PC TEL INC - 10-K Annual Report

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

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

FOR THE YEAR ENDED DECEMBER 31, 2003

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-27115

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

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

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

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

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

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

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

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

As of June 30, 2003, the last business day of Registrant's most recently
completed second fiscal quarter, there were 19,919,070 shares of Registrant's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on June 30, 2003) was approximately $155,312,855.
Shares of Registrant's common stock held by each executive officer and director
and by each entity that owns 5% or more of Registrant's outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

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

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

PCTEL, INC.

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

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PART I

ITEM 1: BUSINESS

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

OVERVIEW

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

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

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

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

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

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

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

DEVELOPMENTS

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

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

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

SALES, MARKETING AND SUPPORT

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

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

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

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

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

BACKLOG

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

RESEARCH AND DEVELOPMENT

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

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

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

MANUFACTURING

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

COMPETITION

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

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

EMPLOYEES

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

WEB SITE POSTINGS

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

ITEM 2: PROPERTIES

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

ITEM 3: LEGAL PROCEEDINGS

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

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

Litigation with U.S. Robotics

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

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

Litigation with Broadcom

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

Litigation with Agere and Lucent

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

Litigation with 3Com

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

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

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

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

ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

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

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PART II

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

PRICE RANGE OF COMMON STOCK

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

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

DIVIDENDS

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

EQUITY COMPENSATION PLANS

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

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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

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

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

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

INTRODUCTION

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

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

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

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

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

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

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

INVENTORY WRITE-DOWNS AND RECOVERIES

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

ACCRUED ROYALTIES

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

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

STOCK-BASED COMPENSATION

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

11

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

GOODWILL AND IMPAIRMENT OF LONG LIVED ASSETS

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

INCOME TAXES

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

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

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

12

RESULTS OF OPERATIONS

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

REVENUES

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

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

GROSS PROFIT

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

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

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

13

RESEARCH AND DEVELOPMENT

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

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

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

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

SALES AND MARKETING

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

GENERAL AND ADMINISTRATIVE

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

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

14

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

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

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

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

AMORTIZATION OF OTHER INTANGIBLE ASSETS

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

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

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

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

15

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

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

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

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

RESTRUCTURING CHARGES

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

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

16

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

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

GAIN ON SALE OF ASSETS AND RELATED ROYALTIES

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

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

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

AMORTIZATION OF DEFERRED STOCK COMPENSATION

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

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

17

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

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

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

OTHER INCOME, NET

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

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

PROVISION FOR INCOME TAXES

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

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

18

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

19

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

20

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

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

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

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

RISKS RELATED TO OUR BUSINESS

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

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

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

21

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

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

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

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

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

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

- suitability for a sufficient number of geographic regions, and

- availability of sufficient site locations for wireless access.

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

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

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

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

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

22

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

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

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

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

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

- disruption of our on-going business,

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

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

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

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

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

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

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

23

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24

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

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

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

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

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

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

- Chipset manufacturers general unwillingness to partner with PCTEL,

- Chipset manufacturers internally developing their own SoftAP
capabilities,

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

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

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

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

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

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

25

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

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

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

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

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

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

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

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

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

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

If we are subject to a successful claim of infringement related to our
wireless intellectual property and we fail to develop non-infringing
intellectual property or license the infringed intellectual property on
acceptable terms and on a timely basis, operating results could decline and our
ability to grow and sustain our wireless business could be materially and
adversely affected. As a result, our business, financial condition, results of
operation and prospects could be impaired.

We may in the future initiate claims or litigation against third parties
for infringement of our intellectual property rights or to determine the scope
and validity of our proprietary rights or the proprietary rights of our
competitors. These claims could also result in significant expense and the
diversion of technical and management personnel's attention.

26

UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN A
LOSS OF CUSTOMERS OR A DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS.

Our products may contain undetected software errors or failures when first
introduced or as new versions are released. To date, we have not been made aware
of any significant software errors or failures in our products. However, despite
testing by us and by current and potential customers, errors may be found in new
products after commencement of commercial shipments, resulting in loss of
customers or delay in market acceptance.

OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF
TAX AUTHORITIES CHALLENGE US AND THE TAX CHALLENGES RESULT IN UNFAVORABLE
OUTCOMES.

We currently have subsidiaries in Japan China and Israel as well as branch
offices in Taiwan and France. Our branch office in France is presently in the
liquidation process. In 2002 we liquidated our subsidiaries in the Cayman
Islands. In 2003 we liquidated our branches in Korea and Yugoslavia. The
complexities resulting from operating in several different tax jurisdictions
increases our exposure to worldwide tax challenges.

RISKS RELATED TO OUR INDUSTRY

IF THE WIRELESS MARKET DOES NOT GROW AS WE ANTICIPATE, OR IF OUR WIRELESS
PRODUCTS ARE NOT ACCEPTED IN THESE MARKETS, OUR REVENUES MAY BE ADVERSELY
AFFECTED.

Our future success depends on market demand and growth patterns for
products using wireless technology. Our wireless products may not be successful
as a result of the intense competition in the wireless market, our relative
inexperience in developing, marketing, selling and supporting these products.

If these new wireless products are not accepted in the markets as they are
introduced, our revenues and profitability will be negatively affected.

OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES. IF WE ARE NOT
SUCCESSFUL IN RESPONSE TO RAPIDLY CHANGING TECHNOLOGIES, OUR PRODUCTS MAY BECOME
OBSOLETE AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

The wireless data access business is characterized by rapidly changing
technologies, short product life cycles and frequent new product introductions.
To remain competitive, we have successfully introduced several new products.

Both the cellular (2.5G and 3G) and Wi-Fi (802.11) spaces are rapidly
changing and prone to standardization. We will continue to evaluate, develop and
introduce technologically advanced products that will position us for possible
growth in the wireless data access market. If we are not successful in response
to rapidly changing technologies, our products may became obsolete and we may
not be able to compete effectively.

CHANGES IN LAWS OR REGULATIONS, IN PARTICULAR, FUTURE FCC REGULATIONS AFFECTING
THE BROADBAND MARKET, INTERNET SERVICE PROVIDERS, OR THE COMMUNICATIONS
INDUSTRY, COULD NEGATIVELY AFFECT OUR ABILITY TO DEVELOP NEW TECHNOLOGIES OR
SELL NEW PRODUCTS AND THEREFORE, REDUCE OUR PROFITABILITY.

The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, future FCC regulatory policies that affect
the availability of data and Internet services may impede our customers'
penetration into their markets or affect the prices that they are able to
charge. In addition, FCC regulatory policies that affect the specifications of
wireless data devices may impede certain of our customers' ability to
manufacture their products profitably, which could, in turn, reduce demand for
our products. Furthermore, international regulatory bodies are beginning to
adopt standards for the communications industry. Although our business has not
been hurt by any regulations to date, in the future,

27

delays caused by our compliance with regulatory requirements may result in order
cancellations or postponements of product purchases by our customers, which
would reduce our profitability.

RISKS RELATED TO OUR LICENSING PROGRAM

OUR ABILITY TO SUSTAIN OR GROW OUR REVENUE FROM THE LICENSING OF OUR
INTELLECTUAL PROPERTY IS SUBJECT TO MANY RISKS, AND ANY INABILITY TO
SUCCESSFULLY LICENSE OUR INTELLECTUAL PROPERTY COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.

We may not be able to sustain or grow our revenue from the licensing of our
intellectual property. In addition to our wireless product lines, we offer our
intellectual property through licensing and product royalty arrangements. We
have over 130 U.S. patents granted or pending addressing both essential
International Telecommunications Union and non-essential technologies. In
connection with our intellectual property licensing efforts, we have filed
several patent infringement lawsuits and are aggressively pursuing unlicensed
companies to license their unauthorized use of our intellectual property. We
have pending patent infringement litigation claims with 3Com, U.S. Robotics,
Agere and Lucent. We expect litigation to continue to be necessary to enforce
our intellectual property rights and to determine the validity and scope of the
proprietary rights of others. Because of the high degree of complexity of the
intellectual property at issue, the inherent uncertainties of litigation in
general and the preliminary nature of these litigation matters, we cannot assure
you that we will ultimately prevail or receive the judgments that we seek. We
may not be able to obtain licensing agreements from these companies on terms
favorable to us, if at all. In addition, we may be required to pay substantial
monetary damages as a result of claims these companies have brought against us
which could materially and adversely affect our business, financial condition
and operating results.

LITIGATION EFFORTS RELATED TO OUR LICENSING PROGRAM ARE EXPECTED TO BE COSTLY
AND MAY NOT ACHIEVE OUR OBJECTIVES.

Litigation such as our suits with 3Com, U.S. Robotics, Agere and Lucent can
take years to resolve and can be expensive to pursue or defend. We currently
expect our intellectual property litigation costs to be approximately $3.0 to
$4.0 million on an annual basis. In addition, the allegations and claims
involved in these lawsuits, even if ultimately resolved in our favor, could be
time consuming to litigate and divert management attention. We may not
ultimately prevail in these matters or receive the judgments that we seek. We
could also face substantial monetary damages as a result of claims others bring
against us. In addition, courts' decisions on current pending and future motions
could have the effect of determining the ultimate outcome of the litigation
prior to a trial on the merits, or strengthen or weaken our ability to assert
claims and defenses in the future. Accordingly, an adverse judgment could
seriously harm our business, financial position and operating results and cause
our stock price to decline substantially.

WE EXPECT TO CONTINUE TO BE SUBJECT TO LITIGATION REGARDING INTELLECTUAL
PROPERTY CLAIMS RELATED TO OUR LICENSING PROGRAM WHICH COULD IMPAIR OUR ABILITY
TO GROW OR SUSTAIN REVENUES FROM OUR LICENSING EFFORTS.

As we continue to aggressively pursue licensing arrangements with companies
that are using our intellectual property without our authorization, we expect to
continue to be subject to lawsuits that challenge the validity of our
intellectual property or that allege that we have infringed third party
intellectual property rights. Any of these claims could results in substantial
damages against us and could impair our ability to grow and sustain our
licensing business. This could materially and adversely affect our business,
financial condition, operating results and prospects. As a result, at least in
part, of our licensing efforts to date, we are currently subject to claims from
3Com, Agere and Lucent regarding patent infringement matters of the nature
described above. We have also been subject to claims from others in the past
regarding similar matters. In addition, in recent years, there has been
significant litigation in the United States involving intellectual property
rights. We expect these claims to increase as our intellectual property
portfolio becomes larger. Intellectual property claims against us, and any
resulting lawsuit, may result in our incurring significant expenses and could
subject us to significant liability for damages and invalidate what we currently
believe are

28

our proprietary rights. These lawsuits, regardless of their merits or success,
would likely be time-consuming and expensive to resolve and could divert
management's time and attention.

OUR ABILITY TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS MAY BE LIMITED, AND ANY
LIMITATION COULD ADVERSELY AFFECT OUR ABILITY TO SUSTAIN OR INCREASE REVENUE
FROM OUR LICENSING PROGRAM.

Our ability to sustain and grow revenue from the licensing of our
intellectual property is dependent on our ability to enforce our intellectual
property rights. Our ability to enforce these rights is subject to many
challenges and may be limited. For example, one or more of our pending patents
may never be issued. In addition, our patents, both issued and pending, may not
prove enforceable in actions against alleged infringers. 3Com, U.S. Robotics,
Agere and Lucent have currently pending claims seeking to invalidate one or more
of our patents. If a court were to invalidate one or more of our patents, this
could materially and adversely affect our licensing program. Furthermore, some
foreign laws, including those of various countries in Asia, do not protect our
proprietary rights to the same extent as United States laws.

WE HAVE ACCRUED FOR NEGOTIATED LICENSE FEES AND ESTIMATED ROYALTY SETTLEMENTS
RELATED TO EXISTING AND PROBABLE CLAIMS OF PATENT INFRINGEMENT. IF THE ACTUAL
SETTLEMENTS EXCEED THE AMOUNTS ACCRUED, ADDITIONAL LOSSES COULD BE SIGNIFICANT,
WHICH WOULD ADVERSELY AFFECT FUTURE OPERATING RESULTS.

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

RISKS RELATED TO OUR COMMON STOCK

THE TRADING PRICE OF OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF
FACTORS, SOME OF WHICH ARE NOT IN OUR CONTROL.

The trading price of our common stock has been highly volatile. The common
stock price has fluctuated from a low of $6.10 to a high of $14.22 during 2003.
Our stock price could be subject to wide fluctuations in response to a variety
of factors, many of which are out of our control, including:

- actual or anticipated variations in quarterly operating results,

- outcome of ongoing intellectual property related litigations,

- announcements of technological innovations,

- new products or services offered by us or our competitors,

- changes in financial estimates by securities analysts,

- conditions or trends in our industry,

- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments,

- additions or departures of key personnel,

29

- mergers and acquisitions, and

- sales of common stock by our stockholders or us.

In addition, the NASDAQ National Market, where many publicly held
telecommunications companies, including PCTEL, are traded, often experiences
extreme price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these companies.
In the past, following periods of volatility in the market price of an
individual company's securities, securities class action litigation often has
been instituted against that company. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.

PROVISIONS IN OUR CHARTER DOCUMENTS MAY INHIBIT A CHANGE OF CONTROL OR A CHANGE
OF MANAGEMENT WHICH MAY CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO FALL AND
MAY INHIBIT A TAKEOVER OR CHANGE IN OUR CONTROL THAT A STOCKHOLDER MAY CONSIDER
FAVORABLE.

Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting,
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series. The board of directors can fix the price,
rights, preferences, privileges and restrictions of this preferred stock without
any further vote or action by our stockholders. The rights of the holders of our
common stock will be affected by, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Further,
the issuance of shares of preferred stock may delay or prevent a change in
control transaction without further action by our stockholders. As a result, the
market price of our common stock may drop.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks. We manage the sensitivity of our results of
operations to credit risks and interest rate risk by maintaining a conservative
investment portfolio, which is comprised solely of, highly rated, short-term
investments. We have investments in both fixed rate and floating rate interest
earning instruments. Fixed rate securities may have their fair market value
adversely impacted based on the duration of such investments if interest rates
rise, while floating rate securities and the reinvestment of funds from matured
fixed rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents, short-term and long-term investments in a variety
of securities, including both government and corporate obligations with ratings
of A or better, and money market funds. We have accumulated a $26,000 and
$263,000 unrealized holding gain as of December 31, 2003 and 2002, respectively.
A hypothetical decrease of 10% in market interest rates would not result in a
material decrease in interest income earned through maturity on investments held
at December 31, 2003.

We do not hold or issue derivative, derivative commodity instruments or
other financial instruments for trading purposes. We are exposed to currency
fluctuations, as we sell our products internationally. We manage the sensitivity
of our international sales by denominating all transactions in U.S. dollars. If
the United States dollar uniformly increased or decreased in strength by 10%
relative to the currencies in which are sales were denominated, our net loss
would not have changed by a material amount for the year ended December 31,
2003. For purposes of this calculation, we have assumed that the exchange rates
would change in the same

30

direction relative to the United States dollar. Our exposure to foreign exchange
rate fluctuations, however, arises in part from translation of the financial
statements of foreign subsidiaries into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability. The effect of foreign
exchange rate fluctuation gains for the year ended December 31, 2003 and 2002
was $65,000 and $35,000, respectively.

31

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PCTEL, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

32

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of PCTEL, Inc.:

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of PCTEL, Inc. and its subsidiaries at December 31, 2003 and 2002, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
PCTEL, Inc. as of December 31, 2001, and for the year ended December 31, 2001,
prior to the adjustments discussed in the Goodwill and Other Intangible Assets
note, were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report dated January 22, 2002 (except with respect
to the matters discussed in Note 11, as to which the date was March 27, 2002).

As disclosed in the Goodwill and Other Intangible Assets note, the Company
changed the manner in which it accounts for goodwill and other intangible assets
upon adoption of the accounting guidance of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

As discussed above, the financial statements of PCTEL, Inc., as of December
31, 2001, and for the year then ended, were audited by other independent
accountants who have ceased operations. As described in the Goodwill and Other
Intangible Assets note, these financial statements have been revised to include
the transitional disclosures required by Statement of Financial Accounting
Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was
adopted by the Company as of January 1, 2002. We audited the transitional
disclosures described in the Goodwill and Other Intangible Assets note. In our
opinion, the transitional disclosures for 2001 in the Goodwill and Other
Intangible Assets note are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 financial statements taken
as a whole.

PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
February 2, 2004

33

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PCTEL, Inc.:

We have audited the accompanying consolidated balance sheets of PCTEL, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PCTEL, Inc. and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California
January 22, 2002
(except with respect to the matters
discussed in Note 11, as to which
the date is March 27, 2002)

34

PCTEL, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

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

35

PCTEL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

36

PCTEL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
37

PCTEL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
38

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED: DECEMBER 31, 2003

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

We were incorporated in California in 1994 and reincorporated in Delaware
in 1998. PCTEL, Inc. provides wireless connectivity products and test tools to
cellular carriers, wireless Internet providers (WISP's), PC OEM's, and wireless
equipment manufacturers. The company brings together expertise in RF platform
design, mobility software, and hardware to ensure wireless excellence. We
simplify mobility, provide wireless intelligence, and enhance wireless
performance. Additionally, the company licenses both patented and proprietary
access technology, principally related to analog modems, to modem solution
providers.

USE OF ESTIMATES

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

BASIS OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

We use the United States dollar as the functional currency for our
financial statements, including the financial statements of our subsidiaries in
foreign countries, with the exception of our Japanese subsidiary for which the
functional currency is the Japanese Yen. Assets and liabilities of our Japanese
operations are translated to U.S. dollars at the exchange rate in effect at the
applicable balance sheet date, and revenues and expenses are translated using
average exchange rates prevailing during that period. Translation gains (losses)
of our Japanese subsidiary are recorded in accumulated other comprehensive
income as a component of stockholders' equity. All gains and losses resulting
from other transactions originally in foreign currencies and then translated
into U.S. dollars are included in net income. At December 31, 2003 the
cumulative translation adjustment was $65,000. As of December 31, 2003, we had
subsidiaries in Japan and Israel as well as branch office in Taiwan and France.
These consolidated financial statements include the accounts of PCTEL and our
subsidiaries after eliminating intercompany accounts and transactions.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

We divide our financial instruments into three different classifications.

Cash equivalents: Are money market and debt instruments that have
an original maturity of 90 days or less.

Restricted cash: Is a certificate of deposit that supports a
stand-by letter of credit in connection with
facilities lease obligations and is restricted
for use by the Company.

Short-term
investments: Are marketable debt instruments that generally
have an original maturity between three months
and one year. All of our short-term investments
are classified as current assets and
available-for-sale.

As of December 31, 2003 and 2002, short-term
investments consisted of high-grade corporate
securities with maturity dates of approximately
three months to one year.

39

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

These investments are recorded at current fair
market value and any unrealized holding gains and
losses (based on the difference between market
price and book value) are reflected as other
comprehensive income/loss in the stockholders'
equity section of the balance sheet. We have
accumulated a $26,000 unrealized holding gain as
of December 31, 2003, net of taxes. Realized
gains and losses and declines in value of
securities judged to be other than temporary are
included in interest income (expense) and have
not been significant to date. Interest and
dividends of all securities are included in
interest income.

The carrying amounts reported for cash equivalents and short-term
investments are considered to approximate fair values based upon the short
maturities of these financial statements.

CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES

We are subject to certain risks including the impact of the continued
economic slowdown, the Company's ability to develop and successfully introduce
new and enhanced products such as wireless products, the outcome of potential
litigation involving intellectual property, competition from larger, more
established companies and dependence on key suppliers.

Financial instruments that potentially subject us to credit risk consist
primarily of short-term investments and trade receivables.

To mitigate credit risk related to short-term investments, we maintain our
portfolio of cash equivalents and short-term investments with reputable
financial institutions and in a variety of securities, including both government
and corporate obligations with ratings of A or better and money market funds.

For trade receivables, credit risk is the potential for a loss due to a
customer not meeting its payment obligations. Our customers are concentrated in
the wireless industry. Estimates are used in determining an allowance for
amounts, which we may not be able to collect, based on current trends, the
length of time receivables are past due and historical collection experience.
Provisions for and recovery of bad debts are recorded against sales and
marketing expense in our consolidated statements of operations.

We perform ongoing evaluations of our customers' credit limits financial
condition and generally require no collateral. As of December 31, 2003, four
customers accounted for approximately 25%, 17%, 14% and 14% of gross accounts
receivable, respectively. As of December 31, 2002, three customers accounted for
approximately 33%, 30% and 21% of gross accounts receivable.

The market for our products is characterized by frequent transitions in
which products rapidly incorporate new features and performance standards. A
failure to develop products with required features or performance standards or a
delay in bringing a new product to market could adversely affect our operating
results. In addition, due to 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.

INVENTORIES

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

40

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

losses was $0.1 million and $2.1 million, respectively. We sold part of the
written-down inventories and recovered $1.8 and $7.2 million of the former
write-downs during the years ended December 31, 2003 and 2002, respectively.
Write-downs of inventories would have a negative impact on gross margin.

PREPAID AND OTHER ASSETS

Prepaid and other assets are stated at cost and are amortized over their
useful lives (up to one year) of the assets.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The company
depreciates computers over three years, office equipment over five years and
furniture and fixtures over seven years. Leasehold improvements are amortized
over the shorter of the corresponding lease term or useful life.

SOFTWARE DEVELOPMENT COSTS

We account for software development costs in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Our products include a software component. To date, we have expensed
all software development costs because costs incurred subsequent to the products
reaching technological feasibility were not significant.

REVENUE RECOGNITION

The company sells Wi-Fi and cellular mobility software, software designed
radio products, antenna products, and licenses its modem technology through its
licensing program. The company records the sale of these products, including
related maintenance, and the licensing of its intellectual property as revenue.
The company accounts for revenue from its Wi-Fi and cellular mobility software,
including related maintenance rights, under SOP 97-2 Software Revenue
Recognition. The company records revenue for sales of its software defined radio
products when title transfers. The company records intellectual property
licensing revenue when it has a licensing agreement, the amount of related
royalties is known for the accounting period reported and collectibility is
reasonably certain. In instances where the Company provides non-recurring
engineering services to customers, the Company recognizes revenue as the
services are completed, using the percentage of completion basis of accounting
in accordance with SAB 104--Revenue Recognition.

INCOME TAXES

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

41

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

STOCK-BASED COMPENSATION

The Company accounts for its stock option plans using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", whereby
compensation cost for stock options is measured as the excess, if any, of the
fair market value of a share of the Company's stock at the date of the grant
over the amount that must be paid to acquire the Stock. SFAS No. 123,
"Accounting for Stock-Based Compensation", issued subsequent to APB No.
25 -- and amended by SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", defines a fair value based method of
accounting for employee stock options, but allows companies to continue to
measure compensation cost for employees using the intrinsic value method of APB
No. 25. The following table illustrates the pro forma information regarding net
income (loss) and net income (loss) per share as if we recorded compensation
expense based on the fair value of stock-based awards in accordance with
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" for the years ended December 31,
2003, 2002 and 2001 (in thousands, except per share data):

These costs may not be representative of the total effects on pro forma
reported income (loss) for future years. Factors that may also impact
disclosures in future years include the attribution of the awards to the service
period, the vesting period of stock awards, timing of additional grants of stock
option awards and the number of shares granted for future awards.

The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option-pricing model as prescribed by SFAS 123
using the following assumptions:

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility and expected option life. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate the existing models may not necessarily provide a reliable
single measure of the fair value of our employee

42

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

stock options. Based on the Black-Scholes option-pricing model, the weighted
average estimated fair value of employee stock option grants was $2.79 for 2003,
$3.78 for 2002 and $4.11 for 2001. Restricted stock awards are recorded at the
fair market value of the stock on the date of grant and is expensed over the
vesting period.

EARNINGS PER SHARE

We compute earnings per share in accordance with SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires companies to compute net income per share
under two different methods, basic and diluted, and present per share data for
all periods in which statements of operations are presented. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding, less shares subject to repurchase. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common stock and common stock equivalents outstanding. Common stock
equivalents consist of stock options using the treasury stock method. Common
stock options are excluded from the computation of diluted earnings per share if
their effect is anti-dilutive. The weighted average common stock option grants
excluded from the calculations of diluted net loss per share were 400,000 and
200,000 for the years ended December 31, 2003 and 2002, respectively.

The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
years ended December 31, 2003, 2002 and 2001, respectively (in thousands, except
per share data):

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

* These amounts have been excluded since the effect is anti-dilutive.

GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets", respectively. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method.

43

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

SFAS No. 142 supersedes Accounting Principles Board Opinion ("APB") No. 17 and
addresses the financial accounting and reporting standards for goodwill and
intangible assets subsequent to their initial recognition. SFAS No. 142 requires
that goodwill no longer be amortized. It also requires that goodwill and other
intangible assets be tested for impairment at least annually and whenever events
or circumstances occur indicating that goodwill might be impaired. Additionally,
an acquired intangible asset should be separately recognized if the benefit of
the intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirer's intent to do so. The Company adopted
SFAS No. 142 on January 1, 2002 at which time the Company ceased amortization of
goodwill. The provisions of SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001 and must be applied to all goodwill and other
intangible assets that are recognized in an entity's balance sheet at the
beginning of that fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149")." SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 is generally effective for
derivative instruments, including derivative

44

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

instruments embedded in certain contracts, entered into or modified after
September 30, 2003 and for hedging relationships designated after September 30,
2003. Adoption of this standard did not have a material impact on the Company's
financial position, results of operations, or cash flows.

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

2. SHORT-TERM INVESTMENTS

We invest in high quality, short-term investments, which we classify as
available-for-sale. There were no significant differences between amortized cost
and estimated fair value of these short-term investments at December 31, 2003
and 2002. The following table presents the estimated fair value breakdown of
investment securities by major security type (in thousands):

As of December 31, 2003, $19.2 million of the short-term investments have
maturity dates of less than one year. All of our short-term investments are
classified as current assets because they are marketable and we have the option
to sell them at any time.

3. PREPAID AND OTHER ASSETS

Prepaid and other assets consists of the following (in thousands):

45

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

Depreciation expense was approximately $0.7, $2.0 and $3.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

5. ACQUISITIONS

Dynamic Telecommunications, Inc.

In March 2003, PCTEL, Inc., completed its asset acquisition of Dynamic
Telecommunications, Inc., ("DTI") through a newly wholly owned subsidiary PCTEL
Maryland, Inc. DTI is a supplier of software-defined radio technology deployed
in high-speed wireless scanning receivers, multi-protocol collection and
analysis systems, interference measurement systems and radio frequency command
and control software solutions. In connection with the asset acquisition, PCTEL
Maryland, a wholly-owned subsidiary of PCTEL, and DTI Holdings, Inc., the sole
shareholder of DTI, entered into an Asset Purchase Agreement dated as of March
12, 2003 under which our wholly-owned subsidiary acquired substantially all of
the assets of DTI, including intellectual property, receivables, property and
equipment and other tangible and intangible assets used in DTI's business.

In exchange for the acquired net assets, PCTEL paid DTI Holdings $11.0
million in cash. In addition, DTI may be entitled to earn-out payments if PCTEL
Maryland, Inc. meets specified financial targets in fiscal years 2003 and 2004.
For the year ended December 31, 2003, DTI earned an approximately $1.3 million
cash payout to be paid on May 1, 2004, which was recorded at December 31, 2003.

The purchase price of $11.0 million was allocated to the assets acquired
and liabilities assumed at their estimated fair values on the date of
acquisition as determined by an independent valuation firm. We attributed $2.3
million to net assets acquired, $1.1 million to acquired in-process research and
development, $0.2 million to the covenant not to compete and $4.4 million to
other intangible assets, net, in the accompanying consolidated balance sheets.
The $3.0 million excess of the purchase price over the fair value of the net
tangible and intangible assets was allocated to goodwill. We expensed in-process
research and development and amortized the covenant not to compete over two
years and other intangible assets over an estimated useful life of four years.

An additional payment of $0.2 million was made in July 2003 to DTI after
they delivered a final balance sheet as agreed upon in the Asset Purchase
Agreement. The additional payment, recorded as goodwill.

46

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

The unaudited pro forma affect on the financial results of PCTEL as if the
acquisition had taken place on January 1, 2003 and 2002 is as follows:

CyberPIXIE, Inc.

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

The pro forma affect on the financial results of PCTEL has not been
presented because the amounts are not material.

6. DISPOSITION

In May 2003, the Company completed the sale of certain of its assets to
Conexant Systems, Inc., ("Conexant"). Conexant is a supplier of semiconductor
system solutions for communications applications. In connection with the
transaction, the Company and Conexant entered into an Asset Purchase Agreement
dated as of May 8, 2003 (the "Purchase Agreement") under which Conexant acquired
specified assets of the Company relating to a component of the Company HSP modem
operations and consisting of inventory, fixed assets from the Company offices in
Taiwan, contracts with customers and distributors related to the soft modem
products, and limited intellectual property. The Company did not transfer any of
its patent portfolio in connection with this transaction, and the Company
retained all operating contracts and intellectual property assets associated
with it's hardware modem and wireless products.

In exchange for the assets acquired from the Company, Conexant delivered
approximately $10.75 million in cash to the Company, which represents $8.25
million plus the book value of the acquired inventory and fixed assets being
transferred to Conexant. Conexant has assumed certain liabilities of the
Company. The total proceeds of $10.75 million netted a gain on sale of assets of
$4.5 million. In connection with the Purchase Agreement, Conexant agreed to
license the Company's Segue Wi-Fi software for use with certain of its products.
Conexant will pay the Company an aggregate of $1 million, as consideration for
this license.

47

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

Concurrent with the completion of the transaction with Conexant, the
Company and Conexant also completed an Intellectual Property Assignment
Agreement and Cross-License Agreement ("IPA"). The Company provided Conexant
with a non-exclusive, worldwide license to certain of the Company's soft modem
patents. In addition, Conexant assigned 46 U.S. patents and patent applications
relating to modem and other access technologies to the Company as part of the
transaction. In consideration for the rights obtained by Conexant from the
Company under this agreement, and taking into account the value of rights
obtained by the Company from Conexant under this agreement, during the period
beginning on July 1, 2003 and ending on September 30, 2007, Conexant agreed to
pay to the Company, on a quarterly basis, royalties in the amount of ten percent
(10%) of the revenue received during the royalty period, up to a maximum amount
of $0.5 million per quarter with respect to each calendar quarter during the
royalty period, contingent upon sales by Conexant during the period. Any such
future payments by Conexant to the Company 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.

7. INVENTORY LOSSES AND RECOVERY

Due to the changing market conditions, economic downturn and estimated
future requirements, inventory write-downs of $10.9 million were recorded in the
second half of 2001. Of the $10.9 million, $2.3 million related to firm purchase
order commitments with our major suppliers and the remaining $8.6 million
related to excess inventory on hand or disposed. During 2003 and 2002, we did
not record any additional inventory write-downs having either sold or disposed
of all the written down inventories and recovered $1.8 and $7.2 million of the
former write-downs, respectively. As of December 31, 2003 and 2002, the
cumulative write down for excess inventory on hand was $0 and $2.1 million,
respectively.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill for the year ended December 31, 2003 was
increased $4.3 million due to the DTI acquisition.

48

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

In 2004 and in future years, amortization of other intangible assets would
be as follows:

The following table reflects the adjusted net income and net income per
share as if SFAS No. 142 had been effective as of January 1, 2001:

If amortization expenses related to goodwill that is no longer amortized
had been excluded from operating expenses for the years ended December 31, 2001
diluted earnings per share would have increased by $0.22.

For the year ended December 31, 2001, goodwill amortization of $4.3 million
included $1.7 million of goodwill amortization classified as cost of revenues in
the Consolidated Statements of Operations.

COMPREHENSIVE INCOME

The following table provides the calculation of other comprehensive income
for the years ended December 31, 2003, 2002 and 2001 (in thousands):

49

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

9. RESTRUCTURING CHARGES

2003 Restructuring

In May 2003, the Company completed the sale of certain of its assets to
Conexant relating to a component of PCTEL's HSP modem product line. As a result
of the disposition, 29 employees were transferred to Conexant. An additional 26
employees, both foreign and domestic, were terminated along with the related
facilities closures. The total restructuring aggregated $3.3 million consisting
of severance and employment related costs of $1.8 million and costs related to
closure of excess facilities as a result of the reduction in force of $1.5
million.

As of December 31, 2003, approximately $1.2 million of termination
compensation and related benefits had been paid to terminated employees and
approximately $0.5 million of lease payments and related costs had been paid to
the landlord for the excess facilities. As of December 31, 2003, the remaining
accrual balance of $1.6 million restructuring will be paid monthly through
January 2006. The following analysis sets forth the rollforward of this charge:

2002 Restructuring

In the quarter ended June 30, 2002, the Company eliminated 20 positions. In
September 2002, we announced our intention to relocate our headquarters and
finance functions to Chicago, Illinois. As a result of the move, 5 general and
administrative positions were replaced in December 2002 and we further
eliminated 7 research and development positions. In the aggregate, 27 positions
were eliminated during the year ended December 31, 2002. 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.

As of December 31, 2003, approximately $0.7 million of termination
compensation and related benefits had been paid to terminated employees in
connection with the 2002 restructuring. As of December 31, 2003, approximately
$0.3 million of lease payments and related costs had been paid to the landlord
for the excess facilities. During 2003, the entire 2002 restructuring was
completed, with cash payments of $0.4 million.

2001 Restructuring

On February 8, 2001, we announced a series of actions to streamline support
for our voiceband operations and sharpen our focus on emerging growth sectors.
These measures were part of a restructuring program and included a reduction in
worldwide headcount of a total of 22 employees, a hiring freeze and cost
containment programs. On May 1, 2001, we announced a new business structure to
provide for greater focus on our activities with a significantly reduced
workforce. A total of 42 positions were eliminated as part of this
reorganization. In the fourth quarter of 2001, a total of 26 positions were
eliminated to further focus our

50

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

business. In the aggregate, 90 positions were eliminated during the year ended
December 31, 2001. The restructuring resulted in $3.8 million of charges for the
year ended December 31, 2001, consisting of severance and employment related
costs of $2.5 million and costs related to closure of excess facilities as a
result of the reduction in force of $1.3 million.

As of December 31, 2002, approximately $2.4 million of termination
compensation and related benefits had been paid to terminated employees. As of
December 31, 2002, approximately $1.2 million of lease payments and related
costs had been paid to the landlord for the excess facilities. During 2003, the
entire 2001 restructuring was completed, with cash payments of $0.1 million.

The combined effect of the 2002 and 2001 restructurings was:

10. INCOME TAXES

The domestic and foreign components of our income (loss) before provision
for income taxes and extraordinary loss were as follows (in thousands):

Our provision for income taxes consisted of the following (in thousands):

51

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

A reconciliation of the provision for income taxes at the Federal statutory
rate compared to our effective tax rate is as follows (in thousands):

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Our net deferred tax
asset consists of the following (in thousands):

At December 31, 2003, we have a California research and development credit
carryforward of approximately $1.0 million; this credit can be carried forward
indefinitely.

As of December 31, 2003, we had a full valuation allowance against our
deferred tax assets due to the uncertainty surrounding the realization of such
assets. Management evaluates on a periodic basis the recoverability of deferred
tax assets and the need for a valuation allowance. At such time as it is
determined that it is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced.

11. CONTINGENCIES

We record an accrual for estimated future royalty payments for relevant
technology of others used in our product offerings in accordance with SFAS No.
5, "Accounting for Contingencies." The estimated royalties accrual reflects
management's broader litigation and cost containment strategies, which may
include

52

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

alternatives such as entering into cross-licensing agreements, cash settlements
and/or ongoing royalties based upon our judgment that such negotiated
settlements would allow management to focus more time and financial resources on
the ongoing business. We have accrued our estimate of the amount of royalties
payable for royalty agreements already signed, agreements that are in
negotiation and unasserted but probable claims of others using advice from third
party technology advisors and historical settlements. Should the final license
agreements result in royalty rates significantly greater than our current
estimates, our business, operating results and financial condition could be
materially and adversely affected.

As of December 31, 2003 and December 31, 2002, we accrued royalties of
approximately $3.2 million and $3.7 million, respectively. Of these amounts,
approximately $0 and $0.5 million represent amounts accrued based upon signed
royalty agreements as of December 31, 2003 and 2002, respectively. While
management is unable to estimate the maximum amount of the range of possible
settlements, it is possible that actual settlements could exceed the amounts
accrued as of each date presented.

We have from time to time in the past received correspondence from third
parties, and may receive communications from additional third parties in the
future, asserting that our products infringe on their intellectual property
rights, that our patents are unenforceable or that we have inappropriately
licensed our intellectual property to third parties. We expect these claims to
increase as our intellectual property portfolio becomes larger. These claims
could affect our relationships with existing customers and may prevent potential
future customers from purchasing our products or licensing our technology.
Intellectual property claims against us, and any resulting lawsuit, may result
in our incurring significant expenses and could subject us to significant
liability for damages and invalidate what we currently believe are our
proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and could divert management's time and
attention. In addition, any claims of this kind, whether they are with or
without merit, could cause product shipment delays or require us to enter into
royalty or licensing agreements. In the event that we do not prevail in
litigation, we could be prevented from selling our products or be required to
enter into royalty or licensing agreements on terms which may not be acceptable
to us. We could also be prevented from selling our products or be required to
pay substantial monetary damages. Should we cross license our intellectual
property in order to obtain licenses, we may no longer be able to offer a unique
product. To date, we have not obtained any licenses from 3Com and the other
companies from whom we have received communication.

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

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

Litigation with U.S. Robotics

On May 23, 2003, we filed in the U.S. District Court for the Northern
District of California a patent infringement lawsuit against U.S. Robotics
Corporation claiming that U.S. Robotics has infringed one of our

53

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

patents. U.S. Robotics filed its answer and counterclaim asking for a
declaratory judgment that the claims of the patent are invalid and not
infringed. No trial date has been set. We believe we have meritorious claims and
defenses. However, because the action is still in its early stages, we are not
able to predict the outcome at this time.

Litigation with Broadcom

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

Litigation with Agere and Lucent

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

Litigation with 3Com

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

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

12. PREFERRED STOCK

We are authorized to issue up to 5,000,000 shares of preferred stock in one
or more series, each with a par value of $0.001 per share. As of December 31,
2003 and 2002, no shares of preferred stock were outstanding.

54

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

13. COMMON STOCK

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

As of December 31, 2003, we had reserved shares of common stock for future
issuance as follows:

1995, 1997 and 2001 Stock Option Plans...................... 5,738,771
1998 Director Option Plan................................... 400,000
Employee Stock Purchase Plan................................ 1,900,074
---------
Total shares reserved....................................... 8,038,845
=========

STOCK OPTION PLANS

1995 Plan, 1997 Plan, and 2001 Plan

In March 1995, the Board of Directors adopted and approved the 1995 Stock
Option Plan ("1995 Plan"). Under the 1995 Plan, the Board may grant to
employees, directors and consultants options to purchase our common stock at
terms and prices determined by the Board. No further options will be granted
under the 1995 Plan. However, all outstanding options under the 1995 Plan remain
in effect. The 1995 Plan will terminate in 2005. As of December 31, 2003, of the
total 3,200,000 shares authorized under the 1995 Plan, 156,032 shares remain
available for issuance.

In November 1996, the Board of Director adopted and approved the 1997 Stock
Option Plan ("1997 Plan"). Under the 1997 Plan, the Board may grant to
employees, directors and consultants options to purchase our common stock and/or
stock purchase rights at terms and prices determined by the Board. In August
1999, the Board of Directors and our stockholders approved an amendment and
restatement of the 1997 Plan that increased the number of authorized shares of
our common stock we may issue under the 1997 Plan to 5,500,000. We will further
increase annually the number of shares we are authorized to issue under the 1997
Plan by an amount equal to the lesser of (i) 700,000 shares, (ii) 4% of the
outstanding shares on such date or (iii) a lesser amount determined by the Board
of Directors. The exercise price of incentive stock options granted under the
1997 Plan may not be less than the fair market value of the common stock on the
grant date. Nonqualified stock options granted under the 1997 Plan must be at a
price equal to at least 85% of the fair market value of our common stock at the
date of grant. Options granted under the 1997 Plan may be exercised at any time
within ten years of the date of grant or within ninety days of termination of
employment, or such shorter time as may be provided in the related stock option
agreement. The 1997 Plan will terminate in 2007. As of December 31, 2003, of the
total 8,262,413 shares authorized under the 1997 Plan, 1,782,495 shares remain
available for issuance.

In August 2001, the Board of Directors adopted and approved the 2001
Nonstatutory Stock Option Plan ("2001 Plan"). Under the 2001 Plan, the Board may
grant to employees and consultants options to purchase our common stock at terms
and prices determined by the Board. The 2001 Plan does not apply to directors
and officers. Options granted under the 2001 Plan may be exercised at any time
within ten years from the date of grant or within ninety days of termination of
employment, or such shorter time as may be provided in the related stock option
agreement. The 2001 Plan will terminate in 2011. As of December 31, 2003, of the
total 750,000 shares authorized under the 2001 Plan, 584,244 remain available
for issuance.

55

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

The following table summarizes stock option activity under the Plans as of
December 31, 2003:

In 2001, in connection with the hiring and appointment of two executive
officers of the Company, we granted an aggregate amount of 300,000 options at
$8.00 per share outside of any stock option plan, pursuant to individual stock
option agreements. As of December 31, 2003, 230,000 options are outstanding.

1998 Director Option Plan ("Directors Plan")

Our Directors Plan became effective following our IPO in October 1999. In
June 2003 the shareholders approved amendments to the plan, which added 200,000
shares for a plan total of 400,000 shares and increased the annual options
granted to the Board of Directors from 7,500 to 10,000 shares. Therefore, we
have reserved a total of 400,000 shares of common stock that we can issue under
our Directors Plan. Under our 1998 Directors Plan, any new non-employee director
elected to the Board of Directors automatically receives a grant of 15,000
shares of common stock. The 15,000 share options will vest one-third as of each
anniversary of its date of grant until the option is fully vested, provided that
the optionee continues to serve as a director on such dates. After the initial
15,000 share options are granted to the non-employee director, he or she shall
automatically be granted an option to purchase 10,000 shares each year on
January 1, if on such date he or she shall have served on the Board of Directors
for at least six months. The 10,000 share options shall vest completely on the
first year anniversary of their date of grant, provided that the optionee
continues to serve as a director on such dates. The exercise price of all
options shall be 100% of the fair market value per share of the common stock,
generally determined with reference to the closing price of the common stock as
reported on the NASDAQ National Market on the date of grant. All of the options
granted under our 1998 Directors

56

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

Plan have a term of 10 years. As of December 31, 2003, of the total 400,000
shares authorized for issuance, we have remaining 250,000 shares that we can
grant under the Directors Plan. For the year ended December 31, 2001, there were
grants of 52,500 options at a weighted average exercise price of $8.46 and
cancellations of 15,000 options at a weighted average exercise price of $33.92
under the Directors Plan. As of December 31, 2001, 60,000 options were
outstanding at a weighted average exercise price of $21.05. For the year ended
December 31, 2002, there were grants of 75,000 options at a weighted average
exercise price of $8.43 and cancellations of 22,500 options at a weighted
average exercise price of $25.95 under the Directors Plan. As of December 31,
2002, 112,500 options were outstanding at a weighted average exercise price of
$11.66. For the year ended December 31, 2003, there were grants of 37,500
options at a weighted average exercise price of $7.90 and no cancellations under
the Directors Plan. As of December 31, 2003, 150,000 options were outstanding at
a weighted average exercise price of $10.72.

The following table summarizes information about stock options outstanding
under the 1995 Plan, 1997 Plan, 2001 Plan, Directors Plan and Executive Options
at December 31, 2003:

As of December 31, 2002, there were 2,080,916, options exercisable at a
weighted average exercise price of $13.40 and as of December 31, 2001, there
were 2,043,124 options exercisable at a weighted average exercise price of
$16.21. Each option has a contractual life of ten years.

Employee Stock Purchase Plan ("Purchase Plan")

In May 1998, we reserved a total of 800,000 shares of common stock for
future issuance under our Purchase Plan, plus annual increases equal to the
lesser of (i) 350,000 shares (ii) 2% of the outstanding shares on such date or
(iii) a lesser amount determined by the Board of Directors. Our Purchase Plan
will enable eligible employees to purchase common stock at the lower of 85% of
the fair market value of our common stock on the first or last day of each
offering period. Each offering period is six months except for the first
offering period which began on October 19, 1999 following the initial public
offering and ended on February 14, 2000. The Purchase Plan will terminate in
2008. As of December 31, 2003, the number of authorized shares available for
issuance under the Purchase Plan was 2,181,207 and we have remaining 1,900,074
shares that we can issue under the Purchase Plan.

57

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

Deferred Stock Compensation

In connection with the grant of stock options to employees prior to our
initial public offering in 1999, we recorded deferred stock compensation of $5.4
million, representing the difference between the exercise price and deemed fair
value of our common stock on the date these stock options were granted. Such
amount is presented as a reduction of stockholders' equity and was amortized
ratably over the vesting period of the applicable options through the second
quarter of 2003.

In connection with the grant of restricted stock to employees in 2001, we
recorded deferred stock compensation of $1.8 million, representing the fair
value of our common stock on the date the restricted stock was granted. Such
amount is presented as a reduction of stockholders' equity and was amortized
ratably over the vesting period of the applicable shares through the fourth
quarter of 2003.

In connection with the grant of restricted stock to employees in March
2002, we recorded deferred stock compensation of $0.4 million, representing the
fair value of our common stock on the date the restricted stock was granted.
Such amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable shares through March 2005.

In connection with the grant of restricted stock to employees in December
2002, we recorded deferred stock compensation of $3.3 million representing the
fair value of our common stock on the date the restricted stock was granted.
Such amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable shares through October 2008.

In connection with the grant of restricted stock to employees and directors
in 2003, we recorded deferred stock compensation of $0.8 million representing
the fair value of our common stock on the date the restricted stock was granted.
Such amount is presented as a reduction of stockholders' equity and is amortized
ratably over the vesting period of the applicable shares through July 2009.

For the years ended December 31, 2003, 2001 and 2000, amortization of
deferred stock compensation (in thousands) relates to the following functional
categories:

14. STOCK REPURCHASES

In August 2002, the Board of Directors authorized the repurchase of up to
one million shares of our common stock, which was completed in February 2003. In
February and November 2003, PCTEL extended its stock repurchase program and
announced its intention to repurchase up to one million and 500,000 additional
shares, respectively, on the open market from time to time. During the year
ended December 31, 2003, we repurchased 762,800 shares of our outstanding common
stock for approximately $6.2 million. Since the inception of the stock
repurchase program we have repurchased 1,538,600 shares of our outstanding
common stock for approximately $11.5 million.

58

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

15. LEASE COMMITMENTS

We have non-cancelable operating leases for office facilities through 2007
and operating leases for equipment through 2004. Our future minimum rental
payments under these leases at December 31, 2003, are as follows (in thousands):

Our rent expense under operating leases for the years ended December 31,
2003, 2002 and 2001 was approximately $710,000, $874,000 and $1,166,000,
respectively.

16. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION

We operate in one segment that segment being wireless products. We market
our products worldwide through our sales personnel, independent sales
representatives and distributors. Prior to May 2003, all of our customers
outside the United States were in the HSP modem product line, which is not
indicative of the geographic distribution of our wireless product lines.

Our revenue to customers outside of the United States, as a percent of
total revenues, is as follows:

Revenue to our major customers representing greater than 10% of total
revenues are as follows:

59

PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

As of December 31, 2003, our long-lived assets were primarily located in
the United States. Our long-lived assets by geographic region as of December 31,
2003 and 2002 are as follows:

17. RELATED PARTY TRANSACTIONS

For the year ended December 31, 2001, we paid a total of $0.2 million to
Dr. Martin H. Singer and John Schoen our executive officers, prior to their
appointment, for consulting services. Dr. Martin H. Singer, an executive officer
served as a member of our Board of Directors during the period in which
consulting fees were paid to him.

18. 401(K) PLAN

Our 401(k) plan covers all of our employees beginning the first of the
month following the month of their employment. Under this plan, employees may
elect to contribute up to 15% of their current compensation to the 401(k) plan
up to the statutorily prescribed annual limit. We may make discretionary
contributions to the 401(k). We made $0.2 million in employer contributions to
the 401(k) plan for the years ended December 31, 2003, 2002 and 2001,
respectively.

19. SUBSEQUENT EVENTS

On January 2, 2004, PCTEL, Inc., completed our acquisition of MAXRAD, Inc.,
an Illinois corporation ("MAXRAD"). 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, MAXRAD,
and the shareholders of MAXRAD and certain other parties entered into a
Securities Purchase Agreement, dated as of January 2, 2004 (the "Purchase
Agreement"), pursuant to which PCTEL acquired all of the outstanding capital
stock of MAXRAD. None of the Shareholders has a material relationship with
PCTEL.

In exchange for the outstanding capital stock of MAXRAD, PCTEL paid $20
million in cash out of its available working capital, a portion of which will be
held in escrow for a limited period of time as security for losses incurred by
PCTEL in connection with, among other matters, any breaches of the agreements,
covenants, representations and warranties made by MAXRAD or the Shareholders
under or in connection with the Purchase Agreement. The purchase price is
subject to adjustment based on the net assets reported on MAXRAD's balance sheet
as of January 2, 2004. It is not expected that any such adjustment will be
material.

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PCTEL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED: DECEMBER 31, 2003

20. QUARTERLY DATA (UNAUDITED)

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

Arthur Andersen LLP was previously our independent accountant.
Representatives for Arthur Andersen LLP are not available to provide the
consents required for the inclusion of their report on our consolidated
financial statements for the year ended December 31, 2001 included in this Form
10-K, and we have dispensed with the requirement to file their consent in
reliance upon Rule 437a of the Securities Act of 1933. Because Arthur Andersen
LLP has not consented to the inclusion of their report in this Form 10-K,
investors will not be able to recover against Arthur Andersen LLP under Section
11 of the Securities Act of 1933 for any untrue statements of material fact
contained in the consolidated financial statements audited by Arthur Andersen
LLP that are incorporated by reference or any omissions to state a material fact
required to be stated therein.

Information regarding changes in accountants is incorporated by reference
to the Current Reports on Forms 8-K filed on May 15, 2002 and May 21, 2002.

For the year prior to our engagement of PricewaterhouseCoopers LLP as our
independent auditors, we did not consult with PricewaterhouseCoopers LLP
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on PCTEL's consolidated financial statements. Additionally,
PricewaterhouseCoopers LLP did not audit our consolidated financial statements
for the fiscal year ended December 31, 2001.

ITEM 9A: CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our management carried out an evaluation, with the participation of our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that as of the end
of the period covered by this Annual Report on Form 10-K our disclosure controls
and procedures as such term is defined under Rule 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act, are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.

(b) CHANGES IN INTERNAL CONTROLS.

There was no change in our internal controls over financial reporting that
occurred during the period covered by this Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item concerning our directors is
incorporated by reference to the sections entitled "Proposal One -- Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in our Proxy Statement related to our 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days of the end of our fiscal year pursuant to general instruction G(3) of Form
10-K (the "Proxy Statement"). Certain information required by this item
concerning executive officers is set forth in Item 4A of this Report in the
section captioned "Business -- Executive Officers of the Registrant".

CODE OF ETHICS

We have adopted the PCTEL, Inc. Code of Ethics for Principal Executives and
Key Financial Officers ("Code of Ethics"). The Code of Ethics applies to our
principal executive financial officer, our principal

62

accounting officer or controller and persons performing similar functions and
responsibilities who shall be identified by our Audit Committee from time to
time.

The Code of Ethics is available at our website, located at www.pctel.com.
It may be found at our website as follows:

1. From our main web page, click on "Investor Relations,"

2. Next, click on "Corporate Governance,"

3. Finally, click on "Financial Code of Ethics."

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of the Code of Ethics by
posting such information on our website.

ITEM 11: EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
sections captioned "Executive Compensation and Other Matters" and "Report of the
Compensation Committee of the Board of Directors" contained in our Proxy
Statement.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information concerning the security ownership of certain beneficial owners
and management as well as equity compensation plans, is incorporated by
reference to the information set forth in the sections entitled "Information
Concerning Solicitation and Voting Security Ownership of Certain Beneficial
Owners and Management" and "Equity Compensation Plan Information" contained in
our Proxy Statement.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships is incorporated by reference
to the section entitled "Transactions with Related Parties and Insiders"
contained in our Proxy Statement.

PART IV

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services is
incorporated by reference to the section entitled "Proposal Two-Ratification of
Appointment of Independent Auditors" contained in our Proxy Statement.

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

Refer to the financial statements filed as a part of this Report under "Item
8 -- Financial Statements and Supplementary Data".

(2) FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as a part of this Report
under "Schedule II" immediately preceding the signature page: Schedule
II -- Valuation and Qualifying Accounts for the three fiscal years ended
December 31, 2003. All other schedules called for by Form 10-K are omitted
because they are inapplicable or the required information is shown in the
financial statements, or notes thereto, included herein.

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(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)

64

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

* Filed herewith.

+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K.

(a) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Current Report on Form 8-K dated March 12, 2003.

(b) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-84707).

(c) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 2001.

(d) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.

(e) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on October 3, 2001 (Registration Statement No.
333-70886).

(f) Incorporated by reference herein to the Registrant's Registration Statement
of Form S-8 filed on December 14, 2001 (Registration Statement No.
333-75204).

(g) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for quarter ended September
30, 2002.

(h) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.

(i) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003.

(j) Incorporated by reference to the exhibit bearing the same number filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.

(B) REPORTS ON FORM 8-K

We filed a report on Form 8-K dated October 28, 2003 that furnished a press
release announcing our financial results for the fiscal quarter ended September
30, 2003.

(c) EXHIBITS

See Item 15(a)(3) above.

(d) FINANCIAL STATEMENT SCHEDULES

See Item 15(a)(2) above.

65

PCTEL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:

PCTEL, Inc.
A Delaware Corporation
(Registrant)

/s/ MARTIN H. SINGER

--------------------------------------
Martin H. Singer
Chairman of the Board and
Chief Executive Officer

Dated: March 12, 2004

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Martin H. Singer and John Schoen, and
each of them, his true and lawful attorneys-in-fact and agents, each with full
power of substitution and re-substitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.

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

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EXHIBIT INDEX