PC TEL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2004

[ ] 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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $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, 2004, the last business day of Registrant's most recently
completed second fiscal quarter, there were 20,827,414 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, 2004) was approximately $182,040,346.
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, 2005, the number of shares of the Registrant's common stock
outstanding was 20,766,533.

Certain sections of Registrant's definitive Proxy Statement relating to its
Annual Stockholders' Meeting to be held on June 2, 2005 are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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PCTEL, INC.

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004

i

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 the 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
the 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 the future business,
financial condition, or results of operations to differ materially from the
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors That May Affect the
Business, Financial Condition, and Future Operating Results," beginning on page
24 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. ("PCTEL", the "company", or "we") provides wireless
connectivity products and technology to wireless carriers, aggregators of
Internet connectivity, wireless Internet service providers (WISP's), PC OEM's,
and wireless equipment manufacturers. The company brings together expertise in
RF platform design, mobility software, and hardware. The company's products
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.

Antenna Products Group

The Antenna Products Group (APG) 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 Antenna Products Group was formed around
the business of MAXRAD, Inc, which was acquired in January 2004. As a result of
the October 2004 acquisition of certain antenna product lines from Andrew
Corporation ("Andrew"), APG expanded the product line to include GPS (Global
Positioning Systems), satellite communications (Mobile SATCOM) and on-glass
mobile antennas.

APG products are sold to end user customers and dealers through
distributors and via direct sales channels to wireless equipment manufacturers.
The products are sold under the MAXRAD, Antenna Specialists(R) and Micro-Pulse
brands.

Revenue growth in this segment is tied to emerging wireless applications in
broadband wireless, in-building wireless, wireless Internet service providers,
GPS and Mobile SATCOM. The LMR and on-glass mobile antenna applications
represent mature markets.

There are many competitors for the APG product line, as the market is
highly fragmented. Competitors include such names as Cushcraft, Mobile Mark,
Radiall/Larsen, Comtelco, Wilson, and Antennex. APG seeks out product
applications that command a premium for product performance and customer
service, and seeks to avoid product applications characterized by
commoditization.

RF Solutions Group

The RF Solutions Group (RFSG) product line consists of software-defined
radio products designed to measure and monitor cellular networks. The RF
Solutions Group was formed around the business of DTI, Inc., which was acquired
in March 2003. The RFSG products represent a cost effective solution for
simplifying wireless intelligence. The technology is sold in three forms; as OEM
radio frequency receivers, as integrated systems solutions, and as components
and systems to U.S. government agencies. The SeeGull(TM) family of OEM receivers
collects and measure RF data, such as signal strength and base station
identification

1

in order to analyze wireless signals. The CLARIFY(TM) product line is a receiver
system solution that uses patent pending technology to identify and measure
wireless network interference. Customers of RFSG products 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.

Revenue in this segment is tied to the deployment of new wireless
technology, such as 2.5G and 3G, and the need for existing wireless networks to
be tuned and reconfigured on a regular basis. Revenue in this market follows the
seasonal capital spending patterns of the large wireless network operators.
Revenue for RFSG within each fiscal year is historically seasonal, with a trend
of the first quarter being the lowest and each succeeding quarter being higher.

Competitors for the RFSG product family are OEM's such as Agilent
Technologies, Rohde and Schwarz, Anritsu, Panasonic, and Berkley Varitronics.
The RFSG products compete on the basis of product performance at a price point
that is generally lower than the competition.

Mobility Solutions Group

The Mobility Solutions Group (MSG) produces Wi-Fi and cellular mobility
software products. This family of solutions simplifies access to both wired and
wireless data networks. In the wireless domain, the company's products support
Wi-Fi (802.11 a/b/g) and all major cellular data networking technologies. For
wired access, the company's products support traditional analog dial-up, DSL,
and Ethernet connectivity. Revenue in this segment is dominated by the company's
Roaming Client product. The 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. Customers for these products are not typically individual end-users,
but cellular carriers, Internet access service providers, manufacturers,
distributors, integrators, or other service aggregators.

Revenue for the Roaming Client is correlated to the success of data
services offered by the customer base. The company describes the roll out of
such data services to be in the early stage of market development. It is too
early to assess if the market will develop seasonal revenue patterns within the
calendar year.

Competitors for the 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 (Network Interface Card) suppliers (that
bundle 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. The company believes it is unique in that many of these competitors are
potential customers for the branded client offering. There are few 'client only'
competitors in the WLAN space, such as Smith Micro, and Alice Systems (acquired
by Birdstep in November 2004). The single biggest competitive condition for the
Roaming Client is product performance.

Licensing

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. Independent of the three
product lines, the company has an active licensing program designed to monetize
its intellectual property. Companies under license at the end of 2004 include
3COM, Intel, Conexant, Broadcom, Silicon Laboratories, Texas Instruments,
Smartlink and ESS Technologies. The company has also asserted its patents and is
currently litigating against Agere, Lucent and U.S. Robotics, who are unlicensed
and the company believes are infringing PCTEL's intellectual property.

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

2

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. These and other factors 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:

- Acquisition of cyberPIXIE, Inc. in May 2002, which was the genesis of the
company's Mobile Solutions Group.

- Exit of the DSP based embedded modem product line in June 2002, and
conversion of that technology to a licensing program.

- Acquisition of Dynamic Telecommunications, Inc. (DTI) in March 2003. DTI
is now known as the RF Solutions Group (RFSG).

- 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.

- Acquisition of MAXRAD, Inc. in January 2004. The Antenna Products Group
(APG) line was further augmented by the acquisition of three product
lines from Andrew Corporation in October of 2004.

During the management discussion and analysis, the APG, RFSG, and MSG
products are collectively referred to as wireless products, and the HSP modem
and embedded modem products as modem products.

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. PCTEL employs a direct sales force with a
thorough level of technical expertise, product background and industry
knowledge. The sales force also supports the sales efforts of the company's
distributors.

The company's marketing strategy is focused on building market awareness
and acceptance of the company's new products. The marketing organization also
provides a wide range of programs, materials and events to support the sales
organization. The company spent approximately $10.9, $7.5 and $7.7 million for
the fiscal years 2004, 2003 and 2002 for sales and marketing support.

As of December 31, 2004, the company employed 33 individuals in sales and
marketing with offices in the U.S., Japan, China, Hong Kong and Israel.

3

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

The 2002 revenue for Askey, Lite-on Technology, and Prewell relates to the
HSP modem product line that was sold in 2003, and the 2003 revenue for Intel
relates to a one-time modem licensing settlement. The 2004 revenue for TESSCO
relates to the Antenna Products Group. TESSCO is a distributor of wireless
products. See footnote 17 for top customers by segment.

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

The shift over the three-year timeframe from foreign to domestic revenue
reflects the transition from modems, which are heavily dominated by Asian sales,
to wireless products that are heavily dominated by domestic sales.

All long-lived assets are in the United States except for certain fixed
assets in Tianjin, China. See footnote 17 to the financial statements for
disclosure of long-lived assets.

BACKLOG

Sales of the company's products are generally made pursuant to standard
purchase orders, which are officially acknowledged according to standard terms
and conditions. The backlog, while useful for scheduling production or software
release dates, is not a meaningful indicator of future revenues as the order to
ship cycle is extremely short.

RESEARCH AND DEVELOPMENT

The company recognizes that a strong technical base is essential to the
long-term success and has made a substantial investment in research and
development. The company will continue to devote substantial resources to
product development and patent submissions. The patent submissions for the three
wireless product segments are characterized as for defensive purposes, rather
than for potential license revenue generation. The company monitors changing
customer needs and works closely with the 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. The company
spent approximately $8.5, $7.8 and $10.0 million for the fiscal years 2004, 2003
and 2002, respectively in research and development.

As of December 31, 2004, the company employed 66 employees in research and
development.

4

MANUFACTURING

The company does final assembly of the products for the APG and RFSG
products. The company also has arrangements with several contract manufacturers
but is not dependent on any one. Should any of these manufacturers be
unsatisfactory, other manufacturers are available. The company has no guaranteed
supply or long-term contract agreements with any other of its suppliers.

MSG products are software licenses and related engineering fees to
customize the product for customer networks. The software product delivery cycle
is comprised of delivering a product master of the software from which customers
make copies for their subscribers.

EMPLOYEES

As of December 31, 2004, the company had 224 full-time equivalent
employees, including 72 in operations, 33 in sales and marketing, 66 in research
and development, and 53 in general and administrative functions. None of the
employees are represented by a labor union. The company considers the employee
relations to be good.

WEB SITE POSTINGS

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

ITEM 2: PROPERTIES

In November 2004, the company purchased a building with approximately
75,000 square feet located in Bloomingdale, Illinois for APG. While the January
2004 acquisition of MAXRAD, included a building with 31,150 square feet located
in Hanover Park, Illinois, the company is currently moving into this larger
building to accommodate MAXRAD and the products lines acquired from Andrew. The
Hanover Park building has been put up for sale but is still currently used in
operations. APG also has a small sales and assembly facility lease in Tianjin,
China.

In October 2003, the company signed a fourth amendment to an operating
lease for the facility in Germantown, Maryland. This building houses office and
assembly space for the RFSG. The lease is for 9,135 square feet and it expires
in August 2007.

In August 2002, the company signed an operating lease for office space in
Chicago, Illinois. This office space houses the corporate functions as well as
MSG's operations. The lease is for 12,624 square feet and it expires in August
2007. The company also has a sales support office in Tokyo, Japan.

The company believes that it has adequate space for its 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 Verified
Complaint (the "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 ("Wells Fargo"). The
Complaint seeks compensatory damages allegedly suffered by Fraser as a result of
the sale of certain stock by Fraser during a secondary offering on April 14,
2000. Wells Fargo filed a Verified Answer to the Complaint on June 12, 2002. On
July 10, 2002, the company filed a Verified Answer to the Complaint, denying
Fraser's claims and asserting numerous affirmative defenses. Wells Fargo and the
company each filed Cross-complaints against the other for indemnity. On November
18, 2002, the parties conducted mediation but were unable to reach a settlement.

5

Wells Fargo filed a motion for summary judgment, or alternatively for
summary adjudication, which was heard on July 29, 2003. On July 30, the Court
granted Wells Fargo's motion for summary adjudication on Fraser's Third and
Fourth Causes of action for Breach of Fiduciary Duty and Declaratory Relief, but
denied Wells Fargo's motion for summary judgment and summary adjudication of
Fraser's First and Second Causes of Action for Breach of Contract and
Conversion. The company filed a Motion for Summary Judgment or, Alternatively,
Summary Adjudication, against Fraser. The Motion was scheduled for December 9,
2003. Fraser filed a motion for leave to amend his complaint, which was also
heard on December 9, 2003. The Court granted Fraser's motion and denied the
company's motion as moot. Trial of this matter had been set for January 12,
2004, but the trial date was vacated in light of the amended complaint. The
company re-filed its Motion for Summary Judgment or, Alternatively, Summary
Adjudication, against Fraser. Trial was scheduled for September 20, 2004.

On August 16, 2004, the Court signed an Order denying PCTEL's motion for
summary judgment but granting in part and denying in part PCTEL's alternative
motion for summary adjudication of Fraser's first cause of action for breach of
contract, and granting PCTEL's motion for summary adjudication of Fraser's fifth
cause of action for declaratory relief. Shortly thereafter, Wells Fargo and the
company dismissed the Cross-complaints against one another. At the Mandatory
Settlement Conference on September 15, 2004, Fraser stipulated to judgment in
favor of the company.

On November 15, 2004 Fraser filed a notice of appeal. The company believes
that this appeal is without merit and intends to defend the appeal vigorously.

Litigation with U.S. Robotics

On May 23, 2003, the company 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 the
company's patents. U.S. Robotics counterclaimed asking for a declaratory
judgment that the claims of the patent are invalid and not infringed. This case
was consolidated for claims construction discovery with the lawsuit against
Agere Systems and Lucent Technologies, and the now-concluded litigation with
3Com Corporation and Broadcom Corporation. Claims construction discovery under
the Patent Local Rules has been taken and the claims construction issues have
been briefed to the Court. A hearing on the construction of the claims of the
patent, originally scheduled for January 12, 2005, was continued by the Court
and is now scheduled for April 6, 2005. No trial date has been set. Although the
company believes that it has meritorious claims and defenses, the company cannot
now predict or determine the outcome or resolution of this proceeding.

Litigation with Agere and Lucent

On May 23, 2003, the company 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 the
company's patents and that Lucent has infringed three of the company's patents.
Agere counterclaimed asking for a declaratory judgment that the claims of the
four patents are invalid, unenforceable and not infringed by Agere. This case
was consolidated for claims construction discovery with the lawsuit against U.S.
Robotics Corporation and the now-concluded litigation with 3Com Corporation and
Broadcom Corporation.

Because of a then-pending reexamination proceeding for PCTEL's U.S. Patent
No. 5,787,305 (the '305 patent), on December 4, 2003, the claims against Agere
and Lucent relating to the "305 patent were stayed by stipulation of the
parties. Claims construction discovery under the Patent Local Rules has been
taken with respect to the three patents as to which the litigation was not
stayed, and the claims construction issues relating to those patents have been
briefed to the Court. A hearing on the construction of the claims of those
patents, originally scheduled for January 12, 2005, was continued by the Court
and is now scheduled for April 6, 2005.

On July 28, 2004, the company received from the U.S. Patent Office a Notice
of Intent to Issue Ex Parte Reexamination Certificate for the '305 patent, and
on January 11, 2005, the U.S. Patent Office issued the

6

Reexamination Certificate. The stay regarding the "305 patent has now been
lifted by stipulation of the parties.

No trial date has been set. Although the company believes that it has
meritorious claims and defenses, the company cannot now predict or determine the
outcome or resolution of this proceeding.

Litigation with 3Com

In March 2003, 3Com Corporation filed a lawsuit against the company
asserting claims that the company infringed certain 3Com patents and asking for
a declaration that one of the company's patents was invalid, unenforceable and
not infringed by 3Com. Also in March 2003, the company filed a lawsuit against
3Com asserting claims that 3Com infringed one of the company's patents and
asking for a declaration that certain of 3Com's patents were invalid,
unenforceable and not infringed by the company. These cases were consolidated
for claims construction discovery with the lawsuits against U.S. Robotics
Corporation, Agere and Lucent, and the now-concluded litigation with Broadcom
Corporation. In November 2004, the parties entered into a settlement agreement
which was favorable to the company, and on December 1, 2004, the Court granted
the parties' stipulated request that all claims and counterclaims in the 3Com
actions be dismissed with prejudice.

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, 2004.

ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information with respect to the company's
executive officers as of March 1, 2005:

Dr. Martin H. Singer has been PCTEL's Chief Executive Officer and Chairman
of the Board since October 2001. Prior to that, Dr. Singer served as the
Non-Executive Chairman of the Board since February 2001 and as one of the
company's directors 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 the Chief Financial Officer and Secretary since
November 2001. Prior to that, Mr. Schoen was a Business Development Manager at
Agilent Technologies, Inc. from July 2000 to November 2001. From May 1999 to
July 2000, 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 the Vice President of Global Sales since
July 2004. Mr. Miller was Vice President of Business Development and Licensing
from January 2003 before taking on his Global Sales role.

7

Prior to that position, in September 2002 Mr. Miller was appointed 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 July 2000 to November 2001. 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 the Vice President and General Manager of the
Mobility Solutions Group since May 2003. Prior to that position, in September
2002 Mr. Nair was appointed the Vice President of Product Development. From
January 2002 when he joined PCTEL, until September 2002, Mr. Nair served as the
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.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

PRICE RANGE OF COMMON STOCK

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

The closing sale price of the company's common stock as reported on the
NASDAQ National Market on March 1, 2005 was $7.45 per share. As of that date
there were 82 holders of record of the common stock.

8

DIVIDENDS

The company has never declared or paid cash dividends on the capital stock.
The company currently intends to retain all of the earnings, if any, for use in
the business and does not anticipate paying any cash dividends in the
foreseeable future.

EQUITY COMPENSATION PLANS

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

ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides the activity of the company's repurchase
program during the three months ended December 31, 2004:

In August 2002, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the common stock, which was completed in February 2003. In
February and November 2003, the company extended the stock repurchase program to
repurchase up to 1,000,000 and 500,000 additional shares, respectively, on the
open market from time to time. The extensions of the stock repurchase program
were announced in the quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2003 and in the Annual Report on Form 10-K for the period ended
December 31, 2003, respectively.

9

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," the 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, 2004, 2003, and
2002 and the balance sheet data as of December 31, 2004 and 2003 are derived
from audited financial statements included elsewhere in this Form 10-K. The
statement of operations data for the years ended December 31, 2001 and 2000 and
the balance sheet data as of December 31, 2002, 2001, and 2000 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 the 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
the 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 the future business,
financial condition, or results of operations to differ materially from the
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors That May Affect the
Business, Financial Condition, and Future Operating Results," beginning on page
24 and elsewhere in, or incorporated by reference into, this report.

INTRODUCTION

PCTEL is focused on growing wireless revenue and maximizing the monetary
value of its intellectual property. These are the two key priorities for the
company in 2005. The company reports revenue and gross profit for APG, RFSG,
MSG, Licensing and Modems as separate product segments.

Growth in wireless product revenue is dependent both on gaining further
revenue traction in the existing product profile as well as further acquisitions
to support the wireless initiatives. Revenue growth in the APG segment is tied
to emerging wireless applications in broadband wireless, in-building wireless,
wireless Internet service providers, GPS and Mobile SATCOM. The LMR and on-glass
mobile antenna applications represent mature markets. A critical factor for 2005
revenue growth is the successful absorption of the product lines purchased from
Andrew in October 2004 into APG. Revenue in the RFSG segment is tied to the
deployment of new wireless technology, such as 2.5G and 3G, and the need for
existing wireless networks to be tuned and reconfigured on a regular basis.
Revenue growth in the MSG segment is correlated to the success of data services
offered by the customer base. The company describes the roll out of such data
services to be in the early stage of market development.

Licensing revenue is dependent on the signing of new license agreements and
the success of the 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. This can make licensing revenue uneven. The company has
found it necessary to enter into litigation from time to time as a means to
bring companies under license. The company is currently in litigation with
Agere, Lucent and U.S. Robotics over the use of PCTEL's intellectual property.
This litigation is the single largest opportunity to maximize the monetary value
of the company's intellectual property.

CRITICAL ACCOUNTING POLICIES

The preparation of the company's consolidated financial statements in
accordance with generally accepted accounting principles requires 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

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

In accordance with SAB No. 104, the company recognizes revenue when the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, price is fixed and
determinable, and collectibility is reasonably assured. The company recognizes
revenue for sales of the antenna products and software defined radio products,
when title transfers, which is generally upon shipment from the factory. PCTEL
sells these products into both commercial and secure application government
markets. Title for sales into the commercial markets generally transfer upon
shipment from the factory. Products that are sold into the secure application
government market are generally designed to a unique specification. Title for
sales into the government markets generally does not transfer until acceptance
of the first units and then upon shipment thereafter. Revenue is recognized for
antenna products sold to major distributors upon shipment from the factory. The
company allows its major distributors to return product under specified terms
and conditions. The company accrues for product returns in accordance with FAS
48, "Revenue Recognition When Right of Return Exists".

The company recognizes revenue from the Wi-Fi and cellular mobility
software, including related maintenance rights, under SOP 97-2 Software Revenue
Recognition. If the software license is perpetual and vendor specific objective
evidence can be established for 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. If part of the licensing agreement requires engineering services to
customize software for the customer needs, the revenue for these services is
recognized when the initial software license is delivered. If vendor specific
objective evidence cannot be established, and the only undelivered item is
maintenance, the software license revenue, the revenue associated with
engineering services, if applicable, and the related maintenance rights are
combined and recognized pro-rata over the expected term of the maintenance
rights. If vendor specific evidence cannot be established on any of the
non-maintenance elements, the revenue is recorded pro-rata over the life of the
contractual obligation.

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 assured. 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. If 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. If 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. If a
one-time license payment is made for a perpetual license, with no future
obligations on behalf of us, revenue is recognized under the capitalized lease
method upon the effective date.

There is one exception to the above-described recognition of intellectual
property licensing as revenue. The company signed a licensing agreement with
Conexant simultaneously with the sale of its HSP modem product line to Conexant
in 2003. Because the HSP modem product line also requires a license to the

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company's patent portfolio, the gain on sale of the product line and the
licensing stream are not separable for accounting purposes. Ongoing royalties
from Conexant are presented in the income statement as Gain on Sale of Assets
and Related Royalties.

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, 2004 and 2003 were
composed of raw materials, subassemblies, work-in-process, and finished goods.
The company regularly monitors inventory quantities on hand and, based on the
current estimated requirements, it was determined that any excess inventory was
reserved as of December 31, 2004 and 2003. Due to competitive pressures and
technological innovation, the company may have excess inventory in the future.
Write-downs of inventories would have a negative impact on gross profit.

ACCRUED ROYALTIES

The company records an accrual for estimated future royalty payments for
relevant technology of others used in the 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 the 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 the 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. The company has accrued the amount of royalties payable for
royalty agreements, agreements that are in negotiation and unasserted but
probable claims of others using advice from third party advisors and historical
settlement rates. As of December 31, 2004 and 2003, the company had accrued
royalties of $11,000 and $3.2 million, respectively. The majority of the
royalties are associated with the modem product line sold to Conexant. On a
forward-looking basis, the value of royalties is not expected to be significant.

STOCK-BASED COMPENSATION

The company accounts for the 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 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 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 does expense restricted stock grants. The company
records the issuance of restricted stock grants based on the fair value on the
date of the grant and amortizes the value over the life of the restriction using
the straight-line method. As required by SFAS No. 123, the summary pro forma
effects to reported income as if the company had elected to recognize
compensation expense based on the fair value of the stock based awards to the
company's employees is disclosed. The calculation of the fair value of these
awards is determined using the Black- Scholes option-pricing model. The highly
subjective assumptions underlying this model include expected stock price
volatility and expected option life.

GOODWILL AND IMPAIRMENT OF LONG LIVED ASSETS

Effective January 1, 2002, the company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangibles," under which goodwill is no longer
amortized. Through a third-party valuation firm the company assessed 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, typically in

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the fourth quarter, the company reviews the value of goodwill and long-lived
assets and, additionally reviews the 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. The company
determines 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.

A third-party valuation firm conducted the annual impairment test of
goodwill and long-lived assets as of October 31, 2004. The estimate of future
undiscounted cash flows for this test was based on historical sales trends,
financial projections, market analysis, capital expenditure needs, working
capital needs, analyst reports, and other data pertinent to the valuation as
provided by the company and obtained from public, financial, and industry
sources. The company's assumptions required significant judgment and actual cash
flows may differ from those forecasted today. The company believes the
assumptions used for discounting future cash flows were appropriately
conservative. Based on the results of the test, there was no impairment of
goodwill or other intangible assets.

INCOME TAXES

The company provides 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.

The company has international subsidiaries located in Japan, China and
Israel as well as international branch offices located in Hong Kong and Taiwan.
The branch office in Taiwan is presently in the liquidation process. The
complexities brought on by operating in several different tax jurisdictions
inevitably lead to an increased exposure to worldwide taxes. Should review of
the tax filings result in unfavorable adjustments to the company's tax returns,
the operating results, cash flows, and financial position could be materially
and adversely affected. The company believes there will not be any significant
adjustments related to foreign taxes.

As part of the process of preparing the consolidated financial statements,
the company is required to estimate the income taxes, which involves estimating
the 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 the deferred tax
assets will be recovered from future taxable income. The company maintains a
full valuation allowance against the deferred tax assets. In the event it was
determined that the company could realize the 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.

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RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(ALL AMOUNTS IN TABLES, OTHER THAN PERCENTAGES, ARE IN THOUSANDS)

REVENUES

APG began operations with the purchase of MAXRAD in January 2004. Revenues
were supplemented in the fourth quarter with the acquisition of several product
lines from Andrew Corporation in October 2004. The fourth quarter included two
months of revenue from the Andrew product lines. The chronological revenue trend
by quarter within the year was $5.1, $5.8, $5.7 and $9.8 million. APG represents
the company's largest revenue segment and is expected to continue as such in
2005. Emerging technology applications such as broadband wireless, in building
wireless, GPS and Mobile SATCOM are the drivers of growth in this segment. The
land mobile radio (LMR) and on-glass mobile antenna products represent mature
markets. The company expects the revenue of this segment to grow in 2005 based
on its investment and market presence in emerging technology applications, as
well as the full year impact of owning the Andrew product lines.

RFSG revenue was $10.8 million in 2004, up 34% from 2003. The 2004 growth
was driven by the full year impact of owning RFSG, which was purchased in March
2003, and the full year impact of the CLARIFY (TM) product line, which was
introduced in the fourth quarter of 2003. The company expects the revenue in
this segment to grow in 2005 from the roll out of 2.5G and 3G technologies by
wireless network operators, increased market acceptance of its CLARIFY(TM)
product line, and penetration of secure government applications for its receiver
technology.

MSG revenue was $5.1 million in 2004, up 228% from 2003. The 2004 growth
was driven by the accumulation of contract wins for the company's Roaming Client
product. The roll out of data services in the customer base in 2004 and 2005 is
characterized as early stage market development. The company expects revenue
growth in 2005 commensurate with the success of its customer base.

Licensing revenue was $5.9 million in 2004, down 68% from 2003 and up 16%
from 2002. Licensing revenue is historically uneven, as licensing agreements
often contain one-time settlements for past infringement or perpetual licenses.
Intel purchased a perpetual license for the company's patented technology in the
fourth quarter of 2003 for $13.5 million. This segment continues to be affected
by older licensing agreements related to modem technology. Absent resolution to
the litigations with Agere, Lucent, and U.S. Robotics, licensing revenue is
expected to continue to shrink in 2005.

Modem product revenue ceased in 2003 with the sale of the HSP product line
to Conexant. Management believes that modems should only be viewed in their
historical context of the transition to wireless.

Intercompany sales from APG to RFSG are eliminated in consolidation. It is
expected that intercompany sales will continue to be insignificant in 2005.

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GROSS PROFIT

Gross profit as a percentage of total revenue was 65.6% in 2004, 74.4% in
2003, and 57.7% in 2002. The gross profit associated with modems over these
periods included favorable cost reserve recoveries of $3.2 million in 2004, $1.8
million in 2003, and $7.2 million in 2002. Additionally, 2003 gross profit
included a $13.5 million benefit from a one-time licensing settlement with
Intel.

The company's product segments vary significantly from each other in gross
profit percent. The revenue mix without the modem cost recovery yielded a total
company gross profit percentage of 59.0% in 2004. It is expected that total
gross profit as a percentage of revenue will settle in a range of 48.0% to 52.0%
in 2005, based on segment revenue mix. The expected change in mix in 2005 is
driven by having the antenna product lines purchased from Andrew for a full year
and an expected decline in licensing revenue, absent a litigation settlement
with Agere, Lucent, or U.S. Robotics.

Gross profit as a percentage of revenue for APG was 40.2 % in 2004. The
chronological trend by quarter within the year was 41.8%, 41.9%, 41.7%, and 37.6
%. The lower fourth quarter gross profit from the previous quarters is
attributed to duplicative manufacturing costs related to the transfer of
manufacturing activities from Andrew to the PCTEL factory as well as lower
long-term margins on the Andrew products versus the PCTEL historical mix. The
transition of manufacturing activities into the PCTEL factory will continue
through the first quarter 2005 with an expected gross profit level in the 36% to
37% range in that period. Once the transition is complete, long-term gross
profit is expected to be in the 39% to 40% range.

Gross profit as a percentage of revenue for RFSG was 66.7 % in 2004 and
75.0 % in 2003. The decrease in percentage is attributed to higher cost of goods
sold in CLARIFY (TM) system sales, versus receiver sales, which have much higher
software content as a percentage of revenue. The company expects long-term gross
profit in this segment to be between 65% and 70%.

Gross profit as a percentage of revenue for MSG was 96.2% in 2004, 94.3% in
2003 and 100% in 2002. The cost of goods sold in the segment relates primarily
to third party licenses included in the Roaming Client product. The company
expects long-term gross profit in this segment to be between 95% and 100%.

Gross profit as a percentage of revenue for Licensing was 95.9% in 2004,
100% in 2003, and 100% in 2002. The decrease in 2004 was attributable to
expensing the net book value of several patents transferred to a third party as
part of a license agreement. The company expects long-term gross profit in this
segment to be between 95% and 100%.

While there was no modem segment revenue in 2004, the fourth quarter 2004
gross profit included a $3.2 million reversal of a modem royalty expense reserve
made possible by the settlement of the company's patent litigation with 3Com.
The company does not expect any further adjustments going forward related to the
modem segment. Gross profit for modems as a percentage of revenue was 45.5% in
2003 and 52.6% in

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2002. The gross profit included favorable inventory reserve recoveries of $1.8
million in 2003 and $7.2 million in 2002. Without those reserve recoveries,
normalized gross profit would have been 35.2% in 2003 and 36.1% in 2002.

RESEARCH AND DEVELOPMENT

Research and development expenses include costs for software and hardware
development, prototyping, certification and pre-production costs. All costs
incurred prior to establishing the technological feasibility of computer
software products to be sold are research and development costs and expensed as
incurred in according with FAS 86. No significant costs have been incurred
subsequent to determining the technological feasibility.

Research and development expenses increased $0.7 million from 2003 to 2004.
The increase is attributed to investment in the development of wireless
products, net of the decrease for HSP modem products, which were sold to
Conexant in 2003. The primary increase in 2004 was $1.3 million related to
MAXRAD and the antenna products purchased from Andrew.

For 2003, total research and development costs incurred were $7.8 million,
compared to $10.0 million for 2002. Research and development expenses decreased
by $2.2 million for 2003 compared to 2002 primarily because of reduction in
research and development associated with the HSP modem product line that was
sold to Conexant was greater than the costs required to invest in the wireless
products.

Employees in Research and development at December 31, 2002, 2003 and 2004
were 47, 50 and 66.

SALES AND MARKETING

Sales and marketing expenses include costs associated with the sales and
marketing employees, sales representatives, product line management, and trade
show expenses.

Sales and marketing expenses increased $3.4 million from 2003 compared to
2004. The increase is attributed to investment in wireless products, net of the
decrease for HSP modem products, which were sold to Conexant in 2003. The
primary increase in 2004 was $3.8 million related to MAXRAD and the antenna
products purchased from Andrew in 2004.

Sales and marketing expenses have declined $0.2 million from 2002 to 2003.
The declines are attributable to reductions in force related to modem products
taken in the second quarter of 2003. Employees in Sales and marketing at
December 31, 2002, 2003, and 2004 were 29, 21 and 33.

GENERAL AND ADMINISTRATIVE

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General and administrative expenses include costs associated with the
general management, finance, human resources, information technology, legal,
insurance, public company costs, and other operating expenses to the extent not
otherwise allocated to other functions.

General and administrative expenses increased $4.0 million from 2003 to
2004. The primary reasons for the increase are the inclusion of Maxrad and the
antenna product lines from Andrew, Sarbanes-Oxley compliance costs, and
increased costs of patent infringement litigation. Legal expenses increased $0.6
million to $3.7 million in 2004, largely related to the intellectual property
litigation and the Frazier lawsuit. Sarbanes-Oxley compliance costs were
approximately $1.0 million.

General and administrative expenses increased $4.9 million from 2002 to
2003. The increase was due to inclusion of expenses related to DTI product
lines, increased insurance expenses and legal costs associated with the
company's 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.

Employees in General and administrative functions at December 31, 2002,
2003 and 2004 were 35, 21 and 53.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

During 2004, the company purchased MAXRAD and several antenna product lines
from Andrew. There was no purchased in-process technology for those acquisitions
that had not yet reached technological feasibility and had no alternative future
use. Upon completion of the DTI (now RFSG) acquisition in 2003, the company
expensed $1.1 million representing purchased in-process technology. During 2002,
the company expensed in-process technology of $0.1 million in connection with
the acquisition of cyberPIXIE.

AMORTIZATION OF OTHER INTANGIBLE ASSETS

The base amount of amortization of intangible assets in 2002 relates to the
acquisition of cyberPIXIE in 2002. The increase in intangible asset amortization
from 2002 to 2003 relates to the acquisition of DTI in 2003. The increase from
2003 to 2004 relates to the acquisitions of MAXRAD and the antenna product lines
from Andrew (now collectively APG).

In October 2004, the company completed the acquisition of selected assets
associated with Andrew Corporation's mobile antenna business for a total of
$10.9 million in cash. The assets acquired consist of Andrew's GPS, Mobile
SATCOM, On-Glass, and Antenna Specialists(R) brand of professional antenna
products. The results of operations of Andrew are included in the financial
statements from the date of acquisition. These product lines were integrated
into the operations of PCTEL's Antenna Products Group. 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 $5.4 million to
net tangible assets acquired, $0.6 million to core technology, $2.6 million to
customer relationships, $0.3 million to trademarks and $0.3 million to order
backlog and other intangible assets, net, in the accompanying consolidated
balance sheets. The $1.7 million excess of the purchase price over the fair
value of the net tangible and intangible assets was allocated to goodwill.
Intangible assets will be amortized over an estimated useful life of six and
eight years. A third-party appraiser prepared the appraisal for the intangible
assets.

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In January 2004, the company completed the acquisition of MAXRAD, Inc. (now
the Antenna Product Group). MAXRAD is a manufacturer of wireless communications
antennas for broadband wireless, in-building wireless and land mobile radio
applications. In connection with the acquisition, PCTEL acquired all of the
outstanding capital stock of MAXRAD. In exchange for the outstanding capital
stock of MAXRAD, PCTEL paid $18.2 million, net of cash acquired of $2.4 million,
out of the available working capital. The results of operations of MAXRAD are
included in the 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 of $20.6
million in cash, of which $0.4 million was paid in April 2004, was allocated
$7.6 million to net tangible assets acquired, $0.9 million to the covenant not
to compete, $1.3 million to core technology, $3.2 million to customer lists,
$1.4 million to trademarks and $0.1 million to other intangible assets, net, in
the accompanying consolidated balance sheets. The $6.1 million excess of the
purchase price over the fair value of the net tangible and intangible assets was
allocated to goodwill. The covenant not to compete will be amortized over two
years and other intangible assets over an estimated useful life of six and eight
years. A third-party appraiser prepared the appraisal for the intangible assets.

In March 2003, the company acquired the assets of DTI for a total of $11.0
million in cash (now the RF Solutions Group). The results of operations of DTI
are included in the financial statements from the date of acquisition. Since the
purchase price exceeded 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. The purchase price was allocated $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. In-process research and development was expensed, but the
covenant not to compete is being amortized over two years, and other intangible
assets over an estimated useful life of four years. A third-party appraiser
prepared the appraisal for the intangible assets. As part of an earn-out
arrangement, the company paid $1.5 million to DTI in 2004.

In May 2002, the company acquired the assets of Chicago-based cyberPIXIE
for a total of $1.6 million in cash, including acquisition costs of $0.2 million
(the Mobility Solutions Group). The acquisition was accounted for under the
purchase method of accounting and the results of operations of cyberPIXIE were
included in the 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. The purchase price was allocated $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. In-process research and development was expensed and the developed
technology is being amortized over its useful life of three years. A third-party
appraiser prepared the appraisal for the intangible assets.

Effective January 1, 2002, the company 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. A third-party
valuation firm conducted the annual impairment test as of October 31, 2004, the
result of which was that there was no impairment of goodwill or other
intangibles.

RESTRUCTURING CHARGES

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2004 restructuring activity consisted of $0.2 million favorable adjustments
to reserves related to the 2003 sale of the HSP modem product line, offset by
$0.1 million of expense related to the discontinuation of the Soft AP product
line.

The company's 2003 restructuring totaled $3.5 million. It consisted 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. $3.3 million of the total related to the sale of the company's HSP
modem product line to Conexant. A total of 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.

During 2002, the company reduced worldwide headcount by 27 employees and
announced its intention to move the headquarters to Chicago, Illinois. The
restructuring resulted in $0.9 million of charges for the year ended 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.

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 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. 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 $2.0
million of royalty payments from Conexant during 2004.

AMORTIZATION OF STOCK BASED PAYMENTS

In connection with the grant of restricted stock to employees in 2004, 2003
and 2002, the company recorded deferred compensation of $3.3, $0.8 and $3.7
million, respectively; representing the fair value of the 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, typically five years. The amortization is recorded in the
income statement as stock based payment expense.

The amortization of stock based payments increased $0.4 million in 2004
compared to 2003 due to the grant of restricted shares to employees in 2004. The
largest portion of the increase was due to restricted stock grants issued as
retention bonuses to key employees hired in the MAXRAD and Andrew acquisitions.

20

The amortization of deferred stock compensation increased $0.3 million in
2003 compared to 2002 primarily due to the grant of restricted stock to
employees in 2003.

The table below summarizes the expected amortization of deferred stock
compensation for restricted stock grants outstanding, assuming no terminations
and without allowance for future grants, for the years 2005 through 2009. The
amount of stock based payment expense to be recorded in future periods could
decrease if restricted shares are forfeited. If the company grants additional
restricted stock, the amortization of deferred compensation will increase.

OTHER INCOME, NET

Other income, net, consists primarily of interest income. Interest income
is expected to fluctuate over time with changes in interest rates and size of
the company's cash and short-term investment balances. Other income, net,
decreased sequentially from 2002 to 2003 and from 2003 to 2004. The trend was
driven by generally declining interest rates over the periods and the use of
cash for acquisitions for the stock buy back program. The company used cash of
$29.1 million for acquisitions and $4.3 million for stock buy backs in 2004.

PROVISION (BENEFIT) FOR INCOME TAXES

Significant management judgment is required to assess the likelihood that
the company's deferred tax assets will be recovered from future taxable income.
The company maintained a full valuation allowance against all the deferred tax
assets since 2001, as a result of uncertainties regarding realizability.

The effective tax rate was below the statutory federal rate of 35% during
2004 principally due to permanent differences between book and tax as well as
adjustments to the deferred tax valuation allowance. The adjustment to the
deferred tax valuation allowance was primarily related to the addition of $1.2
million of research credit carry forwards that became available after the carry
back of the current loss to 2002 and 2003. The 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 $1.1 million. The 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 $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES

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The company used $7.4 million of net cash in its operating activities in
2004. The largest uses of cash flow in the balance sheet were $4.9 million of
growth in accounts receivable primarily related to wireless products, a decrease
in liabilities of $3.2 million related to modem royalties, and a decrease in
income taxes payable of $1.7 million. The company used $15.5 million of net cash
in its investing activities. The largest uses of cash flow were for the
acquisitions of MAXRAD and the Andrew product lines ($29.1 million) and an
earn-out payment made in connection with the DTI acquisition of 2003 ($1.5
million). Additionally, the company used $6.1 million for capital expenditures,
$4.9 million of which was the purchase of the larger building for the Antenna
Products Group. Sources of investing activity cash flow were $2.0 million of
royalties from Conexant, and $19.1 million of sales of short-term investments to
fund the year's acquisition activity. The royalty income is reported as
continued cash flow from the sale of the HSP modem product lines in 2003, as the
royalty agreement and the asset sales agreement are not separable for accounting
purposes. Cash flow from financing activities was $0.8 million in 2004.
Financing activities included $5.1 million of proceeds from issuance of common
stock related to stock option exercises offset by $4.3 million used to
repurchase the company's common stock pursuant to its share buyback program. The
decrease in cash and cash equivalents of $22.1 million in 2004 compared to the
increase of cash and cash equivalents of $13.8 million in 2003 is due to
increase in amounts paid for acquisitions, working capital associated with the
acquisitions, and lower proceeds from royalties.

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 settlement of the intellectual property dispute with Broadcom
and the cross-licensing agreement with Intel, and a decrease in prepaid
royalties and accounts receivable of $6.1 and $3.0 million, respectively. Net
cash provided by investing activities for 2003 consisted 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 for
$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 consisted 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, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the common stock, which was completed in February 2003. In
February and November 2003, the company extended the stock repurchase program to
repurchase up to 1,000,000 and 500,000 additional shares, respectively, on the
open market from time to time. The company repurchased 461,400 shares of the
common stock in 2004 for approximately $4.3 million, and 1,538,600 shares in
2003 for approximately 11.5 million. Since the inception of the stock repurchase
program the company has repurchased 2,000,000 shares of the outstanding common
stock for approximately $15.8 million.

As of December 31, 2004, the company had $83.9 million in cash, cash
equivalents and short-term investments and working capital of $87.8 million.
Accounts receivable, as measured in days sales outstanding (DSO), was 81 and 29
days at December 31, 2004 and 2003, respectively. At December 31, 2003, the DSO
of 29 was unusually low due to $16.1 million of cash intellectual property
settlements from Broadcom and Intel. However, the company considers 81 days to
be unusually high and has targeted to reduce the days outstanding to 50 or lower
for 2005.

The company believes that the existing sources of liquidity, consisting of
cash, short-term investments and cash from operations, will be sufficient to
meet the working capital needs for the foreseeable future. The company will
continue to evaluate opportunities for development of new products and potential
acquisitions of technologies or businesses that could complement the business.
The company may use available cash or other sources of funding for such
purposes.

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the contractual obligations (non-cancelable
operating leases) for office and product assembly facilities and the effect such
obligations are expected to have on the liquidity and cash flows in future
periods (in thousands):

Included in the obligation summary is a lease commitment of $0.6 million
for excess facilities. The total amount was accrued as part of previously
recorded restructuring expense. The company has no outstanding firm inventory
purchase contract commitments with major suppliers beyond near term needs.

As part of the acquisition of DTI there was an earn-out arrangement
covering the fiscal years 2003 and 2004. PCTEL had the option to settle any
earnings under the arrangement in either cash, shares of its common stock, or a
combination of both. For the year ended December 31, 2003, DTI earned a $1.5
million payment under the arrangement that was paid in cash in May 2004. For the
year ended December 31, 2004, DTI earned a $0.6 million payment under the
arrangement, which the company anticipates will be paid in cash during the
second quarter of 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
FAS No. 123R, "Share-Based Payment". The statement addresses the accounting for
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprises equity instruments or that may be settled by
the issuance of such equity instruments. FAS No. 123R is effective no later than
reporting periods ending after June 15, 2005. The company will adopt FAS No.
123R on a prospective basis starting in the third quarter of 2005. During
January 2005 and in advance of the adoption of FAS No. 123R, the company
accelerated the vesting of "out of the money" options with a share price equal
to or greater than $10.00. Under FAS 123R, the acceleration of these options
will result in PCTEL not being required to recognize share-based compensation
expense of approximately $2,200,000 beginning in the company's quarter ending
September 30, 2005 and ending in the company's quarter ending March 31, 2008.
The acceleration of these options will be reflected in pro-forma footnote
disclosure to the company's financial statements for the quarter ending March
31, 2005. See Subsequent Events footnote #19 in the Notes to the Financial
Statements.

In December 2004, the FASB issued Staff Positions in relation to FAS No.
109, "Accounting for Income Taxes". FASB issued FSP FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004". As a domestic manufacturer, the company will access early in 2005 whether
the company is eligible for any tax deductions under this Act. FASB issued FSP
FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Repatriation
Provision within the American Jobs Creation Act of 2004". The company has not
yet completed the assessment of earnings of foreign subsidiaries that might be
repatriated. At this time the company does not expect to repatriate the earnings
of our foreign subsidiaries as dividends to take advantage of this tax credit.

In November 2004, the FASB issued FAS No. 151, "An Amendment of ARB No. 43,
Chapter 4". The statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). FAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for fiscal years beginning
after the date the statement was issued. The provisions of the statement shall
be applied prospectively. Adoption of FAS No. 151 is not expected to have a
material effect on the ongoing operations of the company.

In March 2004, Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings per Share"

23

("EITF 03-6"). EITF 03-6 clarifies what constitutes a participating security and
provides further guidance in applying the two-class method of calculating
earnings per share. The consensus reached by the Task Force in this Issue is
effective for reporting periods beginning after March 31, 2004. The company does
not have any participating securities as defined under EITF 03-6. Adoption of
this standard did not have a material impact on the company's financial
position, results of operations, or cash flows.

In January 2003, 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. In December 2003,
FASB issued Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN
46), "Consolidation of Variable Interest Entities." FIN 46R clarifies some of
the provisions of FIN 46 and exempts certain entities from its requirements. FIN
46R is effective at the end of the first interim period ending after March 15,
2004. The company does not have any variable interest entities. Adoption of this
standard did not have an 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.

24

OUR ABILITY TO GROW OUR BUSINESS MAY BE THREATENED IF THE DEMAND FOR WIRELESS
DATA SERVICES 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 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.

25

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS FOR THE WIRELESS MARKET, WHICH MEET THE NEEDS OF
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, internal accounting
controls 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
MAXRAD, INC. AND CERTAIN ASSETS OF ANDREW CORPORATION.

We acquired MAXRAD, Inc. in January 2004 and certain assets of Andrew
Corporation in October 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 these acquisitions. The business and assets acquired
in these acquisitions are the core of our APG segment. APG's business is the
design and assembly of antenna products

26

and accessories used in wireless systems. These acquisitions represent a
significant expansion of and new direction for our wireless connectivity
business. Potential risks with these acquisitions include:

- the loss or decrease in orders of one or more of the major customers,

- decrease in demand for wireless devices that use these products,

- problems related to the operation of assembly facilities in China,

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

- challenges in integrating internal accounting and financial controls for
financial reporting purposes.

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 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
c