last business day of Registrant's most recently
completed second fiscal quarter, there were 19,919,070 shares of Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on June 30, 2003) was approximately $155,312,855.
Shares of Registrant's common stock held by each executive officer and director
and by each entity that owns 5% or more of Registrant's 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.

As of March 1, 2004, the number of shares of the Registrant's common stock
outstanding was 20,567,020.

Certain sections of Registrant's definitive Proxy Statement relating to its
Annual Stockholders' Meeting to be held on June 3, 2004 are incorporated by
reference into Part III of this Annual Report on Form 10-K.

PCTEL, INC.

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003

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PART I

ITEM 1: BUSINESS

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among other things, statements
concerning our future operations, financial condition and prospects, and
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Investors in
our common stock are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are subject to
substantial risks and uncertainties that could cause our future business,
financial condition, or results of operations to differ materially from our
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors That May Affect Our
Business, Financial Condition, and Future Operating Results," beginning on page
21 of the section of this report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere in, or
incorporated by reference into, this report.

OVERVIEW

PCTEL, Inc. provides wireless connectivity products and test tools to
cellular carriers, wireless Internet providers (WISP's), PC OEM's, and wireless
equipment manufacturers. The company brings together expertise in RF platform
design, mobility software, and hardware to ensure wireless excellence. We
simplify mobility, provide wireless intelligence, and enhance wireless
performance. Additionally, the company licenses both patented and proprietary
access technology, principally related to analog modems, to modem solution
providers.

Our Wi-Fi and Cellular Mobility Software products are offered as the
Segue(TM) product line. The Segue(TM) family of solutions simplifies wireless
access toWi-Fi and cellular data networks. The Segue(TM) Roaming Client is a PC
or PocketPC-based application developed to allow users to easily locate and
connect to Wi-Fi and Wireless Wide Area Networks (WWANs-GPRS, CDMA 1x or other
2.5G cellular networks) data networks. The Segue(TM) Soft AP Module for Wi-Fi
networks permits Wi-Fi enabled notebook or desktop PC's to function as a Wi-Fi
access point and router without the need for external devices. The Segue(TM)
Analyzer is a handheld test and security verification tool for Wi-Fi (802.11
a/b/g) networks. The analyzer allows users to analyze and improve the
performance of 2.4GHz and 5.6 GHz Wi-Fi installations. Customers for Segue(TM)
products are not typically individual end-users, but distributors, integrators,
manufacturers, Internet access service providers, cellular carriers, or other
service aggregators.

Our DTI line of software-defined radio products measure and monitor
cellular networks. They represent a cost effective solution for simplifying
wireless intelligence. The technology is sold in three forms, as OEM receivers,
as integrated systems solutions, and as components and systems to U.S.
government agencies. The SeeGull(TM) family of OEM receivers collects and
measures RF data, such as signal strength and base station identification in
order to analyze wireless signals. The claRiFy(TM) product line is a multiple
receiver system solution that uses patented pending technology to identify and
measure wireless network interference. Customers are wireless network operators,
wireless infrastructure suppliers, and wireless test and measurement solution
providers. The company offers derivatives of the SeeGull(TM) and claRiFy(TM)
products for government security applications to prime contractors that hold the
necessary security clearances.

The MAXRAD product line consists of wireless communication antennas
designed to enhance the performance of broadband wireless, in-building wireless,
wireless Internet service providers, and Land Mobile Radio (LMR) applications.
The products are sold primarily to end customers through distributors and via
direct sales channels to wireless equipment manufacturers.

PCTEL has an intellectual property portfolio consisting of over 130 U.S.
patents and applications, primarily in analog modem technology. It also has
proprietary DSP based embedded modem technology. The company has an active
licensing program designed to monetize its intellectual property. Companies
under license at the end of 2003 include Intel, Conexant, Broadcom, Silicon
Laboratories, Texas Instruments, Smartlink and ESS Technologies. The company has
also asserted its patents and is currently litigating against

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3Com, Agere, Lucent and U.S. Robotics, who are unlicensed and the company
believes are using PCTEL's intellectual property.

We were incorporated in California in 1994 and reincorporated in Delaware
in 1998. Our principal executive offices are located at 8725 W. Higgins Road,
Suite 400, Chicago, Illinois 60631. Our telephone number at that address is
(773) 243-3000. Our web site is www.pctel.com. The contents of our web site are
not incorporated by reference into this Annual Report on Form 10-K.

DEVELOPMENTS

The company entered 2001 as an analog modem company, with an intellectual
property portfolio that did not have significant revenue associated with it. The
personal computer market, which is a significant driver of analog modem volume,
was facing significant challenges in the form of reduced IT spending, intense
competition and severe pricing pressure. The combination of these factors and
others caused the company to shift its direction in 2002 from focusing on wire
line access for revenue growth to faster growing wireless markets and the
monetization of its intellectual property portfolio. The transition out of
analog modems was completed in 2003 and the company continues to look for
opportunities in wireless markets both through internal development and through
acquisitions.

There were five significant events in the transition to wireless and
licensing. The first was the acquisition of cyberPIXIE, Inc. in May 2002, which
was the genesis of the company's Segue(TM) product line. The second was the
exiting of the DSP based embedded modem product line in June 2002, and
conversion of that technology to a licensing program. The third was the
acquisition of Dynamic Telecommunications, Inc. (DTI) in March 2003. The fourth
event was the sale of a component of the company's HSP modem product line to
Conexant in May of 2003. The company sold the product line but retained its
modem patent portfolio for licensing purposes. The fifth event was the
acquisition of MAXRAD, Inc. in January 2004.

The company has emerged with three wireless product lines that address
different aspects of wireless excellence. We continue to offer our intellectual
property through licensing and product royalty arrangements. The licensing
program achieved significant traction in 2003 with the signing of Intel,
Conexant and Broadcom to license agreements. We continue to litigate with 3Com,
Agere, Lucent and USR over the use of our intellectual property.

SALES, MARKETING AND SUPPORT

The company sells its products directly to cellular carriers, wireless
Internet providers (WISP's), PC OEM's, and wireless equipment manufacturers and
indirectly through distributors. We employ a direct sales force with a thorough
level of technical expertise, product background and industry knowledge. Our
sales force also supports the sales efforts of our distributors.

Our market strategy is focused on further building market awareness and
acceptance of our new products. Our marketing organization also provides a wide
range of programs, materials and events to support the sales organization.

As of December 31, 2003, we employed 21 individuals in sales and marketing
with offices in the U.S., Japan, Taiwan, Hong Kong and Israel.

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Revenue to our major customers representing greater than 10% of total
revenues during the last three fiscal years are as follows:

The following table illustrates the percentage of revenues from domestic
sales as compared to foreign sales during the last three fiscal years:

BACKLOG

Sales of our products are generally made pursuant to standard purchase
orders, which are officially acknowledged by us according to our terms and
conditions. We believe that our backlog, while useful for scheduling production,
is not a meaningful indicator of future revenues as our order to ship cycle is
extremely short.

RESEARCH AND DEVELOPMENT

We recognize that a strong technical base is essential to our long-term
success and have made a substantial investment in research and development. We
will continue to devote substantial resources to product development and patent
submissions. We monitor changing customer needs and work closely with our
customers, partners and market research organizations to track changes in the
marketplace, including emerging industry standards.

Research and development expenses include costs for software and hardware
development, prototyping, certification and pre-production costs. Over the last
three fiscal years we spent approximately $7.8, $10.0 and $11.6 million for the
fiscal years 2003, 2002 and 2001, respectively.

As of December 31, 2003, we employed 50 employees in research and
development.

MANUFACTURING

For our MAXRAD and DTI product lines the Company does final assembly of the
products. The company has arrangements with several contract manufacturers and
is not dependent on any one. Should any of these manufacturers be
unsatisfactory, other manufacturers are available to supply us. We have no
guaranteed supply or long-term contract agreements with any other of our
suppliers.

COMPETITION

The competition for our wireless products varies based on product offering.
Competitors for our Segue(TM) Roaming Client range from operating system
suppliers such as Apple or Microsoft (which offers a level of WLAN client
support through its Windows XP offering) to WLAN NIC suppliers (that bundle

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minimal clients with their hardware offering) to service aggregators that
provide a client as part of their service offering such as GRIC, iPASS, and
Boingo. We are unique in that many of these competitors are potential customers
for our branded client offering. There are few 'client only' competitors in the
WLAN space, such as Smith Micro, and Alice Systems. Competitors for the Segue
Soft AP product are Wi-Fi chip set suppliers who offer a level of soft access
point support unique to their chipset solutions, such as Intel and Broadcom.
Competitors for the DTI product family are OEM's such as Agilent Technologies,
Rohde and Schwarz, and Berkley Varitronics. There are many competitors for the
MAXRAD product line, as that market is highly fragmented. Competitors include
such names as Antenna Specialists, Cushcraft, and Centurion.

EMPLOYEES

As of December 31, 2003, we employed 92 people full-time, including 21 in
sales and marketing, 50 in research and development, and 21 in general and
administrative functions. None of our employees are represented by a labor
union. We consider our employee relations to be good.

WEB SITE POSTINGS

We make our annual report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and amendments to such reports, available free of
charge through our web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the United States
Securities and Exchange Commission, at the following address: www.pctel.com. The
information in, or that can be accessed through our web site is not part of this
report.

ITEM 2: PROPERTIES

In January 2004, as part of our acquisition of MAXRAD, Inc. we own a
building with 31,150 square feet. This building houses office and assembly space
for the Maxrad product line. In October 2003, we entered into a fourth amendment
to an operating lease for our facility in Germantown, Maryland. This office
building is 9,135 square feet and the lease expires in August 2007. In August
2002, we entered into an operating lease for our new headquarter facilities in
Chicago, Illinois. This office building is 12,624 square feet and the lease
expires in August 2007. In addition, we have an engineering office in Milpitas,
California and sales support offices in Tokyo, Japan, and Paris, France, we also
have a sales and assembly facility in Tianjin, China. We believe that we have
adequate space for our current needs.

ITEM 3: LEGAL PROCEEDINGS

Ronald H. Fraser v. PC-Tel, Inc., Wells Fargo Shareowner Services, Wells Fargo
Bank Minnesota, N.A.

On March 19, 2002, plaintiff Ronald H. Fraser ("Fraser") filed a Complaint
in Santa Clara County (California) Superior Court for breach of contract and
declaratory relief against the Company, and for breach of contract, conversion,
negligence and declaratory relief against the Company's transfer agent, Wells
Fargo Bank Minnesota, N.A. The Complaint seeks compensatory damages allegedly
suffered by Fraser as a result of the sale of certain stock by Fraser during a
secondary offering in 2000. Wells Fargo and the Company have filed Answers to
the Complaint. Further, each has filed a Cross-complaint against the other for
indemnity. In November 2002, the parties conducted mediation but were unable to
reach a settlement. Discovery is continuing. Trial of this matter had been set
for January 12, 2004; that date was vacated after Fraser was granted leave to
file an amended complaint. We believe that we have meritorious defenses and
intend to vigorously defend the action. Because the action is still in its early
stages, we are not able to predict the outcome at this time.

Litigation with U.S. Robotics

On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against U.S. Robotics
Corporation claiming that U.S. Robotics has infringed one of our patents. U.S.
Robotics filed its answer and counterclaim asking for a declaratory judgment
that the claims of

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the patent are invalid and not infringed. No trial date has been set. We believe
we have meritorious claims and defenses. However, because the action is still in
its early stages, we are not able to predict the outcome at this time.

Litigation with Broadcom

On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against Broadcom
Corporation claiming that Broadcom has infringed four of our patents. Broadcom
filed its answer and counterclaim asking for a declaratory judgment that the
claims of the four patents are invalid and/or unenforceable, and not infringed
by Broadcom. In December 2003, the parties entered into a settlement agreement
which was favorable to the company, and on January 6, 2004, the Court granted
the parties' stipulated request that all claims and counterclaims in the
Broadcom action be dismissed with prejudice.

Litigation with Agere and Lucent

On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against Agere Systems and
Lucent Technologies claiming that Agere has infringed four of our patents and
that Lucent was infringing three of our patents. Agere and Lucent filed their
answers to our complaint. Agere filed a counterclaim asking for a declaratory
judgment that the claims of the four patents are invalid, unenforceable and not
infringed by Agere. We filed our reply to Agere's counterclaim in August 2003.
No trial date has been set. We believe we have meritorious claims and defenses.
However, because the action is still in its early stages, we are not able to
predict the outcome at this time.

Litigation with 3Com

In March 2003 each of 3Com and PCTEL filed a patent infringement lawsuit
against the other. The suits are pending in the U.S. District Court for the
Northern District of California. Our lawsuit alleges infringement of one of our
patents and asks for a declaratory judgment that certain 3Com patents are
invalid and not infringed by PCTEL. 3Com is alleging that our HSP modem products
infringed certain 3Com patents and asks for a declaratory judgment that our
patent is invalid and not infringed by 3Com. No trial date has been set. We
believe we have meritorious claims and defenses. However, because the action is
still in its early stages, we are not able to predict the outcome at this time.

Further, in May 2003, the Company filed a complaint against 3COM in the
Superior Court of the State of California for the County of Santa Clara under
California's Unfair Competition Act. In December 2003, the Company voluntarily
dismissed the action without prejudice. On December 15, 2003, 3COM filed an
action against the Company seeking a declaratory judgment that 3COM has not
violated the California Unfair Competition Act. On January 7, 2004, the parties
filed a stipulation dismissing 3COM's declaratory judgment action without
prejudice. No related claims with respect to the California Unfair Competition
Act are currently pending between the parties.

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

No stockholder votes took place during the fourth quarter of the year ended
December 31, 2003.

ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information with respect to our executive
officers as of March 1, 2004:

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Dr. Martin H. Singer has been our Chief Executive Officer and Chairman of
the Board since October 2001. Prior to that, Dr. Singer served as our
Non-Executive Chairman of the Board since February 2001 and a director for the
Company since August 1999. From October 2000 to May 2001, Dr. Singer served as
President and Chief Executive Officer of Ultra Fast Optical Systems, Inc. From
December 1997 to August 2000, Dr. Singer served as President and CEO of SAFCO
Technologies, Inc., a wireless communications company. He left SAFCO in August
2000 after its sale to Agilent Technologies. From September 1994 to December
1997, Dr. Singer served as Vice President and General Manager of the Wireless
Access Business Development Division for Motorola, Inc., a communications
equipment company. Prior to this period, Dr. Singer held senior management and
technical positions in Motorola Inc., Tellabs, Inc., AT&T and Bell Labs. Dr.
Singer holds a Bachelor of Arts in Psychology from the University of Michigan,
and a Master of Arts and a Ph.D. in Experimental Psychology from Vanderbilt
University.

Mr. John Schoen has been our Chief Operating Officer, Chief Financial
Officer and Secretary since November 2001. Prior to that, Mr. Schoen was
Business Development Manager at Agilent Technologies. From May 1999 to July
2001, Mr. Schoen served as Chief Operating Officer and Chief Financial Officer
of SAFCO Technologies, Inc. before its acquisition by Agilent Technologies Inc.
Prior to this period; Mr. Schoen held various financial positions for over 19
years in Motorola Inc., including Controller of its Wireless Access Business
Development Division. Mr. Schoen received a Bachelor of Science in Accounting
from DePaul University and is a Certified Public Accountant.

Mr. Jeffrey A. Miller has been our Vice President of Business Development
and Licensing since January 2003. Prior to that position, in September 2002 Mr.
Miller was appointed our Vice President of Product Management & New Technology.
From November 2001 when he joined PCTEL, until September of 2002, Mr. Miller was
Vice President of Engineering. Prior to joining PCTEL, Mr. Miller was Functional
Manager of Wireless Optimization Products, Wireless Network Test Division of
Agilent Technologies Inc. From January 1998 to July 2001, Mr. Miller served as
Vice President of Engineering of SAFCO Technologies, Inc. and led its Test and
Measurement Group before its acquisition by Agilent Technologies Inc. From
September 1992 to January 1998, Mr. Miller was a Principal Consultant with
Malcolm, Miller & Associates providing consulting services to wireless network
operators and infrastructure suppliers. From 1978 through September of 1992, Mr.
Miller held various technical and management positions at Motorola, Inc.'s
Cellular Infrastructure Group. Mr. Miller received a Bachelor of Science in
Computer Science from University of Illinois.

Mr. Biju Nair has been our Vice President and General Manager of Segue(TM)
Wireless Products since May 2003. Prior to that position, in September 2002 Mr.
Nair was appointed our Vice President of Product Development. From January 2002
when he joined PCTEL, until September 2002, Mr. Nair served as our Director &
General Manager, Wireless Products. Prior to joining PCTEL, Mr. Nair served,
from July 2000 to January 2002, as the Global Manager of Wireless Planning,
Design and Management solutions at Agilent Technologies. Prior to its
acquisition by Agilent Technologies, Mr. Nair served from April 1994 to July
2000 as Vice President and General Manager of Global Software Products at SAFCO
Technologies in Chicago. In that capacity, he designed OPAS, the industry's
leading wireless post processing software and led the company's launch of its
VoicePrint test and measurement product. Mr. Nair holds B.S and M.S degrees in
Electronics and Computer Engineering and an advanced degree in Computer Science
from Illinois Institute of Technology in Chicago. Mr. Nair is the author of
numerous publications for the wireless industry and has presented technical
papers at major wireless seminars and panels.

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PART II

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

PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the NASDAQ National Market under the
symbol PCTI since our initial public offering on October 19, 1999. The following
table shows the high and low sale prices of our common stock as reported by the
NASDAQ National Market for the periods indicated.

The closing sale price of our common stock as reported on the NASDAQ
National Market on March 1, 2004 was $11.92 per share. As of that date there
were 73 holders of record of our common stock.

DIVIDENDS

We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future.

EQUITY COMPENSATION PLANS

The information require by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this Annual
Report on Form 10-K.

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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our Consolidated Financial Statements and related
notes and other financial information appearing elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 2003, 2002 and
2001 and the balance sheet data as of December 31, 2003 and 2002 are derived
from audited financial statements included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31,2000 and 1999 and
the balance sheet data as of December 31, 2001, 2000 and 1999 are derived from
audited financial statements not included in this Form 10-K.

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

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among other things, statements
concerning our future operations, financial condition and prospects, and
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Investors in
our common stock are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are subject to
substantial risks and uncertainties that could cause our future business,
financial condition, or results of operations to differ materially from our
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors That May Affect Our
Business, Financial Condition, and Future Operating Results," beginning on page
21 and elsewhere in, or incorporated by reference into, this report.

INTRODUCTION

PCTEL, Inc. provides wireless connectivity products and test tools to
cellular carriers, wireless Internet providers (WISP's), PC OEM's, and wireless
equipment manufacturers. The company brings together expertise in RF platform
design, mobility software, and hardware to ensure wireless excellence. We
simplify mobility, provide wireless intelligence, and enhance wireless
performance. Additionally, the company licenses both patented and proprietary
access technology, principally related to analog modems, to modem solution
providers.

The company completed a two-year transition from an analog modem company to
a wireless company during 2003. There were five significant events in that
transition, presented here in chronological order. The first was the acquisition
of cyberPIXIE, Inc. in May 2002, which was the genesis of the company's Segue
product line of Wi-Fi and cellular mobility software. The second was the exiting
of the DSP based embedded modem product line in June 2002, and conversion of
that technology to a licensing program. The third was the acquisition of Dynamic
Telecommunications, Inc. (DTI) in March 2003. The DTI product line of software
defined radios measure and monitor cellular networks. The fourth event was the
sale of a component of the company's HSP modem product line to Conexant in May
of 2003. The company sold the product line but retained operating agreements and
its modem patent portfolio for licensing purposes. The fifth event was the
acquisition of MAXRAD, Inc. in January 2004. The MAXRAD product line consists of
wireless communications antennas for broadband wireless, in-building wireless
and land mobile radio applications. During our management discussion and
analysis, the Segue, DTI and MAXRAD products are collectively referred to as
wireless products, and the HSP modem and embedded modem products as modem
products.

PCTEL has an intellectual property portfolio consisting of over 130 U.S.
patents and applications, primarily in analog modem technology. It also has
proprietary DSP based embedded modem technology. The company has an active
licensing program designed to monetize its intellectual property. Companies
under license at the end of 2003 include Intel, Conexant, Broadcom, Silicon
Laboratories, Texas Instruments, Smartlink and ESS Technologies. The company has
also asserted its patents and is currently litigating against 3Com, Agere,
Lucent and U.S. Robotics, who are unlicensed and the company believes are using
PCTEL's intellectual property. The company collectively refers to revenue from
its licensing program as royalty and licensing revenue, with the exception of
Conexant. The sale of the HSP modem product line to Conexant and

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the signing of their licensing agreement occurred simultaneously. Royalty
payments received from Conexant are recorded as an offset to operating expenses
as Gain On Sale Of HSP Modem Products and Related Royalties.

The company is focused on growing wireless revenue and maximizing the
monetary value of its intellectual property. These will be the two key
priorities for the company in 2004. Growth in wireless product revenue is
dependent both on gaining further revenue traction in our existing products as
well as further acquisitions to support our wireless initiatives. All of the
company's product revenue has been wireless, starting in the third quarter 2003.
There has not been enough history to evaluate whether there is significant
seasonality in revenue between quarters for the product portfolio taken as a
whole. Licensing revenue is dependent on the signing new license agreements and
the success of our licensees in the marketplace. New licenses often contain up
front payments pertaining to past royalty liability, or one time payments if the
license is perpetual. That can make license revenue uneven between years as well
as quarters within years. An example is the Intel license that was signed in
December 2003. It is a perpetual license and yielded $13.5 million of one-time
revenue both for the fourth quarter of 2003 and the year.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in accordance with
generally accepted accounting principles require us to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the period
reported. By their nature, these estimates and judgments are subject to an
inherent degree of uncertainty. Management bases its estimates and judgments on
historical experience, market trends, and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies reflects the more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Management has discussed the critical accounting policies with the Audit
Committee.

REVENUE RECOGNITION

The company sells Wi-Fi and cellular mobility software, software designed
radio products, antenna products, and licenses its modem technology through its
licensing program. The company records the sale of these products, including
related maintenance, and the licensing of its intellectual property as revenue.

The company accounts for revenue from its Wi-Fi and cellular mobility
software, including related maintenance rights, under SOP 97-2 Software Revenue
Recognition. Where the software license is perpetual and vendor specific
objective evidence can be established between the software license and any
related maintenance rights, the software license revenue is recognized upon
delivery of the software and the maintenance is recorded pro-rata over the life
of the maintenance rights. Where the vendor specific objective evidence cannot
be established, and the only undelivered item is maintenance, the software
license revenue and related maintenance rights are combined and recognized
pro-rata over the expected term of the maintenance rights. Where the software is
sold on a fixed term license, the software license and maintenance revenue is
recorded pro-rata over the fixed term.

The company records revenue for sales of its software defined radio
products when title transfers, persuasive evidence of an arrangement exists,
price is fixed and determinable and collectibility is reasonably assured. The
company sells these products into both commercial and secure application
government markets. Title for sales into the commercial market generally
transfers upon shipment from the company's factory. Products that are sold into
the secure application government market are generally designed to a unique
specification. Title generally does not transfer until acceptance for the first
units and then upon shipment thereafter.

The company records revenue for sales of its antenna products when title
transfers, which is generally upon shipment from the company's factory.

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The company records intellectual property licensing revenue when it has a
licensing agreement, the amount of related royalties is known for the accounting
period reported and collectibility is reasonably certain. Knowledge of the
royalty amount specific to an accounting period is either in the form of a
royalty report specific to a quarter, a contractual fixed payment in the license
agreement specific to a quarter, or the pro-rata amortization of a fixed payment
related to multiple quarters over those quarters using the operating lease
method. Where a license agreement provides for a fixed payment related to
periods prior to the license effective date (the past) and volume-based
royalties going forward, the fixed payment is recognized at the license
effective date and the volume based royalties are recognized as royalty reports
are received. Where the license provides for a fixed payment for the past and
for a finite future period, to be followed by volume based royalties thereafter,
the fixed payment is recorded under the operating lease method and recognized
pro-rata from the effective date through the end of the period covered by the
fixed payment. When a one-time license payment is made for a perpetual license,
with no future obligations on behalf of the Company, revenue is recognized under
the capitalized lease method upon the effective date.

In instances where the Company provides non-recurring engineering services
to customers, the Company recognizes revenue as the services are completed,
using the percentage of completion basis of accounting in accordance with SAB
104-Revenue Recognition.

INVENTORY WRITE-DOWNS AND RECOVERIES

Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories as of December 31, 2003 and 2002 were
composed of raw materials, sub assemblies, finished goods and work-in-process.
We regularly monitor inventory quantities on hand and, based on our current
estimated requirements, it was determined that there was no excess inventory,
not reserved, as of December 31, 2003 and 2002. Due to competitive pressures and
technological innovation, we may have excess inventory in the future.
Write-downs of inventories would have a negative impact on gross margin.

ACCRUED ROYALTIES

We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include alternatives such as entering into cross-licensing agreements, cash
settlements, or both, based upon our judgment that such negotiated settlements
would allow management to focus more time and financial resources on the ongoing
business. Accordingly, the royalties accrual reflects estimated costs of
settling claims rather than continuing to defend our legal positions and is not
intended to be, nor should it be interpreted as, an admission of infringement of
intellectual property, valuation of damages suffered by any third parties or any
specific terms that management has predetermined to agree to in the event of a
settlement offer. We have accrued the amount of royalties payable for royalty
agreements already signed, agreements that are in negotiation and unasserted but
probable claims of others using advice from third party technology advisors and
historical settlement rates.

As of December 31, 2003 and 2002, we had accrued royalties of approximately
$3.2 million and $3.7 million, respectively. However, the amounts accrued may be
inadequate and we may be required to record additional expense if royalty
payments are settled at a higher rate than expected. In addition, settlement
arrangements may require royalties for past sales of the associated products.

STOCK-BASED COMPENSATION

The Company accounts for its stock option plans using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", whereby
compensation cost for stock options is measured as the excess, if any, of the
fair market value of a share of the Company's stock at the date of the grant
over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No.
25 -- and amended by SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", defines a fair value based method of
accounting for employee

11

stock options, but allows companies to continue to measure compensation cost for
employees using the intrinsic value method of APB No. 25. The company does not
expense stock options, but expenses restricted stock grants. We record the
issuance of restricted stock grants based on the fair value on the date of the
grant and amortize the value over the life of the restriction using the
straight-line method. As required by SFAS No. 123, we disclose the summary pro
forma effects to reported income as if we had elected to recognize compensation
expense based on the fair value of the stock based awards to our employees. The
calculation of the fair value of these awards is determined using the Black
Scholes option pricing model.

GOODWILL AND IMPAIRMENT OF LONG LIVED ASSETS

Effective January 1, 2002, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangibles," under which goodwill is no longer being
amortized. Through a third party valuation firm we assess the need to record
impairment losses on goodwill and long-lived assets used in operations when
indicators of impairment are present such as a significant industry downturn,
significant decline in the market value of the Company or significant reductions
in projected future cash flows. At least annually, we review the value and
period of amortization or depreciation of long-lived assets. During this review,
the significant assumptions used in determining the original cost of long-lived
assets are reevaluated. We then determine whether there has been a permanent
impairment of the value of long-lived assets by comparing future estimated
undiscounted cash flows to the asset's carrying value. If the carrying value of
the asset exceeds the estimated future undiscounted cash flows, a loss is
recorded as the excess of the asset's carrying value over fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.

INCOME TAXES

We provide for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are provided against tax assets which are not likely to be
realized.

We currently have subsidiaries in Japan and Israel as well as branch
offices in Hong Kong, Taiwan and France. Our branch office in France is
presently in the liquidation process. In 2002 we liquidated our subsidiaries in
the Cayman Islands. In 2003 we liquidated our branches in Korea and Yugoslavia.
The complexities brought on by operating in several different tax jurisdictions
inevitably lead to an increased exposure to worldwide taxes. Should review of
our tax filings result in unfavorable adjustments to our tax returns, our
operating results and financial position could be materially and adversely
affected.

As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes, which involves estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. Significant
management judgment is required to assess the likelihood that our deferred tax
assets will be recovered from future taxable income. We maintain a full
valuation allowance against our deferred tax assets. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.

12

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(ALL AMOUNTS IN TABLES, OTHER THAN PERCENTAGES, ARE IN THOUSANDS)

REVENUES

Wireless products revenue grew to $9.6 million for 2003, up from $0.1
million in 2002. The increase was due to the acquisition of DTI in March 2003 as
well as revenue in the Segue product line in 2003 that was introduced in 2003.
Modem product revenue declined to $17.8 million in 2003, compared to $43.3
million in 2002. The decline is due the sale of the HSP modem product line to
Conexant in May 2003. The increase in royalty and licensing revenue in 2003 was
primarily attributable to $13.5 million of revenue associated with the Intel
perpetual licenses signed in December 2003.

Product revenues increased $4.0 million in 2002 from 2001. The revenue
increase was primarily due to stronger modem sales, in particular, one of our
major customers significantly increased purchases in the second half of the
year. Royalty and licensing revenues increased $3.8 million in 2002 from 2001.
Licensing revenue in 2002 includes $2.8 million from the settlement of the ESS
litigation as well as $1.6 million from another large customer.

GROSS PROFIT

Cost of revenues consists primarily of cost of operations and components we
purchase from third party manufacturers. Provision for inventory losses and
recoveries are also included in the determination of gross profit.

Product gross profit decreased $7.3 million for 2003 compared to the prior
year primarily due to our disposition of our HSP analog modem products to
Conexant and inventory recovery of $7.2 million in 2002 compared to $1.8 million
in 2003. The remaining $1.9 million decline is attributed to the growth in
wireless products not being sufficient in the year to offset the sale of the HSP
modem product line. Gross profit from royalty and licensing revenue increased
$13.1 million for the year ended December 31, 2003 from 2002 primarily due to
the $13.5 million of gross profit associated with the Intel perpetual license.

Gross profit increased $22.2 million for 2002 compared to the same period
in 2001 primarily as a result of the provision for inventory losses of $10.9
million recorded in 2001, an inventory recovery of $7.2 million recognized in
2002 and the elimination of goodwill amortization of $1.7 million resulting from
write-off of goodwill arising from the acquisition of the Communications Systems
Division. Gross profit as a percentage of product revenue increased from 5.3%
for 2001 to 57.7% for 2002 for the same reasons.

13

RESEARCH AND DEVELOPMENT

Research and development expenses include costs for software and hardware
development, prototyping, certification and pre-production costs. We expense all
research and development costs as incurred.

Research and development expenses decreased $2.2 million for 2003 compared
to 2002. The primarily reason is that the reduction in modem costs associated
with our HSP modem product line that was sold to Conexant was greater than the
costs required to invest in our wireless products.

For 2002, total research and development costs incurred were $10.0 million,
compared to $11.6 million for 2001. Research and development expenses decreased
by $1.6 million for 2002 compared to 2001 primarily because of decreased
personnel expenses resulting from the reductions in force that occurred
throughout fiscal year 2001 and the savings from the closure of the Connecticut
engineering center in June 2002. This decrease in research in development
expenses was offset by our expansion of research and development efforts in
wireless products and utilities. In 2002, we closed down our Connecticut
engineering center which focused on DSP based embedded modem products and
shifted our research and development efforts to wireless products. As a
percentage of revenues, research and development costs decreased for 2002 for
the same reasons as above as well as due to our higher revenues in fiscal 2002.

Employees in Research and development increased from 47 to 50 from December
31, 2001 and 2002 to December 31, 2003.

SALES AND MARKETING

Sales and marketing expenses have declined by $3.3 million from 2001 to
2002, and by another $0.2 million from 2002 to 2003. The declines are
attributable to reductions in force related to modem products taken in 2001, the
second quarter of 2002 and the second quarter of 2003. Employees in Sales and
marketing at December 31, 2001, 2002, and 2003 were 34, 29, and 21 respectively.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include costs associated with our
general management and finance functions as well as professional service
charges, such as legal, tax and accounting fees. Other general expenses include
rent, insurance, utilities, travel and other operating expenses to the extent
not otherwise allocated to other functions.

General and administrative expenses increased $4.9 million, 2003 compared
to 2002. The increase was due to inclusion of expenses related to DTI product
lines, increased insurance expenses and legal costs associated with our
settlement with Intel and patent infringement litigation against 3Com, U.S.
Robotics, Broadcom, Agere Systems and Lucent Technologies. Legal expenses
increased from $0.9 million in 2002 to $3.1 million in 2003.

14

General and administrative expenses decreased $8.6 million for 2002
compared to 2001. The decrease was primarily due to decreased legal costs
associated with the patent infringement litigation against Smart Link, ESS
Technology and Dr. Brent Townshend, which were settled in May 2001, February
2002 and March 2002, respectively, offset by an increase in headcount from 31 in
2001 to 35 in 2002. Legal expenses decreased from $8.9 million in 2001 to $0.9
million in 2002.

Employees in General and administrative increased from 31 to 35 from
December 31, 2001 to December 31, 2002 and decreased to 21 at December 31, 2003.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

Upon completion of the DTI acquisition, we immediately expensed $1.1
million representing purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use. During 2002, we
expensed in process technology of $0.1 million in connection with our
acquisition of cyberPIXIE.

AMORTIZATION OF OTHER INTANGIBLE ASSETS

Amortization of intangible assets increased from $0.1 million for the year
ended December 31, 2002 to $1.1 million for the year ended December 31, 2003 due
to the DTI acquisition.

In March 2003, we acquired the assets of DTI for a total of $11.0 million
in cash. The results of operations of DTI were included in our financial
statements from the date of acquisition. Since the purchase price exceeds the
net tangible assets acquired, the difference is recorded as excess purchase
price and allocated to in-process research and development, goodwill and other
intangible assets. The purchase price was allocated to the assets acquired and
liabilities assumed at their estimated fair values on the date of acquisition as
determined by an independent valuation firm. We attributed $2.3 million to net
assets acquired, $1.1 million to acquired in-process research and development,
$0.2 million to the covenant not to compete and $4.4 million to other intangible
assets, net, in the accompanying consolidated balance sheets. The $3.0 million
excess of the purchase price over the fair value of the net tangible and
intangible assets was allocated to goodwill. We expensed in-process research and
development and amortize the covenant not to compete over two years and other
intangible assets over an estimated useful life of four years.

In May 2002, we acquired the assets of Chicago-based cyberPIXIE for a total
of $1.6 million in cash, including acquisition costs of $0.2 million. The
acquisition was accounted for under the purchase method of accounting and the
results of operations of cyberPIXIE were included in our financial statements
from May 22, 2002, the date of acquisition. The purchase price of $1.6 million
was allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition as determined by an independent valuation firm. We attributed $0.2
million to net assets acquired, $0.1 million to in-process research and
development and $0.4 million to developed technology. The $0.9 million excess of
the purchase price over the fair value of the net tangible and identifiable
intangible assets was allocated to goodwill. We expensed in-process research and
development and amortize the developed technology over its useful life of three
years.

In December 2000, we acquired BlueCom for a total of $2 million in cash and
stock. The acquisition was accounted for under the purchase method of
accounting. The difference of $1.1 million by which the purchase price exceeded
tangible and identifiable intangible assets was allocated to goodwill.

15

In February 2000, we acquired Voyager for a total of $18.6 million in cash
and stock. The acquisition was structured as a tax-free reorganization and was
accounted for under the purchase method of accounting. We attributed $1.6
million of the purchase price to in-process research and development, which we
expensed immediately, $0.5 million to intellectual property and $0.3 million to
workforce, both of which are being amortized. The difference by which the
purchase price exceeded the fair value of the tangible and identifiable
intangible assets acquired was $16.2 million and was allocated goodwill.
Goodwill was being amortized in 2001 and 2000, prior to our adoption of SFAS
142.

Effective January 1, 2002, we have adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangibles," under which goodwill is no longer being
amortized and will be tested for impairment at least annually. An independent
valuation firm conducted the annual impairment test, the result of which was
that there was no impairment of goodwill or other intangibles. As a result of
the acquisitions discussed above, amortization of intangible assets increased to
$1.1 million for the year ended December 31, 2003.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

In the second half of 2001, we evaluated the recoverability of the
long-lived assets, including intangibles acquired from CSD, Voyager and BlueCom,
and recorded impairment charges totaling $16.8 million. Due to the economic
downturn, we determined that CSD's estimated future undiscounted cash flows were
below the carrying value of CSD's long-lived assets. Accordingly, during the
third quarter of 2001, we adjusted the carrying value of CSD's long-lived
assets, primarily goodwill, to their estimated fair value of approximately $0.4
million, resulting in an impairment charge of approximately $4.5 million. The
estimated fair value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved. We determined the goodwill and
intangible assets acquired from Voyager, as a result of the corporate
restructuring and reorganization in 2001, that there were no future cash flows
expected from this business. Accordingly, during the third quarter of 2001, we
wrote off the carrying value of Voyager's long-lived assets, primarily goodwill,
resulting in an impairment charge of approximately $11.1 million. In regards to
the goodwill and intangible assets acquired from BlueCom, as a result of the
corporate restructuring and reorganization, we determined that there are no
future cash flows expected from this business. Accordingly, during the fourth
quarter of 2001, we wrote off the carrying value of BlueCom's long-lived assets,
resulting in an impairment charge of approximately $1.2 million. In the years
2003 and 2002 there were no impairments to goodwill and intangible assets.

RESTRUCTURING CHARGES

Restructuring expenses increased $2.6 for the year ended December 31, 2003
compared to 2002. The total restructurings aggregated $3.5 million consisting of
severance and employment related costs of $1.9 million and costs related to
closure of excess facilities as a result of the reduction in force of $1.6
million. These increases are primarily from the 2003 restructuring due to our
disposition of our HSP analog modem products to Conexant. 26 employees, both
foreign and domestic, were terminated subsequent to the sale of the soft modem
product line to Conexant in May 2003 along with the related facilities closures.
This restructuring aggregated $3.3 million consisting of severance and
employment related costs of $1.8 million and costs related to closure of excess
facilities as a result of the reduction in force of $1.5 million.

During 2002, we reduced worldwide headcount by 32 employees and announced
our intention to move our headquarters to Chicago, Illinois. The restructuring
resulted in $0.9 million of charges for the year ended

16

December 31, 2002, consisting of severance and employment related costs of $0.7
million and costs related to closure of excess facilities as a result of the
reduction in force of $0.2 million.

During 2001, we announced a series of actions to streamline support for our
voiceband business and sharpen our focus on emerging growth sectors. These
measures were part of two restructuring program and included a reduction in
worldwide headcount of 64 employees. The restructuring resulted in $3.8 million
of charges for 2001, consisting of severance and employment related costs of
$2.5 million and costs related to closure of excess facilities of $1.3 million.

GAIN ON SALE OF ASSETS AND RELATED ROYALTIES

In May 2003, the Company completed the sale of certain of its assets to
Conexant Systems, Inc., ("Conexant"). In exchange for the assets acquired from
the Company, Conexant delivered approximately $10.75 million in cash to the
Company, which represents $8.25 million plus the book value of the acquired
inventory and fixed assets being transferred to Conexant. Conexant has assumed
certain liabilities of the Company. The total proceeds of $10.75 million netted
a gain on sale of assets of $4.5 million.

Concurrently with the completion of the asset transaction with Conexant,
PCTEL and Conexant also completed an Intellectual Property Assignment Agreement
("IPA") and Cross-License Agreement. PCTEL provided Conexant with a
non-exclusive, worldwide license to certain of PCTEL's soft modem patents. In
consideration for the rights obtained by Conexant from PCTEL under this
agreement, and taking into account the value of patent rights obtained by PCTEL
from Conexant under this agreement, during the period beginning on July 1, 2003
and ending on June 30, 2007, Conexant agreed to pay to PCTEL, on a quarterly
basis, royalties in the amount of ten percent (10%) of the revenue received
during the royalty period, up to a maximum amount of $0.5 million per quarter
with respect to each calendar quarter during the royalty period, contingent upon
sales by Conexant during the period. Any such future payments by Conexant to
PCTEL in connection with the IPA will be recorded as part of the gain on sale of
assets and related royalties in the statement of operations.

The company received $1.0 million royalty payments during 2003. The $1.0
million of royalty payments, along with the gain on sale of assets of $4.5
million, increased the gain on sale of assets and related royalties to $5.5
million for 2003.

AMORTIZATION OF DEFERRED STOCK COMPENSATION

In connection with the grant of restricted stock to employees in 2003, 2002
and 2001, we recorded deferred stock compensation of $0.8, $3.7 and $1.8
million, respectively; representing the fair value of our common stock on the
date the restricted stock was granted. Such amounts are presented as a reduction
of stockholders' equity and are amortized ratably over the vesting period of the
applicable shares.

In connection with the grant of stock options to employees prior to our
initial public offering in 1999, we recorded deferred stock compensation of $5.4
million representing the difference between the exercise price and deemed fair
value of our common stock on the date these stock options were granted. Such
amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable options.

17

The amortization of deferred stock compensation increased $0.3 million for
2003 compared to 2002 primarily due to the grant of restricted stock to
employees in 2003. We expect the amortization of deferred stock compensation to
be approximately $0.1 million per quarter through 2007 and decreasing
thereafter, based on restricted stock grants and stock option grants through
December 31, 2003. The amount of deferred stock compensation expense to be
recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited. If we grant additional
restricted stock, the amortization of deferred compensation will increase.

The amortization of deferred stock compensation decreased $0.4 million for
the year ended December 31, 2002 compared to the year ended 2001 primarily due
to the termination of employees in 2002 and the corresponding reversal of the
remaining deferred stock compensation balance. This decrease was offset by the
additional expense related to the restricted stock grants in 2002.

In 2004 and in future years, amortization of deferred stock compensation
that will be recorded assuming no terminations and without allowance for future
grants would be as follows:

OTHER INCOME, NET

Other income, net, consists of interest income, net of interest expense.
Interest income is expected to fluctuate over time. Other income, net, decreased
$1.9 million for 2003 compared to the same period in 2002 primarily due to the
decrease in interest rates and change in short-term investment balances due to
net cash outflow for the asset acquisition of DTI offset by the proceeds
received from the disposition of a component of the HSP product line to
Conexant. The short-term investment balances have declined from $87.2 to $58.4
to $19.2 million for the years 2001, 2002 and 2003, respectively.

Other income, net, decreased $2.9 million for 2002 compared to 2001
primarily due to lower average cash balances and decrease in interest rates in
2002.

PROVISION FOR INCOME TAXES

The realization of deferred tax assets is dependent on future
profitability. During the third quarter of 2001, we recorded $5.3 million of
provision for income taxes to establish valuation allowances against deferred
tax assets in accordance with the provisions of FASB No. 109, "Accounting for
Income Taxes" as a result of uncertainties regarding realizability.

Our effective tax rate was below the statutory tax rate of 35% during 2003
primarily due to the recognition of benefits relating to tax credits for
research and development activities in the amounts of $1.2 million. Our
effective tax rate was below the statutory tax rate of 35% during 2002 primarily
due to the recognition of benefits relating to net operating losses previously
unrecognized as well as tax credit for research and development activities in
the amounts of $2.4 million. The negative tax rate for 2001 is primarily
attributable to the establishment of a valuation allowance against our net
deferred tax assets.

18

LIQUIDITY AND CAPITAL RESOURCES

The increase in net cash provided by operating activities for the year
ended December 31, 2003 compared to 2002 was primarily due to the $16.1 million
payments from the Broadcom settlement and the Intel cross-licensing agreement
and the decrease in prepaid royalties and accounts receivable of $6.1 and $3.0
million, respectively. Net cash provided by investing activities for 2003
consists primarily of proceeds from the sales and maturities of short-term
investments of $375.7 million, net of purchases of short-term investments of
$343.1 million, purchase of DTI of $10.8 million, proceeds on sale of assets and
related royalties of $11.7 million and purchases of property and equipment of
$1.0 million. Net cash provided by financing activities for 2003 consists of
proceeds from the issuance of common stock associated with stock option
exercises and from share purchases through the employee stock purchase plan of
$9.0 million, offset by shares repurchased by the Company of $6.2 million.

In August 2002, we initiated a stock repurchase program which was extended
by the Board of Directors in February 2003, and November 2003. PCTEL's
repurchase activities will be at management's discretion based on market
conditions and the price of PCTEL's common stock. During the year 2003, we
repurchased 762,800 shares of our outstanding common stock for approximately
$6.2 million. Since the inception of the stock repurchase program we have
repurchased 1,538,600 shares of our outstanding common stock for approximately
$11.5 million.

On January 2, 2004, PCTEL, Inc., completed our acquisition of MAXRAD, Inc.,
in exchange for the outstanding capital stock of MAXRAD. PCTEL paid $20 million
in cash. The purchase price is subject to adjustment based on the net assets
reported on MAXRAD's balance sheet as of January 2, 2004. It is not expected
that any such adjustment will be material.

As of December 31, 2003, we had $125.5 million in cash, cash equivalents
and short-term investments and working capital of $112.7 million. Accounts
receivable, as measured in days sales outstanding, was 29 and 30 days at
December 31, 2003 and 2002, respectively.

We believe that our existing sources of liquidity, consisting of cash,
short-term investments and cash from operations, will be sufficient to meet our
working capital needs for the foreseeable future. We will continue to evaluate
opportunities for development of new products and potential acquisitions of
technologies or businesses that could complement our business. We may use
available cash or other sources of funding for such purposes. However, possible
investments in or acquisitions of complementary businesses, products or
technologies, or cash settlements resulting from new litigation, may require us
to use our existing working capital or to seek additional financing.

19

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations (non-cancelable
operating leases) for office facilities and the 2003 restructuring as of
December 31, 2003 and the effect such obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):

As of December 31, 2003, we have non-cancelable operating leases for office
facilities of $2.0 million through July 2007, unpaid restructuring (severance
and employment related costs and costs related to closure of excess facilities)
of $1.6 million through December 2004 and no outstanding firm inventory purchase
contract commitments with our major suppliers.

As part of the acquisition of DTI there is an earn-out over two years if
certain milestones are achieved. At PCTEL's option, DTI could be paid in PCTEL
stock or cash. For the year ended December 31, 2003, DTI earned an approximately
$1.3 million cash payout to be paid on May 1, 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that were previously accounted for under EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 also includes costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 became effective for exit or
disposal activities initiated after December 31, 2002. We adopted SFAS No. 146
on January 1, 2003. The provisions of EITF No. 94-3 shall continue to apply for
an exit activity initiated under an exit plan that met the criteria of EITF No.
94-3 prior to the adoption of SFAS No. 146. The effect of adopting SFAS No. 146
changed the time of when restructuring charges are recorded from a commitment
date approach to when the liability is incurred.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The company believes
that there will be no impact of FIN 46 on our consolidated financial statements.

In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.

20

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149")." SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 is generally effective for
derivative instruments, including derivative instruments embedded in certain
contracts, entered into or modified after September 30, 2003 and for hedging
relationships designated after September 30, 2003. Adoption of this standard did
not have a material impact on the Company's financial position, results of
operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150")." SFAS 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003 and must
be applied to the Company's existing financial instruments effective July 1,
2003, the beginning of the first fiscal period after June 15, 2003. Adoption of
this standard did not have a material impact on the Company's financial
position, results of operations, or cash flows.

FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND FUTURE OPERATING
RESULTS

This annual report on Form 10-K, including this Management's Discussion and
Analysis, contains forward-looking statements. These forward-looking statements
are subject to substantial risks and uncertainties that could cause our future
business, financial condition or results of operations to differ materially from
our historical results or currently anticipated results, including those set
forth below.

RISKS RELATED TO OUR BUSINESS

COMPETITION WITHIN THE WIRELESS CONNECTIVITY PRODUCTS INDUSTRIES IS INTENSE AND
IS EXPECTED TO INCREASE SIGNIFICANTLY. OUR FAILURE TO COMPETE SUCCESSFULLY COULD
MATERIALLY HARM OUR PROSPECTS AND FINANCIAL RESULTS.

The wireless products connectivity markets are intensely competitive. We
may not be able to compete successfully against current or potential
competitors. We expect competition to increase in the future as current
competitors enhance their product offerings, new suppliers enter the wireless
connectivity products markets, new communication technologies are introduced and
additional networks are deployed. Our client software competes with software
developed internally by Network Interface Card (NIC) vendors, service providers
for 802.11 networks, and with software developed by large systems integrators.
Increased competition could materially and adversely affect our business and
operating results through pricing pressures, the loss of market share and other
factors.

Many of our present and potential competitors have substantially greater
financial, marketing, technical and other resources with which to pursue
engineering, manufacturing, marketing, and distribution of their products. These
competitors may succeed in establishing technology standards or strategic
alliances in the connectivity products markets, obtain more rapid market
acceptance for their products, or otherwise gain a competitive advantage. We can
offer no assurance that we will succeed in developing products or technologies
that are more effective than those developed by our competitors. We can offer no
assurance that we will be able to compete successfully against existing and new
competitors as the connectivity wireless markets evolve and the level of
competition increases.

21

OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED IF THE DEMAND FOR WIRELESS
DATA SERVICES IN GENERAL AND WI-FI PRODUCTS IN PARTICULAR DOES NOT CONTINUE TO
GROW.

Our ability to compete successfully in the wireless market is dependent on
the continued trend toward wireless telecommunications and data communications
services. If the rate of growth slows and service providers reduce their capital
investments in wireless infrastructure or fail to expand into new geographic
markets, our revenue may decline. Wireless data solutions are relatively
unproven in the marketplace and some of the wireless technologies have only been
commercially introduced in the last few years. We began offering wireless
products in the second quarter of fiscal 2002. If wireless data access
technology turns out to be unsuitable for widespread commercial deployment, we
may not be able to generate enough sales to achieve and grow our business. We
have listed below some of the factors that we believe are key to the success or
failure of wireless access technology:

- reliability and security of wireless access technology and the perception
by end-users of its reliability and security,

- capacity to handle growing demands for faster transmission of increasing
amounts of data, voice and video,

- the availability of sufficient frequencies for network service providers
to deploy products at commercially reasonable rates,

- cost-effectiveness and performance compared to wire line or other high
speed access solutions, whose prices and performance continue to improve,

- suitability for a sufficient number of geographic regions, and

- availability of sufficient site locations for wireless access.

The factors listed above influence our customers' purchase decisions when
selecting wireless versus other high-speed data access technology. Future
legislation, legal decisions and regulation relating to the wireless
telecommunications industry may slow or delay the deployment of wireless
networks.

Wireless access solutions, including Wi-Fi, compete with other high-speed
access solutions such as digital subscriber lines, cable modem technology, fiber
optic cable and other high-speed wire line and satellite technologies. If the
market for our wireless solutions fails to develop or develops more slowly than
we expect due to this competition, our sales opportunities will be harmed. Many
of these alternative technologies can take advantage of existing installed
infrastructure and are generally perceived to be reliable and secure. As a
result, they have already achieved significantly greater market acceptance and
penetration than wireless data access technologies. Moreover, current wireless
data access technologies have inherent technical limitations that may inhibit
their widespread adoption in many areas.

We expect wireless data access technologies to face increasing competitive
pressures from both current and future alternative technologies. In light of
these factors, many service providers may be reluctant to invest heavily in
wireless data access solutions, including Wi-Fi. If service providers do not
continue to establish Wi-Fi "hot spots," we may not be able to generate sales
for our Wi-Fi products and our revenue may decline.

OUR WIRELESS BUSINESS IS DEPENDENT UPON THE CONTINUED GROWTH OF EVOLVING
TELECOMMUNICATIONS AND INTERNET INDUSTRIES.

Our future success is dependent upon the continued growth of the data
communications and wireless industries, particularly with regard to Internet
usage. The global data communications and Internet industries are relatively new
and evolving rapidly and it is difficult to predict potential growth rates or
future trends in technology development for this industry. The deregulation,
privatization and economic globalization of the worldwide telecommunications
market that have resulted in increased competition and escalating demand for new
technologies and services may not continue in a manner favorable to us or our
business strategies. In addition, the growth in demand for wireless and Internet
services, and the resulting need for high speed or enhanced data communications
products and wireless systems, may not continue at its current rate or at all.

22

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS FOR THE WIRELESS MARKET, WHICH MEET THE NEEDS
CUSTOMERS.

Our revenue depends on our ability to anticipate our existing and
prospective customers' needs and develop products that address those needs. Our
future success will depend on our ability to introduce new products for the
wireless market, anticipate improvements and enhancements in wireless technology
and wireless standards, and to develop products that are competitive in the
rapidly changing wireless industry. Introduction of new products and product
enhancements will require coordination of our efforts with those of our
customers, suppliers, and manufacturers to rapidly achieve volume production. If
we fail to coordinate these efforts, develop product enhancements or introduce
new products that meet the needs of our customers as scheduled, our operating
results will be materially and adversely affected and our business and prospects
will be harmed. We cannot assure you that product introductions will meet the
anticipated release schedules or that our wireless products will be competitive
in the market. Furthermore, given the emerging nature of the wireless market,
there can be no assurance our products and technology will not be rendered
obsolete by alternative or competing technologies.

WE MAY EXPERIENCE INTEGRATION OR OTHER PROBLEMS WITH POTENTIAL ACQUISITIONS,
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS OR RESULTS OF OPERATIONS. NEW
ACQUISITIONS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS, AND THE
ANNOUNCEMENT OF NEW ACQUISITIONS COULD RESULT IN A DECLINE IN THE PRICE OF OUR
COMMON STOCK.

We may in the future make acquisitions of, or large investments in,
businesses that offer products, services, and technologies that we believe would
complement our products or services, including wireless products and technology.
We may also make acquisitions of, or investments in, businesses that we believe
could expand our distribution channels. Even if we were to announce an
acquisition, we may not be able to complete it. Additionally, any future
acquisition or substantial investment would present numerous risks, including:

- difficulty in integrating the technology, operations or work force of the
acquired business with our existing business,

- disruption of our on-going business,

- difficulty in realizing the potential financial or strategic benefits of
the transaction,

- difficulty in maintaining uniform standards, controls, procedures and
policies,

- possible impairment of relationships with employees and customers as a
result of integration of new businesses and management personnel, and

- impairment of assets related to resulting goodwill, and reductions in our
future operating results from amortization of intangible assets.

We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If consideration for a transaction is paid in common stock, this
would further dilute our existing stockholders.

WE MAY NEVER ACHIEVE THE ANTICIPATED BENEFITS FROM OUR RECENT ACQUISITIONS OF
DYNAMIC TELECOMMUNICATIONS, INC. AND MAXRAD, INC.

We acquired Dynamic Telecommunications, Inc. in March 2003 and MAXRAD, Inc.
in January of 2004 as part of our continuing efforts to expand our wireless line
and product offerings. We may experience difficulties in achieving the
anticipated benefits of acquisitions. Dynamic Telecommunication's product line
utilizes software-defined radio technology to optimize and plan wireless
networks and MAXRAD's business is the design and manufacture of antenna products
and accessories used in wireless systems. These acquisitions

23

represent a significant expansion of and new direction for our wireless
business. Potential risks with these acquisitions include:

- successfully developing and marketing security-related applications for
the software-defined radio technology of Dynamic Telecommunications;

- the loss or decrease in orders of one or more of the major customers of
MAXRAD or Dynamic Telecommunications.

- reduction or delay of capital expenditures by wireless operators for
network deployments (extensions of existing wireless networks and network
technologies as well as 3G and 4G technologies);

- decrease in demand for wireless devices that use MAXRAD or Dynamic
Telecommunications products;

- failure to develop effective distribution capability for products
purchased by the government;

- problems related to the operation of MAXRAD's assembly facilities in
China;

- difficulties in assimilation of acquired personnel, operations,
technologies or products; and

- migration of network test and measurement functions into wireless
infrastructure as a standard part of product offerings.

Furthermore, under the asset purchase agreement, PCTEL has an earn-out
obligation to pay additional consideration to Dynamic Telecommunications if the
DTI product line meets specified earnings targets. Any such earn-out payments
may be paid, at our option, in cash or a combination of cash and our common
stock. If the earn-out payments are paid in common stock, this would dilute our
existing stockholders.

OUR GROSS MARGINS MAY VARY BASED ON THE MIX OF SALES OF OUR PRODUCTS AND
LICENSES OF OUR INTELLECTUAL PROPERTY, AND THESE VARIATIONS MAY CAUSE OUR NET
INCOME TO DECLINE.

We derive a significant portion of our sales from our software-based
connectivity products. We expect gross margins on newly introduced products
generally to be higher than our existing products. However, due in part to the
competitive pricing pressures that affect our products and in part to increasing
component and manufacturing costs, we expect gross margins from both existing
and future products to decrease over time. In addition, licensing revenues from
our intellectual property historically have provided higher margins than our
product sales. Changes in the mix of products sold and the percentage of our
sales in any quarter attributable to products as compared to licensing revenues
could cause our quarterly results to vary and could result in a decrease in
gross margins and net income.

ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLES COULD RESULT IN CUSTOMERS
CANCELING PURCHASES OF OUR PRODUCTS.

Sales cycles for our products with major customers are lengthy, often
lasting nine months or longer. In addition, it can take an additional nine
months or more before a customer commences volume production of equipment that
incorporates our products. Sales cycles with our major customers are lengthy for
a number of reasons, including:

- our original equipment manufacturer customers and carriers usually
complete a lengthy technical evaluation of our products, over which we
have no control, before placing a purchase order,

- the commercial introduction of our products by an original equipment
manufacturer and carriers is typically limited during the initial release
to evaluate product performance,

- the development and commercial introduction of products incorporating new
technologies frequently are delayed.

A significant portion of our operating expenses is relatively fixed and is
based in large part on our forecasts of volume and timing of orders. The lengthy
sales cycles make forecasting the volume and timing of product

24

orders difficult. In addition, the delays inherent in lengthy sales cycles raise
additional risks of customer decisions to cancel or change product phases. If
customer cancellations or product changes were to occur, this could result in
the loss of anticipated sales without sufficient time for us to reduce our
operating expenses.

OUR REVENUES MAY FLUCTUATE EACH QUARTER DUE TO BOTH DOMESTIC AND INTERNATIONAL
SEASONAL TRENDS.

The connectivity products market is too new for us to be able to predict
seasonal revenue patterns. We do anticipate seasonal demand for the Segue(TM)
SoftAP product as volumes tend to ramp up to support year end customer sales.
Such patterns are also true for wireless test and measurements products, such as
DTI's, where capital spending is involved.

We are currently expanding our sales in international markets, particularly
in Europe and Asia. To the extent that our revenues in Europe and Asia or other
parts of the world increase in future periods, we expect our period-to-period
revenues to reflect seasonal buying patterns in these markets.

WE REQUIRE TECHNICAL COOPERATION WITH 802.11 CHIPSET MANUFACTURERS IN ORDER TO
REALIZE OUR SOFT ACCESS POINT PRODUCT. FAILURE TO SUCCESSFULLY SECURE THIS
COOPERATION WOULD IMPAIR OUR REVENUE FROM THIS PRODUCT.

We rely on our ability to forge relationships with 802.11 chipset
manufacturers, in order to ensure that our Segue(TM) SoftAP software is
compatible with their chipsets. This relationship requires that source code be
given to PCTEL or that 802.11 chipset manufacturers undertake development
activities to enable our SoftAP capability. There are many risks associated with
this:

- Chipset manufacturers general unwillingness to partner with PCTEL,

- Chipset manufacturers internally developing their own SoftAP
capabilities,

- Chipset manufacturers not seeing the value provided by SoftAP; and

- Chipset manufacturers viewing SoftAP as a threat to the hardware AP side
of the business.

WE GENERALLY RELY ON INDEPENDENT COMPANIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS. IF THESE COMPANIES DO NOT MEET THEIR COMMITMENTS TO US, OUR ABILITY TO
SELL PRODUCTS TO OUR CUSTOMERS WOULD BE IMPAIRED.

We have limited manufacturing capability. For some product lines we
outsource the manufacturing, assembly, and testing of printed circuit board
subsystems. For other product lines, we purchase completed hardware platforms
and add our proprietary software. While there is no unique capability with these
suppliers, any failure by these suppliers to meet delivery commitments would
cause us to delay shipments and potentially be unable to accept new orders for
product.

In addition, in the event that these suppliers discontinued the manufacture
of materials used in our products, we would be forced to incur the time and
expense of finding a new supplier or to modify our products in such a way that
such materials were not necessary. Either of these alternatives could result in
increased manufacturing costs and increased prices of our products.

We assemble our MAXRAD products in our MAXRAD facilities located in
Illinois and China. We may experience delays, disruptions, capacity constraints
or quality control problems at our assembly facilities, which could result in
lower yields or delays of product shipments to our customers. In addition, we
are having an increasing number of our MAXRAD products manufactured in China via
contract manufacturers. Any disruption of our own or contract manufacturers'
operations could cause us to delay product shipments, which would negatively
impact our sales, competitive reputation and position. In addition, if we do not
accurately forecast demand for our products, we will have excess or insufficient
parts to build our product, either of which could seriously affect our operating
results.

25

IN ORDER FOR US TO OPERATE AT A PROFITABLE LEVEL AND CONTINUE TO INTRODUCE AND
DEVELOP NEW PRODUCTS FOR EMERGING MARKETS, WE MUST ATTRACT AND RETAIN OUR
EXECUTIVE OFFICERS AND QUALIFIED TECHNICAL, SALES, SUPPORT AND OTHER
ADMINISTRATIVE PERSONNEL.

Our performance is substantially dependent on the performance of our
current executive officers and certain key engineering, sales, marketing,
financial, technical and customer support personnel. If we lose the services of
our executives or key employees, replacements could be difficult to recruit and,
as a result, we may not be able to grow our business.

Competition for personnel, especially qualified engineering personnel, is
intense. We are particularly dependent on our ability to identify, attract,
motivate and retain qualified engineers with the requisite education, background
and industry experience. As of December 31, 2003, we employed a total of 50
people in our engineering department. If we lose the services of one or more of
our key engineering personnel, our ability to continue to develop products and
technologies responsive to our markets may be impaired.

FAILURE TO MANAGE OUR TECHNOLOGICAL AND PRODUCT GROWTH COULD STRAIN OUR
MANAGEMENT, FINANCIAL AND ADMINISTRATIVE RESOURCES.

Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future product expansion efforts could be expensive and put a strain on
our management by significantly increasing the scope of their responsibilities
and by increasing the demands on their management abilities. To effectively
manage our growth in these new technologies, we must enhance our marketing,
sales, research and development areas.

WE MAY BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY ASSOCIATED WITH
OUR WIRELESS BUSINESS AND THIS COULD BE COSTLY TO DEFEND AND COULD PREVENT US
FROM USING OR SELLING THE CHALLENGED TECHNOLOGY.

In recent years, there has been significant litigation in the United States
involving intellectual property rights. We have from time to time in the
past-received correspondence from third parties alleging that we infringe the
third party's intellectual property rights. We expect potential claims to
increase in the future, including with respect to our wireless business.
Intellectual property claims against us, and any resulting lawsuit, may result
in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their merits or success, would
likely be time-consuming and expensive to resolve and could divert management's
time and attention. This could have a material and adverse effect on our
business, results of operation, financial condition and prospects. Any potential
intellectual property litigation against us related to our wireless business
could also force us to do one or more of the following:

- cease selling, incorporating or using technology, products or services
that incorporate the infringed intellectual property,

- obtain from the holder of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all, or

- redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated
development expenses.

If we are subject to a successful claim of infringement related to our
wireless intellectual property and we fail to develop non-infringing
intellectual property or license the infringed intellectual property on
acceptable terms and on a timely basis, operating results could decline and our
ability to grow a