<PAGE>

     As filed with the Securities and Exchange Commission on August 6, 1999

                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ---------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                                ---------------
                                  PC-Tel, Inc.
             (Exact Name of Registrant as Specified in Its Charter)

                                ---------------
         Delaware                      3661                    77-0364943
     (State or other            (Primary Standard           (I.R.S. Employer
     jurisdiction of        Industrial Classification        Identification
     incorporation or              Code Number)                 Number)
      organization)



                                 70 Rio Robles
                           San Jose, California 95134
                                 (408) 965-2100
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                   PETER CHEN
                            Chief Executive Officer
                                  PC-Tel, Inc.
                                 70 Rio Robles
                           San Jose, California 95134
                                 (408) 965-2100
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                   Copies to:
          DOUGLAS H. COLLOM, ESQ.                  SCOTT D. LESTER, ESQ.
           ROGER E. GEORGE, ESQ.                   MICHAEL S. DORF, ESQ.
          DEBORAH M. CHANG, ESQ.                    TORREY MILLER, ESQ.
           SHELDON J. QUAN, ESQ.              Brobeck Phleger & Harrison, LLP
     Wilson Sonsini Goodrich & Rosati               Spear Street Tower
         Professional Corporation                       One Market
            650 Page Mill Road                San Francisco, California 94105
        Palo Alto, California 94304                   (415) 442-0900
              (650) 493-9300
                                ---------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement
                                ---------------
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                                ---------------
                        CALCULATION OF REGISTRATION FEE
<TABLE>
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
                                              Proposed       Proposed
 Title of Each Class of        Amount         Maximum        Maximum      Amount of
    Securities to be           to be       Offering Price   Aggregate    Registration
       Registered            Registered      Per Share    Offering Price    Fee(1)
-------------------------------------------------------------------------------------
<S>                       <C>              <C>            <C>            <C>
Common Stock, $0.001 par
 value.................   5,290,000 shares     $16.00      $84,640,000     $23,530
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(a) promulgated under the Securities
    Act of 1933, as amended.
                                ---------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed without +
+notice. PC-Tel, Inc. may not sell these securities until the registration     +
+statement filed with the Securities and Exchange Commission is effective.     +
+This prospectus is not an offer to sell these securities, and PC-Tel, Inc. is +
+not soliciting offers to buy these securities, in any jurisdiction where the  +
+offer or sale of these securities is not permitted.                           +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Not Complete)
Issued      , 1999

                                4,600,000 Shares

                           [PCtel LOGO APPEARS HERE}

                                  PC-Tel, Inc.

                                  Common Stock

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

  PC-Tel, Inc. is offering shares of its common stock in an initial public
offering. We estimate that the initial public offering price for our shares
will be between $15.00 and $17.00.

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

  We will apply to have our common stock quoted on the Nasdaq National Market
under the symbol "PCTI."

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

  Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8.

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

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
<S>                                                              <C>       <C>
Public Offering Price...........................................   $       $
Discounts and Commissions to Underwriters.......................   $       $
Proceeds to PC-Tel, Inc.........................................   $       $
</TABLE>

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

  PC-Tel, Inc. has granted the underwriters the right to purchase up to an
additional 690,000 shares of common stock to cover any over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. Banc of America Securities LLC expects to deliver the shares of
common stock to investors on      , 1999.

Banc of America Securities LLC

                            Warburg Dillon Read LLC

                                                         Needham & Company, Inc.

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

                   The date of this prospectus is      , 1999
<PAGE>

Inside front cover

Background of space shot photograph of planet earth and graphic images of
telephone, laptop computer, desktop computer, wireless modem, personal digital
assistant and set-top box. Text caption "High-Speed Personal Connecting
Communications Solutions."
<PAGE>

   You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   4
Risk Factors.............................................................   8
Special Note Regarding Forward Looking Statements........................  20
Use of Proceeds..........................................................  21
Dividend Policy..........................................................  21
Capitalization...........................................................  22
Dilution.................................................................  23
Selected Consolidated Financial Data.....................................  24
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  25
Business.................................................................  37
Management...............................................................  50
Certain Transactions.....................................................  60
Principal Stockholders...................................................  62
Description of Capital Stock.............................................  64
Shares Eligible for Future Sale..........................................  66
Underwriting.............................................................  68
Legal Matters............................................................  70
Experts..................................................................  70
Where You Can Find Additional Information................................  70
Index to Financial Statements............................................ F-1
</TABLE>



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

   PC-Tel, the PC-Tel logo, HSP Modem, MicroModem, HIDRA and LiteSpeed are
trademarks of PC-Tel. Other service marks, trademarks and trade names referred
to in this prospectus are the property of their respective owners.

                                       3
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully before making an investment
decision.

   This prospectus contains forward-looking statements, which involve risks and
uncertainties. PC-Tel's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described under "Risk Factors" and elsewhere in this prospectus.

                                     PC-Tel

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions. Our solutions enable Internet access and other
communications applications through existing analog and emerging broadband
networks. We have developed a proprietary software architecture that
substantially reduces the hardware, space and power requirements of
conventional hardware-based connectivity devices. Our software architecture is
easily upgradeable, minimizing the risk of technological obsolescence. Our
communications products are designed to enable widespread Internet access and
other communication applications through desktop PCs, notebook computers,
Internet appliances such as set-top boxes and webphones, video game consoles
and remote monitoring devices.

   We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective software-based
digital signal processing solutions. Host signal processing technology utilizes
the computational and processing resources of a host central processing unit
rather than requiring additional special-purpose hardware. The reduction of
hardware components in our architecture reduces space requirements by 50% and
power requirements by 70% compared to conventional solutions. The first
implementation of our host signal processing technology was in a software
modem, or soft modem, in 1995. Through June 1999, we have shipped 11.3 million
soft modems. Based on our 1998 unit shipments, we believe we are the largest
worldwide producer of soft modems, representing 68% of all soft modems sold
that year, as estimated by Vision Quest 2000. We also believe that in 1998 we
sold 6% of all analog modems, estimated by Dataquest to have been 59.1 million
units. Various OEMs, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.

   In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high-speed remote access.
The accelerated growth of content-rich applications, which demand high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now an ordinary requirement for business, government, academic
and home environments. These market trends have resulted in a significant
increase in the demand for connectivity devices. International Data Corporation
estimates that by 2003, the number of Internet connectivity devices in use will
grow to over 722 million.

   Our host signal processing architecture allows us to quickly and cost-
effectively capitalize on this rapid growth in demand for connectivity devices.
We believe that we can use our intellectual property portfolio to readily adapt
to the speed and design requirements of additional emerging connectivity
technologies. For example, we have developed LiteSpeed, a host signal
processing architecture solution, in response to growing market acceptance of
G.Lite, a digital subscriber line, or DSL, technology that enables downstream
data transmission speeds of up to 1.5 Mbps and upstream data transmission
speeds of 512 Kbps over existing copper telephone lines. Our G.Lite technology
is completely compatible with analog transmission networks, offering the user
complete flexibility in choosing access technology and transmission speed. By
providing connectivity solutions that can be easily adapted to new standards
and protocols, we reduce interoperability obstacles, which simplifies
purchasing decisions and accelerates deployment times for OEMs.

                                       4
<PAGE>


   To extend our position as the leading provider of cost-effective software-
based connectivity solutions, our strategy includes the following key elements:

  . identify emerging high-growth communications technologies and develop
    innovative software-based connectivity solutions to capitalize on these
    new market opportunities as they gain acceptance,

  . enhance the scope of our host signal processing technology to further
    reduce the number of hardware components in our software-based solutions,

  . develop innovative products based on our host signal processing
    architecture that enable migration to emerging broadband communications
    technologies for next generation devices,

  . extend our intellectual property leadership position and establish
    industry standards through rapid internal product development, strategic
    acquisitions and licensing of innovative communications technology, and

  . license our proprietary digital signal processing communications
    applications in non-PC devices to provide enhanced performance and cost
    savings.

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

   Our principal executive offices are located at 70 Rio Robles, San Jose,
California 95134. Our telephone number is (408) 965-2100.

                                       5
<PAGE>

                                  The Offering

Common stock offered by PC-Tel.......
                                         4,600,000 shares

Common stock to be outstanding after    15,602,078 shares
 this offering.......................

Use of proceeds......................   $15.7 million of the proceeds from this
                                        offering will be used to repay bank
                                        debt. The remaining proceeds will be
                                        used for general corporate purposes,
                                        including working capital, and for
                                        potential investments in and
                                        acquisitions of complementary products,
                                        technologies or businesses.

Proposed Nasdaq National Market         PCTI
 symbol..............................

   In addition to the shares of common stock to be outstanding after this
offering, we are obligated to issue shares of our common stock upon exercise of
outstanding options and warrants. As of June 30, 1999 these additional shares
included:

  . a total of 3,815,710 shares of common stock issuable upon exercise of
    outstanding stock options under our 1995 stock plan and 1997 stock plan
    at a weighted average exercise price per share of $5.72, and

  . a total of 202,417 shares of common stock issuable upon exercise of
    outstanding warrants at an exercise price of $8.00 per share.

   In addition, during the period between July 1 and August 3, 1999, we granted
additional stock options under our 1997 stock plan for the purchase of 565,390
shares. This includes options to purchase 400,000 shares of common stock
granted to William F. Roach, our President and Chief Operating Officer, who
began employment with PC-Tel in August 1999.

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

   Please also note that, except where otherwise indicated:

  . the information in this prospectus relating to our outstanding shares of
    common stock or options or warrants to purchase our common stock is based
    upon information as of June 30, 1999,

  . the information in this prospectus reflects the conversion of all of our
    outstanding shares of preferred stock into 8,510,748 shares of common
    stock upon the closing of this offering,

  . the information in this prospectus assumes no exercise of the
    underwriters' over-allotment option, and

  . in this prospectus, "PC-Tel," "we," "us" and "our" refer to PC-Tel, Inc.
    and its subsidiaries.

  . all shares referred to in this prospectus reflect a 3 for 2 reverse stock
    split that we effected on October 4, 1995.

                                       6
<PAGE>

                   Summary Consolidated Financial Information

   You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto
included elsewhere in this prospectus. The adjusted balance sheet data as of
June 30, 1999 reflects the application of the net proceeds from the sale of the
4,600,000 shares of common stock offered by PC-Tel at an assumed offering price
of $16.00 per share, after deducting estimated offering expenses and
underwriting discounts and commissions. Had this offering closed on June 30,
1999, $16.0 million of the proceeds would have been used to repay bank debt.
The adjusted balance sheet data as of June 30, 1999 also reflects the write-off
of deferred debt issuance costs and the expense of the prepayment penalty
related to the bank debt.

<TABLE>
<CAPTION>
                           Period From
                           February 10,
                               1994                                      Six Months Ended
                          (inception) to    Year Ended December 31,          June 30,
                           December 31,  ------------------------------- -----------------
                               1994       1995    1996    1997    1998     1998     1999
                          -------------- ------  ------- ------- ------- -------- --------
                                       (in thousands, except per share data)
<S>                       <C>            <C>     <C>     <C>     <C>     <C>      <C>
Statement of Operations
 Data:
Revenues................      $ --       $  191  $16,573 $24,009 $33,004 $ 12,343 $ 33,046
Gross profit............        --           85    7,391  11,085  19,126    6,395   16,049
Income (loss) from
 operations.............       (283)     (1,127)   3,882   2,957     228      732    4,454
Net income (loss).......       (280)     (1,093)   3,004   2,301     495      683    2,704
Basic earnings per
 share..................      $ --       $  --   $  4.79 $  1.13 $  0.21 $   0.29 $   1.10
Diluted earnings per
 share..................      $ --       $  --   $  0.29 $  0.20 $  0.04 $   0.06 $   0.21
Shares used in computing
 basic earnings per
 share..................        --          --       627   2,032   2,355    2,320    2,461
Shares used in computing
 diluted earnings per
 share..................        --          --    10,280  11,645  12,325   12,400   12,638
</TABLE>

<TABLE>
<CAPTION>
                                                               June 30, 1999
                                                            --------------------
                                                                    Adjusted for
                                                            Actual  the offering
                                                            ------- ------------
                                                               (in thousands)
<S>                                                         <C>     <C>
Balance Sheet Data:
Cash and short-term investments............................ $23,534   $74,182
Total assets...............................................  50,483    99,661
Long-term debt, net of current portion.....................  13,630        --
Total stockholders' equity.................................  17,861    83,113
</TABLE>

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

   See Note 2 of Notes to the Consolidated Financial Statements for an
explanation of the shares used in computing basic earnings per share and shares
used in computing diluted earnings per share in the above table.


                                       7
<PAGE>

                                  RISK FACTORS

   Before you invest in our common stock, you should carefully consider the
various risks, including those described below, together with all of the other
information included in this prospectus. Additional risks and uncertainties not
presently known to us or that we currently consider to be immaterial may also
impair our business operations. If any of these risks actually occur, our
business, financial condition or operating results could be adversely affected.
In that case, the trading price of our common stock could decline and you could
lose all or part of your investment.

                         Risks Related to Our Business

Our sales are concentrated among a limited number of customers and the loss of
one or more of these customers could negatively affect our operating results.

   Our sales are concentrated among a limited number of customers. If we were
to lose one or more of these customers, or if one or more of these customers
were to delay or reduce purchases of our products, our financial performance
could be adversely affected. For the six months ended June 30, 1999,
approximately 81% of our revenues were generated by five of our customers, and
revenues derived from sales to Talent Trade Asia, TriGem and Silicon
Application Corporation accounted for 42%, 20% and 10%, respectively, of our
product sales. For the year ended December 31, 1998, approximately 60% of our
revenues were generated by five of our customers, and revenues derived from
sales to Silicon Application Corporation, BTC, Askey Computer and Zoltrix
accounted for 15%, 13%, 12% and 12%, respectively, of our product sales. These
customers may in the future decide not to purchase our products at all,
purchase fewer products than they did in the past or alter their purchasing
patterns, because:

  . we do not have any long term purchase arrangements or contracts with
    these or any of our other customers,

  . our product sales to date have been made primarily on a purchase order
    basis, which permit our customers to cancel, change or delay product
    purchase commitments with little or no notice and without penalty, and

  . many of our customers also have pre-existing relationships with current
    or potential competitors which may affect our customers' purchasing
    decisions.

   We expect that a small number of customers will continue to account for a
substantial portion of our revenues for the foreseeable future and that a
significant portion of our sales will continue to be made on the basis of
purchase orders.

We have been sued by Motorola for patent infringement. If this litigation
resolves unfavorably to us, our business is likely to be harmed.

   In September 1998, Motorola, Inc. filed a patent infringement lawsuit
against PC-Tel and another modem manufacturer in the U.S. District Court for
the District of Massachusetts. Motorola's complaint alleges that we are, and
have been, infringing seven Motorola patents by making, using, offering to
sell, selling and/or importing products that embody or use the inventions
claimed in its patents. In addition to alleging direct infringement, Motorola's
complaint includes allegations of inducing infringement and contributory
infringement. Motorola's complaint seeks damages and also asks the court to
award a preliminary and permanent injunction to prevent us from continuing acts
of direct infringement, inducing infringement and contributory infringement.
Motorola's complaint contains a demand for Motorola's costs, expenses and
reasonable attorney's fees and treble damages for willful infringement. Six of
the seven patents asserted by Motorola relate to communications standards
accepted by the International Telecommunications Union, or ITU. Any patents
incorporating communications standards accepted by the ITU are required to be
made available for licensing by the holder of the patent on terms that are
fair, reasonable and non-discriminatory. The seventh

                                       8
<PAGE>

Motorola patent, entitled "Processor Modem," allegedly relates to software
modem technology. Motorola subsequently dismissed its Massachusetts lawsuit
without prejudice and re-filed its complaint in the U.S. District Court for the
District of Delaware.

   We answered Motorola's complaint denying infringement of Motorola's seven
patents and alleging the patents are invalid and unenforceable. We also
asserted counter-claims asserting tort and breach of contract claims and
violations of the antitrust and unfair competition laws. Our counter-claims and
defenses are based in part on Motorola's refusal to license its ITU-related
patents to us at fair, reasonable and non-discriminatory rates, as required by
the ITU. Our counter-claims also allege that Motorola intentionally interfered
with our actual and potential customer relationships.

   In response to Motorola's lawsuit, we filed a patent infringement suit
against Motorola in the U.S. District Court for the District of Delaware. We
have since amended our first complaint against Motorola to include allegations
that Motorola is, and has been, infringing, inducing infringement and
contributorily infringing ten of our patents. In our complaint, we have asked
the court to award similar relief to that requested by Motorola in its lawsuit,
including a preliminary and permanent injunction, damages, costs, expenses,
reasonable attorneys' fees and treble damages for willful infringement. Our ten
patents asserted against Motorola include patents related to ITU standards,
software and other modem technology.

   Discovery is underway and trial is set for early 2001 in both Motorola's
lawsuit against us and our lawsuit against Motorola.

   Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, we cannot ascertain the outcome of the lawsuit,
the availability of injunctive relief or other equitable remedies, or estimate
the total expenses, possible damages or settlement value, if any, that we may
ultimately incur in connection with our litigation with Motorola. However, we
believe, based on our knowledge of the industry, our review of Motorola's six
ITU-related patents and our products, our involvement in the ITU standards
setting process and our awareness of Motorola's participation in that process,
and the advice of our patent counsel, Knobbe, Martens, Olson & Bear, LLP, that
Motorola's six ITU-related patents asserted in its lawsuit are not enforceable
against us. We also believe, based on our knowledge of the industry, our review
of Motorola's patent related to software modem technology and our products, and
the advice of our patent counsel, Knobbe, Martens, Olson & Bear, LLP, that
Motorola's patent allegedly related to software modem technology asserted by
Motorola in its patent lawsuit against us is not infringed by us and is
invalid. We are vigorously contesting, and intend to continue to vigorously
contest, all of Motorola's claims. Nonetheless, this litigation could be time
consuming and costly, and we will not necessarily prevail given the inherent
uncertainties of litigation.

   Substantially all of our revenues to date are attributable to products which
Motorola claims as the basis for its infringement suit against us. Further, we
anticipate that a substantial proportion of our revenues for the foreseeable
future is expected to be dependent upon sales of these and future products
incorporating technology that Motorola has alleged infringes its patents. 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. We could also be required to pay substantial monetary damages to
Motorola, which are subject to trebling in the event of a finding by the court
of willful infringement. The grant of a preliminary or permanent injunction
could have an adverse effect on our business, including a substantial reduction
in our revenues and income, losses for an extended period of time and a
substantial depletion of our financial resources. In the event of an
injunction, we could attempt to obtain a license from Motorola to enable us to
continue to sell products incorporating the technology. However, we may not be
able to enter into any royalty or licensing agreements on terms acceptable to
us or at all. We could also attempt to develop a different technology and
modify the design of our products in an effort to avoid infringement of
Motorola's patents. However, we are not currently engaged in any development
efforts in this regard, and we cannot be sure that any efforts would be
successful. Even if successful, these efforts would require a substantial
period of time to complete and we cannot be sure that these efforts would
result in competitive products.


                                       9
<PAGE>

   In connection with the Motorola litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
Motorola litigation has diverted and is expected to continue to divert the
efforts and attention of our management and technical personnel. Accordingly,
whether or not we are ultimately successful on the merits, the expenses and
diversion of resources associated with the Motorola litigation could have a
material adverse effect on our business and operating results. If the Motorola
lawsuit were to be resolved by a settlement, we might be required to make
substantial payments to Motorola or to grant a cross-license to Motorola to
utilize our technology, which could also hurt our business and operating
results.

Our business is exposed to additional risks because we have significant
international sales and operations.

   Our sales to customers located in Asia accounted for 74%, 77% and 76% of our
total revenues in the years ended December 31, 1996, 1997 and 1998,
respectively, and 77% and 99% of total revenues in the six months ended June
30, 1998 and 1999, respectively. The predominance of our sales are in Asia,
mostly in Taiwan and China, because our customers are primarily motherboard or
modem manufacturers that are located there. In many cases, our indirect OEM
customers specify that our products be included on the modem boards or
motherboards that they purchase from board manufacturers, and we sell our
products directly to the board manufacturers for resale to our indirect OEM
customers. Industry statistics indicate that approximately two thirds of modems
manufactured in Asia are sold back to OEMs located in the United States. Due to
the industry-wide concentration of modem manufacturers in Asia, we believe that
a high percentage of our future sales will continue to be concentrated with
Asian customers. As a result, our future operating results could be uniquely
affected by a variety of factors outside of our control, including:

  . political and economic instability,

  . changes in tariffs, quotas, import restrictions and other trade barriers,

  . difficulty in meeting export license requirements,

  . delays in collecting accounts receivable,

  . adverse tax consequences,

  . changes in legislative or regulatory requirements, and

  . fluctuations in the value of Asian currencies relative to the U.S.
    dollar.

   To successfully expand our international sales, we must strengthen foreign
operations, hire additional personnel and recruit additional international
distributors and resellers. This will require significant management attention
and financial resources. To the extent that we are unable to effect these
additions in a timely manner, we may not be able to maintain or increase
international market demand for our products, and our operating results could
be adversely affected.

Continuing decreases in the average selling prices of our products could
materially adversely affect our operating results.

   Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline, and negatively affect
operating results. The average selling price of our products has decreased by
approximately 40% from October 1995 to June 30, 1999. We expect this trend to
continue. This erosion is due to a number of factors, including:

  . competitive pricing pressures from other sellers of connectivity
    solutions,

  . rapid technological change resulting in rapid introductions of new
    products,

  . continuing price performance enhancements by our competitors, and

  . customers of PC-Tel who negotiate price reductions in exchange for longer
    term purchase commitments.

   In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Decreasing average selling prices

                                       10
<PAGE>

in our products could result in decreased revenue even if the number of units
that we sell increases. Therefore, we must continue to develop and introduce
next-generation products with enhanced functionalities that can be sold at
higher gross margins. Our failure to do this could cause our revenues and gross
margin to decline.

Our gross margins may vary based on the mix of sales of our products and
services, and these variations will directly affect our quarterly operating
results.

   We derive a significant portion of our sales from our software-based
connectivity products. We expect 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 margins from both
existing and future products to decrease over time. In addition, licensing
revenues from our products historically have provided higher margins than of
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 will cause our quarterly results to vary and could adversely affect
our operating results.

Our quarterly operating results may fluctuate significantly, and these
fluctuations may cause our stock price to fall.

   Our quarterly and annual operating results have varied in the past and are
expected to vary in the future depending upon a number of factors. As a result,
we believe that quarter-to-quarter comparisons of our financial results are not
necessarily meaningful, and you should not rely on them as an indication of
future performance. The operating results of companies in our industry have in
the past experienced significant quarter-to-quarter fluctuations. If our
revenues for a quarter fall below our expectations and we are not able to
quickly reduce our operating expenses in response, our operating results for
that quarter would be negatively affected. In addition, it is likely that in
some future quarter our operating results may be below the expectations of
public market analysts and investors and, as a result, our stock price may
fall.

Seasonal trends in sales of our software-based connectivity products may affect
our quarterly operating results.

   We have experienced and expect to continue to experience seasonality in
sales of our connectivity products. These seasonal trends materially affect our
quarter-to-quarter operating results. Our revenues are higher during the back-
to-school and holiday seasons which fall in the third and fourth calendar
quarters. Revenue and operating results in our third and fourth quarters are
typically higher relative to other quarters because many purchasers of PCs make
purchase decisions based on their calendar year-end budgeting requirements. As
a result, we generally expect revenue levels and operating results for the
first quarter to be less than those for the preceding quarter.

   We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. We expect our third quarter to reflect the
effects of summer slowing of international business activity and spending
activity generally associated with that time of year, particularly in Europe.
To the extent that our revenue in Asia, Europe 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 expect that our operating expenses will increase substantially in the future
and these increased expenses may adversely affect our ability to remain
profitable.

   Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially in the foreseeable future as we:

  . further develop and introduce new applications and functionality for our
    host signal processing technology,

  . explore emerging product opportunities in digital technologies and
    wireless and cable communications,

                                       11
<PAGE>

  . expand our distribution channels, both domestically and in our
    international markets, and

  . pursue strategic relationships and acquisitions.

   In order to maintain profitability we will be required to increase our
revenue to meet these additional expenses. Any failure to significantly
increase our revenue as we implement our product, service, distribution and
strategic relationship strategies would have a negative effect on our operating
results.

We must accurately forecast our customer demand for our modem products. If
there is an unexpected fluctuation in demand for our products, we may incur
excessive operating costs or lose product revenues.

   We must forecast and place purchase orders for specialized semiconductor
chips, the ASIC, CODEC and discrete access array, or DAA, components of our
modem products, several months before we receive purchase orders from our own
customers. This forecasting and order lead time requirement limits our ability
to react to unexpected fluctuations in demand for our products. These
fluctuations can be unexpected and may cause us to have excess inventory, or a
shortage, of a particular product. In the event that our forecasts are
inaccurate, we may need to write down excess inventory. For example, we were
required to write down inventory in the second quarter of 1996 in connection
with a product transition within our 14.4 Kbps product family. Similarly, if we
fail to purchase sufficient supplies on a timely basis, we may incur additional
rush charges or we may lose product revenues if we are not able to meet a
purchase order. These failures could also adversely affect our customer
relations. Significant write-downs of excess inventory or declines in inventory
value in the future could adversely affect our financial results.

Any delays in our normally lengthy sales cycles could result in significant
fluctuations in our quarterly operating results.

   Sales cycles for our products with major customers are lengthy, often
lasting six months or longer. In addition, it can take an additional six 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:

  . our OEM customers usually complete a lengthy technical evaluation of our
    products, over which we have no control, before placing a purchase order,

  . the commercial integration of our products by an OEM is typically limited
    during the initial release to evaluate product performance, and

  . 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 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. If this were to occur, our operating results for the
quarter would be adversely affected.

Other third parties may also assert that our products infringe their
intellectual property rights.

   In addition to our ongoing patent litigation with Motorola, we have
received, and may receive in the future, communications from third parties
asserting that our products infringe on their intellectual property rights.
These claims could affect our relationships with existing customers and may
prevent potential future customers from purchasing our products or licensing
our technology. Because we depend upon a limited number of products, any claims
of this kind, whether they are with or without merit, could be time consuming,
result in costly litigation, 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

                                       12
<PAGE>

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.

   We have received communications from third parties, including Motorola,
Lucent and Dr. Brent Townshend, claiming to own patent rights in technologies
that are part of communications standards adopted by the ITU, such as v.90,
v.34, v.42bis and v.32bis, and other common communications standards. These
third parties claim that our products utilize such patented technologies and
have requested that we enter into license agreements with them. At various
times we have engaged in negotiations with, and are continuing to negotiate
with, Lucent to obtain licenses under its patents. Motorola has refused to
conduct further negotiations with us to license its patents and we are in
litigation with Motorola in connection with its patent infringement claims. To
date, we have not obtained any licenses from Lucent, Motorola or Dr. Townshend,
because we believe that Lucent, Motorola and Dr. Townshend have requested
license fees or cross licenses of our portfolio of intellectual property on
terms that are not fair, reasonable and nondiscriminatory as required by the
ITU. Should we cross license our intellectual property in order to obtain
licenses, we may no longer be able to offer a unique product.

   In addition, new patent applications may be currently pending or filed in
the future by third parties covering technology that we use currently or may
use in the future. Pending U.S. patent applications are confidential until
patents are issued, and thus it is impossible to ascertain all possible patent
infringement claims against us. We believe that several of our competitors,
including Motorola, Lucent and ESS Technology, may have a strategy of
protecting their market share by filing intellectual property claims against
their competitors and may assert claims against us in the future. The legal and
other expenses and diversion of resources associated with any such litigation
could materially and adversely affect our business, financial condition and
results of operations.

   In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.

   We have established and recorded on a monthly basis a financial per-unit
reserve for payment of future license fees based upon our estimate as to the
likely amount of the licensing fees that we may be required to pay in the event
that licenses are obtained. We believe that it is typical for participants in
the modem industry to obtain licenses in exchange for grants of cross licenses
rather than for payment of fees and we have based our estimates on our
understanding of the license fee practices of other segments of our industry.
Our reserves may not be adequate because of factors outside of our control and
because these license fee practices in the modern industry may not be
applicable to our experience.

If we cannot retain our executive officers and our key personnel our business
may be adversely affected.

   Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, managerial, sales, marketing, financial, technical and customer
support personnel. If we lost the services of one or more of our executives or
key employees, a replacement could be difficult to recruit and our business
could be adversely affected.

   In August 1999, we hired William F. Roach as our new President and Chief
Operating Officer. If for any reason Mr. Roach is not successful, our business
may be adversely affected.

   We maintain "key person" life insurance policies on Peter Chen, our Chairman
and Chief Executive Officer, William Wen-Liang Hsu, our Vice President,
Engineering, and Han-Chung Yeh, our Vice President, Technology, in the face
amount of $1 million for each individual. However, these insurance policies may
not adequately compensate for the loss of services of any of these individuals.


                                       13
<PAGE>

Our success depends on our ability to attract and retain qualified technical,
sales, support and other administrative personnel.

   We intend to hire a significant number of additional engineering, sales,
support, marketing and finance personnel in the future. Competition for
personnel, especially engineers and marketing and sales personnel in Silicon
Valley, is intense. We expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining personnel. If we do
not attract qualified personnel, this could adversely affect our business.

   We are particularly dependent on our ability to identify, attract, motivate
and retain qualified engineers with the requisite education, backgrounds and
industry experience. As of June 30, 1999, we employed a total of 58 people in
our engineering department, over half of whom have advanced degrees. In the
past we have experienced difficulty in recruiting qualified engineering
personnel, especially developers, on a timely basis. If we are not able to hire
at the levels that we plan, our ability to continue to develop products and
technologies responsive to our markets will be impaired.

   Technical and customer support is also critical to our future success
because our products and the related technologies are rapidly evolving and many
customers require technical support in implementing our products. If we are
unable to provide comprehensive technical support services satisfactory to our
existing and prospective customers, our ability to establish and expand our
presence in the connectivity markets may be adversely affected.

   As we continue to develop new products for the emerging broadband and
Internet markets, our expanded business focus has also placed greater emphasis
on our need for additional sales and marketing personnel. Hiring additional
personnel in this area will be important for us to effectively achieve customer
acceptance in our targeted markets.

We have experienced significant growth in our business in recent periods and
failure to manage our growth could strain our management and other resources.

   Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future expansion efforts could be expensive and put a strain on our
management and resources. We have increased, and plan to continue to increase,
the scope of our operations at a rapid rate. Our headcount has grown and will
continue to grow substantially. At December 31, 1998, we had a total of 95
employees and at June 30, 1999, we had a total of 125 employees. In addition,
we expect to continue to hire a significant number of new employees. To
effectively manage our growth, we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations.

If we are unable to expand our customer base, our ability to sustain our
revenue growth rates may be adversely affected.

   To date, we have principally relied upon our direct sales organization for
product sales to smaller accounts. Our direct sales efforts have focused
principally on board manufacturers and smaller PC OEMs. To increase penetration
of our target customer base, including large, tier-one, OEMs, we must
significantly increase the size of our direct sales force and organize and
deploy sales teams targeted at specific domestic tier-one OEM accounts. If we
are unable to expand our sales to additional OEMs, our revenue growth rates may
be adversely affected.

We are subject to additional risks because we 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 do not have our own manufacturing, assembling or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips which are integral components of our

                                       14
<PAGE>

products. Most of these companies are located outside of the United States.
There are many risks associated with our relationships with these independent
companies, including reduced control over:

  . delivery schedules,

  . quality assurance,

  . manufacturing costs,

  . capacity during periods of excess demand, and

  . availability of access to process technologies.

   In addition, the location of these independent parties outside of the United
States creates additional risks resulting from the foreign regulatory,
political and economic environments in which each of these companies exists.
While to date we have not experienced any material problems, failures or delays
by our manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.

   We are a fabless company and the majority of our products and related
components are manufactured by five principal companies: Taiwan Semiconductor
Manufacturing Corporation, ST Microelectronics, Kawasaki/LSI, Silicon Labs and
Delta Integration. We expect to continue to rely upon these third parties for
these services. Currently, the DAA chips used in our soft modem products are
provided by a sole source, Silicon Labs, on a purchase order basis, and we have
only a limited guaranteed supply arrangement under a contract with our
supplier. We are currently in the process of qualifying a second source for our
DAA chips. Although we believe that we would be able to qualify an alternative
manufacturing source for DAA chips within a relatively short period of time,
such a transition, if necessary, could result in loss of purchase orders or
customer relationships, which could adversely affect our operating results.

We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. If we cannot protect these rights,
this could adversely affect our business.

   Our success is heavily dependent upon our proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These means of protecting our proprietary rights may not be
adequate. We hold a total of 32 patents, a number of which cover technology
that is considered essential for ITU standard communications solutions, and
also have 26 additional patent applications pending or filed. These patents may
never be issued. These patents, both issued and pending, may not provide
sufficiently broad protection against third party infringement lawsuits or they
may not prove enforceable in actions against alleged infringers.

   Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our data model and other proprietary information underlying our
licensed applications. Additionally, our competitors may independently develop
similar or superior technology. Finally, policing unauthorized use of software
is difficult and some foreign laws, including those of various countries in
Asia, do not protect our proprietary rights to the same extent as United States
laws. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of resources and could have a negative effect
on our financial results.

Undetected software errors or failures found in new products may result in loss
of customers or 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. 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.

                                       15
<PAGE>

Potential Year 2000 issues could adversely affect our business or operating
results.

   The Year 2000 issue refers to computer programs which use two digits rather
than four to define a given year and which might read a date using "00" as the
year 1900 rather than the Year 2000. As a result, many companies' systems and
software may need to be upgraded or replaced in order to function correctly
after December 31, 1999.

   Our Software. In the ordinary course of our business, we test and evaluate
our software modems. We believe that our current products are Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of our software products or the
ability of our products to transmit data involving dates. However, our
connectivity products are incorporated into computer products of our customers
which may not be Year 2000 compliant, or which may be perceived by their
markets as not meeting Year 2000 compliance requirements. As a result, it is
likely that any failure of the computer products into which our products may be
incorporated to be Year 2000 compliant, or any slowdown in the connectivity
markets as a result of Year 2000 compliance concerns, will hurt our product
sales. In addition, we believe that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase our products. To the extent Year 2000 issues cause a significant
delay in, or cancellation of, decisions to purchase our products or services,
our business would suffer.

   Third Party Equipment And Software. We use third party equipment and
software that may not be Year 2000 compliant. This equipment and software
includes our key internal systems such as for our internal accounting systems
or controls. If this equipment or software does not operate properly with
regard to the Year 2000, we may incur unexpected expenses to remedy any
problems. These costs may materially adversely affect our business. In
addition, if our key internal systems fail as a result of Year 2000 problems,
we could incur substantial costs and disruption of our business.

   Compliance. To date, we have not incurred any material costs directly
associated with Year 2000 compliance efforts, except for compensation expense
associated with salaried employees who have devoted some of their time to Year
2000 assessment and remediation efforts. We do not expect the total cost of
Year 2000 problems to be material to our business, financial condition or
operating results. However, during the months prior to the century change, we
will continue to evaluate new versions of our products, new software and
information systems provided by third parties and any new infrastructure
systems that we acquire, to determine whether they are Year 2000 compliant.
Despite our current assessment, we may not identify and correct all significant
Year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could harm our business,
financial condition and operating results. We currently do not have any
estimate of potential costs related to potential Year 2000 problems. We
currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems.

                         Risks Related to Our Industry

If the market for applications using our host signal processing technology does
not grow as we anticipate, or if our products are not accepted in this market,
our business will be adversely affected.

   Our success depends on the growth of the market for applications using our
host signal processing technology. This market has only recently begun to
develop and may not develop at the growth rates that have been suggested by
industry estimates. Market demand for host signal processing technology depends
primarily upon the cost and performance benefits relative to other competing
solutions. For example, soft modems have only recently begun to gain acceptance
in the modem market. Although we have shipped a significant number of soft
modems since we began commercial sales of these products in October 1995, the
current level of demand for soft modems may not be sustained or may not grow.
If customers do not accept soft modems or the market for soft modems does not
grow, our business will be adversely affected.

                                       16
<PAGE>

   Further, we are in the process of developing next generation products and
applications which improve and extend upon our host signal processing
technology, such as a G.Lite modem solution, an external modem product and a
remote access solution. If these products are not accepted in our markets when
they are introduced, our revenues and profitability will be adversely affected.

Our business, operating results and financial condition will be adversely
impacted if we fail to compete successfully in our connectivity product market,
which is highly competitive.

   The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors, and our
failure to do so will adversely affect our business, operating results and
financial condition. Our current competitors include 3Com, Conexant, ESS
Technology, Lucent Technologies and Motorola. Motorola introduced soft modems
in the third quarter of 1998 and Conexant introduced soft modems in the fourth
quarter of 1998. We expect competition to increase in the future as current
competitors enhance their product offerings, new suppliers enter the
connectivity device market, new communication technologies are introduced and
additional networks are deployed.

   We may in the future also face competition from other suppliers of products
based on host signal processing technology or on new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Alcatel,
Analog Devices, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.

   Compared to us, many of our competitors, including some of those described
above, have:

  . longer operating histories than we do with more experience in designing
    and selling connectivity products and services,

  . greater presence in our connectivity product markets, which can provide
    an immediate advantage in connection with new product introductions,

  . greater name recognition, which can facilitate customer acceptance of new
    products and technologies,

  . access to larger customer bases,

  . significantly greater financial resources, which could enable a
    competitor to significantly reduce the price of new products below
    prevailing market rates to capture market share,

  . significantly greater research and development and other technical
    resources, which may enable a competitor to respond more quickly than we
    can to new or emerging technologies and changes in customer requirements,
    or to introduce new products that are superior to our products or bundle
    modem solutions with its other products, and

  . significantly greater sales and marketing resources to devote to the
    promotion, sale and support of competitive products.

   We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with
industry standards, price, functionality, ease of use and customer service and
support. Although we believe that our products currently compete favorably with
respect to these factors, we may not be able to maintain our competitive
position against current and potential competitors.

Our industry is characterized by rapidly changing technologies and our future
success will depend on our ability to adapt to these technologies.

   The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce many products over a limited period of time. For example, we
introduced a 14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6
Kbps product in late 1996, a non-ITU standard 56 Kbps modem in the second half
of 1997 and a v.90 ITU standard 56 Kbps modem in early 1998. The market for
high speed

                                       17
<PAGE>

data transmission is also characterized by several competing technologies that
offer alternative broadband solutions which allow for higher modem speeds and
faster Internet access. These competing broadband technologies include xDSL,
wireless and cable. However, substantially all of our current product revenue
is derived from sales of analog modems, which use a more conventional
technology. We must continue to develop and introduce technologically advanced
products that support one or more of these competing broadband technologies. If
we are not successful in our response, we will not be able to compete
effectively and our financial results will be adversely affected.

If we are unable to adapt our products to evolving industry standards, we will
not be able to meet the requirements of our customers.

   The emergence of new industry standards may render our products unmarketable
or obsolete and may require us to incur substantial unanticipated costs to
develop products that comply with new standards. The emphasis on communications
standards in the connectivity product market may cause OEMs and end users to
delay purchasing activities on a market-wide basis until vendors redesign and
redevelop connectivity products to suit new industry communications standards.
For example, we believe that the commercial introduction in 1997 of 56 Kbps
modems based on incompatible standards created uncertainty in the modem
industry generally, which adversely affected our operating results in the first
two quarters of 1998. Because we intend to introduce products and applications
to support broadband communications, our financial performance will depend on
the announcement and acceptance of industry standards as they relate to
different broadband technologies such as G.Lite and ADSL, and our ability to
design and develop products based on those standards. If we do not meet or
anticipate these standards, we will not be able to compete effectively and our
financial results will be adversely affected.

The success of our future products designed for the emerging broadband and
Internet markets will depend on the supporting infrastructure for these
markets. If this infrastructure fails to keep pace, our products will not be
accepted by customers.

   The success of our future products for the broadband and Internet markets
will depend on the commercial availability and cost of other products and
systems, including switches, routers, multimedia and Internet servers,
code/decode equipment within telephony networks, and customer premises
equipment for the telephone company customers. If this infrastructure of
products and systems is not fully integrated into our markets, the
functionality and utility of our products, such as our G.Lite product designed
to increase the speed of Internet access and other interactive services, will
be impaired and will not be accepted by our markets. Many of the products and
systems necessary to support our connectivity products are still in the
implementation and testing stages of their development. We cannot assure you
that the suppliers of these products and systems will complete this development
and market these complementary products and components effectively. In
addition, we cannot predict that these products and systems, when combined with
our broadband products, will be a cost-effective means of delivering high speed
data transmission, for Internet and other interactive services.

Our products and those of our customers are subject to government regulations.
Changes in laws or regulations that negatively impact our products and
technologies could harm our business.

   The jurisdiction of the Federal Communications Commission 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, 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,
international regulatory bodies are beginning to adopt standards for the
communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our operating results and financial condition.


                                       18
<PAGE>

                         Risks Related to this Offering

Shares eligible for sale in the near future may adversely affect the market
price for our common stock.

   Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price for our
common stock. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
agreements that our stockholders have entered into with the underwriters. Those
agreements restrict our stockholders from selling, pledging or otherwise
disposing of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Banc of America Securities LLC.
Banc of America Securities LLC may, however, in its sole discretion, release
all or any portion of the common stock from the restrictions of the lockup
agreements, although they have no current plans to do so. Upon completion of
this offering we will have outstanding 15,602,078 shares of common stock,
assuming no exercise of the underwriters' over allotment option and no exercise
of outstanding options or warrants. Of these shares, the 4,600,000 shares sold
in this offering are freely tradeable. The remaining 11,002,078 shares are
eligible for sale in the public market as follows:

<TABLE>
<CAPTION>
                            Approximate
                          Shares Eligible
     Relevant Dates       for Future Sale                       Comment
------------------------  --------------- ---------------------------------------------------
<S>                       <C>             <C>
On effective date(1)....                  Shares sold in this offering and eligible for
                                          sale under Rule 144(k)
90 days after effective                   Additional shares eligible for sale under
 date(2)................                  Rules 144 and 701
180 days after effective                  All shares subject to lock-up released; additional
 date(2)................                  shares eligible for sale under Rules 144 and 701

More than 181 days after                  Additional shares becoming eligible for sale under
 effective date(2)......                  Rule 144 more than 180 days from the effective date
</TABLE>
--------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Assumes an effective date of September 30, 1999.

   In addition, as of June 30, 1999, there were outstanding options and
warrants to purchase 4,018,127 shares of common stock. All such options and
warrants are subject to lock-up agreements. Banc of America Securities LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.

Our current officers and directors own a significant portion of our stock and
accordingly, no corporate actions requiring stockholder approval can be
consummated without approval of this group.

   Upon completion of this offering, our officers, directors and persons or
entities directly related to these individuals will together beneficially own
approximately 37% of the outstanding shares. In particular, WK Technology Funds
owns approximately 17.2% and Peter Chen owns 11.7% of the shares. As a result,
WK Technology Funds and our officers and directors, in general, will be able to
control most matters requiring stockholder approval. These matters would
include the election of our directors and approval of potential mergers,
consolidations or sales of all or substantially all of our assets.

Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which are beyond our control.

   Stock prices and trading volumes for many communications companies fluctuate
widely for a number of reasons, including some reasons that may be unrelated to
their businesses or operating results, such as changes in analysts' estimates,
the presence or absence of short-selling of common stock and events affecting
other companies that the market deems to be comparable. This market volatility,
as well as general domestic or international economic, market and political
conditions, could negatively affect the market price of our common stock
without regard to our operating performance.


                                       19
<PAGE>

Provisions in our charter documents may inhibit a change of control or a change
of management which may adversely affect the market price for our common stock.

   Provisions of our charter documents specify procedures for nominating and
electing directors and submitting proposals for consideration at stockholder
meetings. Some of these provisions could discourage potential acquisition
proposals, delay or prevent a change in control transaction and have the effect
of discouraging others from making tender offers for our shares. As a result,
these provisions may prevent the market price of our common stock from
reflecting the effects of actual or rumored takeover attempts. These same
provisions may also inhibit changes in our management.

   Upon the closing of the offering, our board of directors will have 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 subject to, 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 the our stockholders. As a result, the market price
of the our common stock may be adversely affected.

Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.

   The trading market price of our common stock may decline below the initial
public offering price. In addition, an active public market for our common
stock may not develop or be sustained after this offering. Before this
offering, there has not been a public market for our common stock. The initial
public offering price will be determined by negotiations between PC-Tel and the
representatives of the underwriters.

               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

   This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These
risks and other factors include among other things, those listed under "Risk
Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.

                                       20
<PAGE>

                                USE OF PROCEEDS

   We estimate that we will receive net proceeds of $66,648,000 from the sale
of 4,600,000 shares of common stock based on an assumed initial offering price
of $16.00 per share (or $76,915,000 assuming the underwriters' over-allotment
option of $690,000 shares is exercised in full) after deducting estimated
offering expenses and underwriting discounts and commissions.

   The principal purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate our future access to
public securities markets.

   We currently expect to use $15.7 million of the proceeds of this offering to
repay bank debt. Had this offering closed on June 30, 1999, the amount used to
repay bank debt would have equaled $16.0 million. This debt bears interest at
the bank's prime interest rate plus 0.5%. Absent such prepayment, this debt is
to be repaid in 60 monthly payments ending in January 2004. The prepayment of
this debt will result in a 3% penalty. We entered into this debt to fund our
acquisition in December 1998 of Communications Systems Division from General
DataComm Inc.

   We will use the remaining proceeds from this offering for general corporate
purposes, including working capital. We also may use a portion of the net
proceeds to acquire complementary products, technologies or businesses.
However, we currently have no commitments or agreements and are not involved in
any negotiations with respect to any transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in short-term,
interest-bearing securities.

                                DIVIDEND POLICY

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

                                       21
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our capitalization as of June 30, 1999 (i) on
an actual basis, and (ii) on a pro forma basis adjusted to give effect to the
receipt by us of the estimated net proceeds from the sale of 4,600,000 shares
of common stock in this offering at an assumed initial public offering price of
$16.00 per share and the repayment of outstanding bank debt for $16.0 million
as of June 30, 1999. The adjusted balance sheet data as of June 30, 1999 also
reflects the write-off of deferred debt issuance costs and the expense of the
prepayment penalty related to the bank debt.

   The outstanding share information in the table excludes, as of June 30,
1999, 3,815,710 shares of common stock subject to outstanding stock options
under our 1995 and 1997 stock plans, and 202,417 shares of common stock
issuable upon exercise of outstanding warrants. The outstanding share
information in the table also does not reflect option grants under our 1997
stock plan made during the period between July 1 and August 3, 1999 for the
purchase of 565,390 shares, including an option grant to purchase 400,000
shares of common stock to Mr. William F. Roach, who became our President and
Chief Operating Officer in August 1999.

<TABLE>
<CAPTION>
                                                        June 30, 1999
                                                 ------------------------------
                                                                  Pro Forma
                                                                  After the
                                                    Actual         Offering
                                                 -------------  ---------------
                                                 (in thousands, except share
                                                     and per share data)
<S>                                              <C>            <C>
Current portion of long-term debt............... $       1,847   $          --
                                                 -------------   -------------
Long-term debt, net of current portion..........        13,630              --
                                                 -------------   -------------
Stockholders' equity:
  Preferred stock: par value $0.001 per share,
  aggregate liquidation preference of $10,015,
  9,385,548 shares authorized, 8,510,748 issued
  and outstanding, actual; zero shares issued
  and outstanding pro forma after the offering..             9              --
  Common stock: par value $0.001 per share,
  50,000,000 shares authorized, 2,491,330 issued
  and outstanding, actual; 15,602,078 shares
  issued and outstanding, pro forma after the
  offering......................................             2              16
Additional paid-in-capital......................        12,881          79,524
Deferred compensation...........................        (2,162)         (2,162)
Retained earnings...............................         7,131           5,735
                                                 -------------   -------------
Total stockholders' equity......................        17,861          83,113
                                                 -------------   -------------
Total capitalization............................ $      33,338   $      83,113
                                                 =============   =============
</TABLE>

                                       22
<PAGE>

                                    DILUTION

   Net tangible book value per share of common stock represents the amount of
our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the pro forma as adjusted net
tangible book value per share immediately after the completion of this
offering.

   Our pro forma net tangible book value as of June 30, 1999 was approximately
$6.7 million, or $0.61 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of outstanding shares of common stock. Our pro forma net
tangible book value per share stated here gives effect to the conversion of all
outstanding shares of preferred stock into 8,510,748 shares of common stock
effective immediately upon the closing of this offering. After giving effect to
the sale of the 4,600,000 shares of common stock offered by us at an assumed
initial public offering price of $16.00 per share and after deducting
underwriting discounts and estimated offering expenses, the pro forma as
adjusted net tangible book value at June 30, 1999 would have been approximately
$73.4 million, or approximately $4.70 per share of common stock. This
represents an immediate increase in net tangible book value of $4.09 per share
to existing stockholders and an immediate dilution in net tangible book value
of $11.30 per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:

<TABLE>
   <S>                                                             <C>   <C>
   Assumed initial public offering price per share...............        $16.00
                                                                         ------
   Pro forma net tangible book value per share at June 30, 1999..  $0.61
                                                                   -----
   Increase per share attributable to this offering..............   4.09
                                                                   -----
   Pro forma as adjusted net tangible book value per share after
    this offering................................................          4.70
                                                                         ------
   Dilution per share to new investors...........................        $11.30
                                                                         ======
</TABLE>
--------
   The table above excludes, as of June 30, 1999, 3,815,710 shares of common
stock subject to outstanding options under our 1995 and 1997 stock plans, and
202,417 shares of common stock issuable upon exercise of outstanding warrants.
To the extent options or warrants are exercised, there will be further dilution
to new investors.

   The following table sets forth, on a pro forma basis adjusted for the
offering as of June 30, 1999, the differences between the number of shares of
common stock purchased from us, the total consideration paid and the average
price per share paid by existing stockholders and by new investors, before
deducting underwriting discounts and commissions and estimated offering
expenses, at an assumed initial public offering price of $16.00 per share.

<TABLE>
<CAPTION>
                                 Shares Purchased  Total Consideration  Average
                                ------------------ -------------------   Price
                                  Number   Percent   Amount    Percent Per Share
                                ---------- ------- ----------- ------- ---------
<S>                             <C>        <C>     <C>         <C>     <C>
Existing stockholders.......... 11,002,078   70.5% $10,156,798   12.1%  $ 0.92
New investors..................  4,600,000   29.5%  73,600,000   87.9%   16.00
                                ----------  -----  -----------  -----
  Total........................ 15,602,078  100.0% $83,756,798  100.0%
                                ==========  =====  ===========  =====
</TABLE>
--------
   If the underwriters' over-allotment option is exercised in full, the
percentage of shares of common stock held by existing stockholders after this
offering would be reduced to approximately 67.5% and the number of shares of
common stock held by new investors would increase to 5,290,000 or approximately
32.5% of the total number of shares of common stock outstanding after this
offering.

                                       23
<PAGE>

                      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 prospectus.
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the balance sheet data as of December 31, 1997 and 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from inception to
December 31, 1994 and year ended December 31, 1995 and the balance sheet data
as of December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this prospectus. The balance sheet data as of June
30, 1999 and the statement of operations data for the six months ended June 30,
1998 and 1999 are unaudited, have been prepared on the same basis as the
audited statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of PC-Tel's operating results for such periods and financial
condition at such date. The operating results for the six-month period ended
June 30, 1999 are not necessarily indicative of the results to be expected for
any other interim period or any future fiscal year.

<TABLE>
<CAPTION>
                             Period From                                                 Six Months
                          February 10, 1994         Year Ended December 31,            Ended June 30,
                           (inception) to   ----------------------------------------  -----------------
                          December 31, 1994   1995       1996      1997      1998      1998      1999
                          ----------------- ---------  --------- --------- ---------  -------  --------
                                             (in thousands, except per share data)
<S>                       <C>               <C>        <C>       <C>       <C>        <C>      <C>
Statement of Operations
 Data:
Revenues................        $  --       $     191  $  16,573 $  24,009 $  33,004  $12,343  $33,046
Cost of revenues........           --             106      9,182    12,924    13,878    5,948   16,997
                                -----       ---------  --------- --------- ---------  -------  -------
Gross profit............           --              85      7,391    11,085    19,126    6,395   16,049
                                -----       ---------  --------- --------- ---------  -------  -------
Operating expenses:
 Research and
  development...........          198             822      2,152     3,348     4,932    2,455    4,423
 Sales and marketing....           42             275        839     3,168     5,624    2,407    4,945
 General and
  administrative........           43             115        477     1,612     2,169      791    2,063
 Acquired in-process
  research and
  development...........           --              --         --        --     6,130       --       --
 Amortization of
  deferred compensation
  expense...............           --              --         41        --        43       10      164
                                -----       ---------  --------- --------- ---------  -------  -------
   Total operating
    expenses............          283           1,212      3,509     8,128    18,898    5,663   11,595
                                -----       ---------  --------- --------- ---------  -------  -------
Income (loss) from
 operations.............         (283)         (1,127)     3,882     2,957       228      732    4,454
                                -----       ---------  --------- --------- ---------  -------  -------
Other income (expense),
 net:
 Interest income........            4              35        127       299       504      254      303
 Interest expense.......           --              --         --        --       (25)     (11)    (895)
                                -----       ---------  --------- --------- ---------  -------  -------
   Total other income
    (expense), net......            4              35        127       299       479      243     (592)
                                -----       ---------  --------- --------- ---------  -------  -------
Income (loss) before
 provision for income
 taxes..................         (279)         (1,092)     4,009     3,256       707      975    3,862
Provision for income
 taxes..................            1               1      1,005       955       212      292    1,158
                                -----       ---------  --------- --------- ---------  -------  -------
Net income (loss).......        $(280)      $  (1,093) $   3,004 $   2,301 $     495  $   683  $ 2,704
                                =====       =========  ========= ========= =========  =======  =======
Basic earnings per
 share..................        $  --       $      --  $    4.79 $    1.13 $    0.21  $  0.29  $  1.10
                                =====       =========  ========= ========= =========  =======  =======
Diluted earnings per
 share..................        $  --       $      --  $    0.29 $    0.20 $    0.04  $  0.06  $  0.21
                                =====       =========  ========= ========= =========  =======  =======
Shares used in computing
 basic earnings per
 share..................           --              --        627     2,032     2,355    2,320    2,461
Shares used in computing
 diluted earnings per
 share..................           --              --     10,280    11,645    12,325   12,400   12,638
<CAPTION>
                                             As of December 31,
                          ----------------------------------------------------------           June 30,
                                1994          1995       1996      1997      1998                1999
                          ----------------- ---------  --------- --------- ---------           --------
                                               (in thousands)
<S>                       <C>               <C>        <C>       <C>       <C>        <C>      <C>
Balance Sheet Data:
Cash and short-term
 investments............        $ 594       $   1,676  $   5,585 $   6,685 $  12,988           $23,534
Working capital.........          702           3,068      6,236    12,840    16,313            18,778
Total assets............          747           3,980     14,110    23,148    45,996            50,483
Long term debt, net of
 current portion........           --               3          5        38    14,709            13,630
Total stockholders'
 equity.................          746           3,228      6,689    13,610    15,139            17,861
</TABLE>

                                       24
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   You should read the following discussion in conjunction with our
Consolidated Financial Statements and related notes appearing elsewhere in this
prospectus. Except for historical information, the following discussion
contains forward-looking statements that involve risks and uncertainties,
including, among other things, statements regarding our anticipated revenues,
profits, costs and expenses, revenue mix and plans for addressing Year 2000
issues. Such forward-looking statements include, among others, those statements
including the words, "may", "will", "plans", "seeks", "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause future results to differ materially from those discussed in
the forward-looking statements include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.

Overview

   We provide cost-effective software-based connectivity solutions that address
Internet access and other communications requirements for existing analog and
emerging broadband networks. Our communications products enable Internet access
through desktop PCs, notebook computers and non-PC devices. From our inception
in February 1994 through the end of 1995, we were a development stage company
primarily engaged in product development, product testing and the establishment
of strategic relationships with customers and suppliers. From 1996 to 1999, our
total headcount increased to support corporate growth from 18 at the end of
1995 to 125 at June 30, 1999. We first recognized revenue on product sales in
the fourth quarter of 1995, and became profitable in 1996, our first full year
of product shipments. Revenues increased from $16.6 million in 1996 to $24.0
million in 1997 to $33.0 million in 1998. Revenues for the six months ended
June 30, 1999 were $33.0 million.

   We sell soft modems to manufacturers and distributors principally in Asia
through our sales personnel, independent sales representatives and
distributors. Our sales to manufacturers and distributors in Asia were 74.4%,
77.1% and 75.9% of our total sales for the years ended 1996, 1997 and 1998,
respectively, and 76.9% and 98.6% for the six months ended June 30, 1998 and
1999, respectively. The predominance of our sales are in Asia because our
customers are primarily motherboard and modem manufacturers, and the majority
of these manufacturers are located in Asia. In many cases, our indirect OEM
customers specify that our products be included on the modem boards or
motherboards that they purchase from the board manufacturers, and we sell our
products directly to the board manufacturers for resale to our indirect OEM
customers. Industry statistics indicate that approximately two-thirds of modems
manufactured in Asia are sold back to OEMs located in the United States.

   We recognize revenues from product sales to customers upon shipment. We
provide for estimated sales returns, allowances and discounts related to such
sales at the time of shipment. We recognize revenues from product sales to
distributors upon a "sell through" basis from the distributor to the end user.
We recognize revenues from non-recurring engineering contracts as contract
milestones are achieved.

   In the fourth quarter of 1998, we acquired substantially all of the assets
and selected liabilities of Communications Systems Division of General
DataComm, Inc., for a total purchase price of $17.0 million. We began to
recognize revenues in the three months ended June 30, 1999 from licensing the
patent portfolio that we acquired in this acquisition. These revenues are
recognized based on confirmation from licensees of the royalty payments due to
us.

                                       25
<PAGE>

Results of Operations

   The following table sets forth the results of our operations expressed as a
percentage of total revenues.

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                 Year Ended December 31,        June 30,
                                 -------------------------  ------------------
                                  1996     1997     1998      1998      1999
                                 -------  -------  -------  --------  --------
<S>                              <C>      <C>      <C>      <C>       <C>
Revenues........................   100.0%   100.0%   100.0%    100.0%    100.0%
Cost of revenues................    55.4     53.8     42.0      48.2      51.4
                                 -------  -------  -------  --------  --------
  Gross profit..................    44.6     46.2     58.0      51.8      48.6
                                 -------  -------  -------  --------  --------
Operating expenses:
  Research and development......    13.0     13.9     14.9      19.9      13.4
  Sales and marketing...........     5.1     13.2     17.0      19.5      15.0
  General and administrative....     2.9      6.7      6.6       6.4       6.2
  Acquired in-process research
   and development..............      --       --     18.6        --        --
  Amortization of deferred
   compensation expense.........     0.2       --      0.1       0.1       0.5
                                 -------  -------  -------  --------  --------
    Total operating expenses....    21.2     33.8     57.2      45.9      35.1
                                 -------  -------  -------  --------  --------
Operating income................    23.4     12.4      0.8       5.9      13.5
                                 -------  -------  -------  --------  --------
Other income (expense), net:
  Interest income...............     0.8      1.2      1.5       2.1       0.9
  Interest expense..............      --       --     (0.1)     (0.1)     (2.7)
                                 -------  -------  -------  --------  --------
    Total other income
     (expense), net.............     0.8      1.2      1.4       2.0      (1.8)
Income before provision for
 income taxes...................    24.2     13.6      2.2       7.9      11.7
Provision for income taxes......     6.1      4.0      0.6       2.4       3.5
                                 -------  -------  -------  --------  --------
Net income......................    18.1%     9.6%     1.6%      5.5%      8.2%
                                 =======  =======  =======  ========  ========
</TABLE>

Six Months Ended June 30, 1998 and 1999

 (All amounts in tables, other than percentages, are in thousands)

 Revenues
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  Six Months
                                                                     Ended
                                                                   June 30,
                                                                ---------------
                                                                 1998    1999
                                                                ------- -------
<S>                                                             <C>     <C>
Revenues....................................................... $12,343 $33,046
% change from prior period.....................................     N/A   167.7%
</TABLE>
--------------------------------------------------------------------------------

   Our historical revenues primarily consisted of product sales of soft modems
to board manufacturers and distributors in Asia.

   The 167.7% increase in revenues for the six months ended June 30, 1999 over
the same period in the previous year was attributable to an increase in unit
sales in 1999. We believe that this unit increase was due principally to the
general acceptance of our products in the low cost, or sub-$1,000, PC
marketplace, the increase of market share of our MicroModem product and the
certification by Microsoft of its Windows 98 logo for our products. The
benefit of increase of sales volume was partly offset by downward pressure on
average selling prices and sales discounts to customers.


                                      26
<PAGE>

 Gross Profit
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                                  June 30,
                                                              -----------------
                                                               1998      1999
                                                              -------- --------
<S>                                                           <C>      <C>
Gross profit................................................. $ 6,395  $ 16,049
Percentage of revenue........................................    51.8%     48.6%
% change from prior period...................................     N/A     151.0%
</TABLE>
--------------------------------------------------------------------------------

   Cost of revenues consists primarily of chipsets which we purchase from third
party manufacturers and also includes amortization of intangibles related to
our acquisition of the Communications Systems Division in December 1998,
accrued intellectual property royalties, cost of operations, reserves for
inventory obsolescence and distribution costs. The royalties accrued are our
best estimate based on royalty agreements already signed, or in negotiation, as
well as advice from patent counsel. Upon consummation of the Communications
Systems Division acquisition, we reduced our royalty reserves because we
believe that we can obtain necessary licenses of the patent portfolio in
exchange for grants of cross licenses rather than the payment of fees.

   Gross profit increased $9.7 million, or 151.0%, to $16.0 million for the six
months ended June 30, 1999 from $6.4 million for the same period the previous
year. The increase in gross profit was the direct result of increased revenues.
However, as a percentage of revenues, gross profit decreased from 51.8% for the
six months ended June 30, 1998 to 48.6% for the same period in 1999. Average
selling prices decreased faster than the rate of cost reduction, which
adversely effected our gross profit margins. We believe that decreases in the
average selling price of our products through volume discounts have resulted in
our attaining greater market share.

 Research and Development
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
<S>                                                          <C>       <C>
Research and development.................................... $  2,455  $  4,423
Percentage of revenue.......................................     19.9%     13.4%
% change from prior period..................................      N/A      80.2%
</TABLE>
--------------------------------------------------------------------------------

   Research and development expenses include compensation 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 increased for the six months ended June
30, 1999 due to the addition of personnel for new product development in the
G.Lite, modem riser card and HIDRA projects and engineering work related to
v.90 modems. As a percentage of revenues, research and development decreased
for the six months ended June 30, 1999 because revenue increased proportionally
greater than research and development expenses. Approximately 70% of all
research and development expenses are payroll related. The headcount in this
area increased approximately 87% from the same period in the prior year, which
included 18 additional staff members from the Communications Systems Division
acquisition in December 1998. We expect that our research and development
expenses will increase in absolute dollars due to the anticipated additional
headcount and continued efforts in broadband product development.

 Sales and Marketing
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
<S>                                                          <C>       <C>
Sales and marketing......................................... $  2,407  $  4,945
Percentage of revenue.......................................     19.5%     15.0%
% change from prior period..................................      N/A     105.4%
</TABLE>
--------------------------------------------------------------------------------

                                       27
<PAGE>

   Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Marketing costs include promotional goods,
trade shows, press tours and advertisements in trade magazines.

   Sales and marketing expenses increased $2.5 million for the six months ended
June 30, 1999, but decreased as a percentage of total revenues, compared to the
same period in the prior year. The dollar increase reflects the addition of
sales and marketing personnel to develop new accounts, support customers, and
drive new product developments and product launches. We also expanded our sales
regions geographically to include Japan and Korea. The increase in sales and
marketing expenses is also due to increased governmental telephony
certification of our products in Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom, the production of sales materials, travel
costs, trade shows and press tours.

 General and Administrative
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                              1998      1999
                                                             -------- ---------
<S>                                                          <C>      <C>
General and administrative.................................. $   791  $   2,063
Percentage of revenue.......................................     6.4%       6.2%
% change from prior period..................................     N/A      160.8%
--------------------------------------------------------------------------------

   General and administrative expenses include costs associated with our
general management, human resources 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.

   These general and administrative expenses increased $1.3 million for the six
months ended June 30, 1999, over the same period in the prior year but
decreased as a percentage of total revenues, compared to the same period in the
prior year. This increase reflected additional legal costs related to contract
negotiations, patent submissions, additional tax planning, as well as
litigation expenses related to the Motorola lawsuit. We also incurred
additional expenses related to the increase in staff.

 Amortization of Deferred Compensation Expense
--------------------------------------------------------------------------------

<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                              1998      1999
                                                             -------- ---------
<S>                                                          <C>      <C>
Amortization of deferred compensation expense............... $    10  $     164
Percentage of revenue.......................................     0.1%       0.5%
% change from prior period..................................     N/A      1,540%
</TABLE>
--------------------------------------------------------------------------------

   In connection with the grant of stock options to employees, we amortized
$164,000 in deferred compensation for the six months ended June 30, 1999. The
deferred compensation expense related to the grant of stock options to
employees for the six months ended June 30, 1998 was $10,000. We expect that
the deferred compensation expense will increase to approximately $340,000 per
quarter through the third quarter of 2003, based on option grant activity
through August 3, 1999.

 Other Income (Expense), Net
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                            ------------------
                                                             1998      1999
                                                            -------- ---------
<S>                                                         <C>      <C>
Other income (expense), net................................ $   243  $    (592)
Percentage of revenue......................................     2.0%      (1.8)%
% change from prior period.................................     N/A     (343.6)%
</TABLE>
--------------------------------------------------------------------------------

                                       28
<PAGE>

   Other income (expense), net, consists of interest income, net of interest
expense. Interest income is expected to fluctuate over time. Interest expense
will continue to consist primarily of interest on capital leases and the $16.3
million loan issued to acquire Communications Systems Division. Other income
(expense), net, decreased $835,000 for the six months ended June 30, 1999 over
the same period for the prior year. The decrease was due primarily to the
interest expense related to the bank loan issued to acquire the Communications
Systems Division. We intend to repay the bank loan following completion of the
offering.

 Provision for Income Taxes
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
<S>                                                          <C>       <C>
Provision for income taxes.................................. $    292  $  1,158
Effective tax rate..........................................     30.0%     30.0%
% change from prior period..................................      N/A     296.6%
</TABLE>
--------------------------------------------------------------------------------

   Provision for income taxes increased for the six months ended June 30, 1999
over the same period for the prior year due to higher taxable income, while the
effective tax rate remained constant at 30%.

Year Ended December 31, 1996, 1997 and 1998

 Revenues
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                       1996     1997     1998
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenues............................................. $16,573  $24,009  $33,004
% change from prior period...........................     N/A     44.9%    37.5%
--------------------------------------------------------------------------------

   Revenues increased 37.5% for 1998 due to an increase in unit sales over
1997. This unit increase was due principally to acceptance of our products in
the marketplace following the certification by Microsoft of its Windows 95 and
98 logos for our products and the launch of our v.90 soft modem products early
in 1998. The benefit of increased sales volume was partly offset by downward
pressure on prices throughout the industry.

   Revenues for 1997 increased 44.9% reflecting a doubling in unit sales over
the same period in 1996. This revenue growth was fueled by the introduction of
our K56Flex soft modem in late 1997. The benefit of increased sales volume was
partly offset by downward pressure on prices throughout the industry.

 Gross Profit
--------------------------------------------------------------------------------

<CAPTION>
                                                       1996     1997     1998
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Gross profit......................................... $ 7,391  $11,085  $19,126
Percentage of revenue................................    44.6%    46.2%    58.0%
% change from prior period...........................     N/A     50.0%    72.5%
</TABLE>
--------------------------------------------------------------------------------

   Gross profit increased $8.0 million, or 72.5%, for 1998 and increased as a
percentage of revenues to 58.0% from 46.2% in 1997. The increase was due to the
increase in revenues and lower unit costs obtained through volume discounts
from our semiconductor vendors, which were partly offset by declining selling
prices throughout the industry. The increase was also due in part to a $3.0
million reversal in royalty reserves in the fourth quarter of 1998. Upon
consummation of the Communications Systems Division acquisition in December
1998, we reduced our royalty reserves because we believe that in some instances
we can obtain necessary licenses of third party technologies in exchange for
grants of cross licenses of our patent portfolio rather than the payment of
license fees or royalties. Without considering the $3.0 million reversal in
royalty reserves, gross profit as a percentage of revenues would have been
48.9% in 1998.

                                       29
<PAGE>

   The increase in gross profit as a percentage of revenues from 1996 to 1997
reflects the change in the mixture of sales toward higher margin modems,
economies of scale and lower reserves required for product obsolescence. The
addition of personnel in the operations area enabled us to focus on better
managing product cost, improving product transition strategies and reducing
inventory levels.

 Research and Development
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1996    1997    1998
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Research and development................................ $2,152  $3,348  $4,932
Percentage of revenue...................................   13.0%   13.9%   14.9%
% change from prior period..............................    N/A    55.6%   47.3%
--------------------------------------------------------------------------------

   Research and development expenses increased $1.6 million, or 47.3%, for
1998. The increase was due to the addition of research and development
personnel to facilitate new product development for our v.90, G.Lite and Modem
Riser products.

   Research and development expenses increased $1.2 million in 1997, reflecting
the growth in our software development team to facilitate new product
development for our K56Flex and v.90 products.

 Sales and Marketing
--------------------------------------------------------------------------------

<CAPTION>
                                                          1996    1997    1998
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Sales and marketing..................................... $  839  $3,168  $5,624
Percentage of revenue...................................    5.1%   13.2%   17.0%
% change from prior period..............................    N/A   277.6%   77.5%
--------------------------------------------------------------------------------

   Sales and marketing expenses increased $2.5 million for 1998. We continued
to develop our sales organization in 1998 to expand into different distribution
channels, particularly the OEM channel. Consequently, sales and marketing
personnel grew by approximately 63% to develop new accounts, support customers
and drive new product developments and product launches. Sales and marketing
expenses in 1998 also reflected higher sales commissions and increased
promotional activity including increased spending in trade shows and press
tours.

   Sales and marketing expenses increased $2.3 million for 1997, reflecting the
addition of sales and marketing personnel to support customers, develop new
accounts and expand our business geographically. Higher sales and marketing
expenses in 1997 also included increased commission expenses due to higher
revenues, increased promotional activity, the production of sales material and
the costs of trade shows and press tours.

 General and Administrative
--------------------------------------------------------------------------------

<CAPTION>
                                                          1996    1997    1998
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
General and administrative.............................. $  477  $1,612  $2,169
Percentage of revenue...................................    2.9%    6.7%    6.6%
% change from prior period..............................    N/A   237.9%   34.6%
</TABLE>
--------------------------------------------------------------------------------

   General and administrative expenses increased $557,000 for 1998. This
increase reflected additional legal costs related to the negotiation and review
of an increased number of contracts, an increase in patent submissions, tax
planning and litigation expenses related to the Motorola lawsuit.

   General and administrative expenses increased $1.1 million for 1997,
reflecting higher costs associated with the expansion of our infrastructure,
including increased personnel required to implement and sustain a financial
reporting structure and increased expenses resulting from the move to a larger
facility.

                                       30
<PAGE>

 Acquired In-Process Research & Development
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               1996 1997  1998
                                                               ---- ---- ------
<S>                                                            <C>  <C>  <C>
Acquired in-process research & development....................  --   --  $6,130
Percentage of revenue.........................................  --   --    18.6%
% change from prior period.................................... N/A   --      --
</TABLE>
--------------------------------------------------------------------------------

   Upon completion of our acquisition of the Communications Systems Division in
December 1998, we immediately expensed $6.1 million, representing purchased in-
process technology that had not yet reached technological feasibility and had
no alternative future use. The value assigned to purchased in-process
technology, based on a percentage of completion discounted cash flow method,
was determined by identifying research projects in areas for which
technological feasibility has not been established. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate includes a risk-adjusted discount rate to take into account the
uncertainty surrounding the successful development of the in-process
technology. The valuation includes cash inflows from in-process technology
through 2002 with revenues commencing in 1999 and increasing significantly in
2000 before declining in 2002. A royalty payment of 3% was assumed from in-
process technology to existing technology, based on management's estimate of a
patent license rate. The HIDRA and industrial modem projects were approximately
56% complete at the time of the valuation and the expected timeframe for
achieving these product releases was assumed to be in the second half of 1999.
The DSL project was approximately 56% complete at the time of the valuation and
the expected timeframe for achieving this product release is assumed to be in
early 2000. Significant remaining development efforts must be completed in the
next six to 18 months in order for the projects of the Communications Systems
Division to become implemented in a commercially viable timeframe.

 Amortization of Deferred Compensation Expense
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1996   1997    1998
                                                         ------  -----   -----
<S>                                                      <C>     <C>     <C>
Amortization of deferred compensation expense........... $   41  $  --   $  43
Percentage of revenue...................................    0.2%    --     0.1%
% change from prior period..............................    N/A     --      --
--------------------------------------------------------------------------------

   In connection with the grant of stock options to employees, we amortized
$43,000 in deferred compensation for the year ended December 31, 1998. There
was no deferred compensation expense for the year ended December 31, 1997. The
deferred compensation expense related to the grant of stock options to
employees for the year ended December 31, 1996 was $41,000.

 Other Income (Expense), Net
--------------------------------------------------------------------------------

<CAPTION>
                                                          1996   1997    1998
                                                         ------  -----   -----
<S>                                                      <C>     <C>     <C>
Other income (expense), net............................. $  127  $ 299   $ 479
Percentage of revenue...................................    0.8%   1.2%    1.4%
% change from prior period..............................    N/A  135.4%   60.2%
--------------------------------------------------------------------------------

   Other income (expense), net, increased $180,000 for 1998. The increase was
due to higher average cash balances.

 Provision for Income Taxes
--------------------------------------------------------------------------------

<CAPTION>
                                                          1996   1997    1998
                                                         ------  -----   -----
<S>                                                      <C>     <C>     <C>
Provision for income taxes.............................. $1,005  $ 955   $ 212
Effective tax rate......................................   25.1%  29.3 %  30.0 %
% change from prior period..............................    N/A   (5.0)% (77.8)%
</TABLE>
--------------------------------------------------------------------------------

                                       31
<PAGE>

   Provision for income taxes decreased $743,000, or 77.8%, for 1998 due to
lower gross profits, while the effective tax rate for 1998 remained at 30.0%.

   Income taxes remained relatively constant for 1997 and 1996. The lower
effective tax rate for 1996 was due to the benefit realized from net operating
losses carried forward from our inception.

   We have deferred tax assets on our balance sheet as of December 31, 1998
amounting to $4.2 million. We believe that our expected effective tax rate will
be below the statutory tax rate due to our research and development tax credits
and the increase in international sales through our wholly owned subsidiaries.

                                       32
<PAGE>

Quarterly Results of Operations

   The following table presents our operating results for each of the six
quarters up to and including the period ended June 30, 1999. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited financial statements appearing elsewhere in this prospectus. In
the opinion of management, all necessary adjustments consisting only of normal
recurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with our audited Consolidated
Financial Statements and the related notes appearing elsewhere in this
prospectus. These operating results are not necessarily indicative of the
results of any future period.

<TABLE>
<CAPTION>
                                              Quarter Ended
                          ---------------------------------------------------------
                          Mar. 31, June 30, Sept. 30, Dec. 31,   Mar. 31,  June 30,
                            1998     1998     1998      1998       1999      1999
                          -------- -------- --------- --------   --------  --------
<S>                       <C>      <C>      <C>       <C>        <C>       <C>
Revenues................   $5,515   $6,828   $9,063   $11,598    $15,156   $17,890
Cost of revenues........    2,533    3,415    4,902     3,028      7,926     9,071
                           ------   ------   ------   -------    -------   -------
 Gross profit...........    2,982    3,413    4,161     8,570      7,230     8,819
                           ------   ------   ------   -------    -------   -------
Operating expenses:
 Research and
  development...........    1,129    1,326    1,283     1,194      2,043     2,380
 Sales and marketing....    1,068    1,339    1,713     1,504      2,298     2,647
 General and
  administrative........      384      407      423       955        815     1,248
 Acquired in-process
  research and
  development...........       --       --       --     6,130         --        --
 Amortization of
  deferred compensation
  expense...............       --       10       17        16         16       148
                           ------   ------   ------   -------    -------   -------
  Total operating
   expenses.............    2,581    3,082    3,436     9,799      5,172     6,423
                           ------   ------   ------   -------    -------   -------
Operating income
 (loss).................      401      331      725    (1,229)     2,058     2,396
                           ------   ------   ------   -------    -------   -------
Other income (expense),
 net:
 Interest income........      106      148      140       110        116       187
 Interest expense.......       (5)      (6)      (6)       (8)      (453)     (442)
                           ------   ------   ------   -------    -------   -------
  Total other income
   (expense), net.......      101      142      134       102       (337)     (255)
                           ------   ------   ------   -------    -------   -------
Income (loss) before
 provision for income
 taxes..................      502      473      859    (1,127)     1,721     2,141
Provision (benefit) for
 income taxes...........      151      141      258      (338)       516       642
                           ------   ------   ------   -------    -------   -------
Net income (loss).......   $  351   $  332   $  601   $  (789)   $ 1,205   $ 1,499
                           ======   ======   ======   =======    =======   =======
<CAPTION>
                                              Quarter Ended
                          ---------------------------------------------------------
                          Mar. 31, June 30, Sept. 30, Dec. 31,   Mar. 31,  June 30,
                            1998     1998     1998      1998       1999      1999
                          -------- -------- --------- --------   --------  --------
<S>                       <C>      <C>      <C>       <C>        <C>       <C>
Revenues................    100.0%   100.0%   100.0%    100.0%     100.0%    100.0%
Cost of revenues........     45.9     50.0     54.1      26.1       52.3      50.7
                           ------   ------   ------   -------    -------   -------
 Gross profit...........     54.1     50.0     45.9      73.9       47.7      49.3
                           ------   ------   ------   -------    -------   -------
Operating expenses:
 Research and
  development...........     20.5     19.4     14.2      10.3       13.5      13.3
 Sales and marketing....     19.4     19.6     18.9      13.0       15.1      14.8
 General and
  administrative........      7.0      6.0      4.7       8.2        5.4       7.0
 Acquired in-process
  research and
  development...........      0.0      0.0      0.0      52.9        0.0       0.0
 Amortization of
  deferred compensation
  expense...............       --      0.1      0.1       0.1        0.1       0.8
                           ------   ------   ------   -------    -------   -------
  Total operating
   expenses.............     46.9     45.1     37.9      84.5       34.1      35.9
                           ------   ------   ------   -------    -------   -------
Operating income
 (loss).................      7.2      4.9      8.0     (10.6)      13.6      13.4
                           ------   ------   ------   -------    -------   -------
Other income (expense),
 net:
 Interest income........      1.9      2.2      1.5       1.0        0.8       1.1
 Interest expense.......     (0.1)    (0.1)      --      (0.1)      (3.0)     (2.5)
                           ------   ------   ------   -------    -------   -------
  Total other income
   (expense), net.......      1.8      2.1      1.5       0.9       (2.2)     (1.4)
                           ------   ------   ------   -------    -------   -------
Income (loss) before
 provision for income
 taxes..................      9.0      7.0      9.5      (9.7)      11.4      12.0
Provision (benefit) for
 income taxes...........      2.7      2.1      2.8      (2.9)       3.4       3.6
                           ------   ------   ------   -------    -------   -------
Net income (loss).......      6.3%     4.9%     6.7%     (6.8)%      8.0%      8.4%
                           ======   ======   ======   =======    =======   =======
</TABLE>



                                       33
<PAGE>

   Our quarterly operating results have varied significantly in the past and
may vary significantly in the future depending on a number of factors, many of
which are beyond our control. Our revenues have been negatively affected by
market-wide delays in purchasing activities associated with the anticipated
announcement by the ITU of the v.90 standard whereas our revenues have been
positively affected by the market acceptance of our soft modems. We have also
experienced seasonality in our quarterly operating results. A detailed
discussion of these and other factors are described under Risk Factors
elsewhere in this prospectus. Our gross profit for the fourth quarter ended
December 31, 1998 was favorably impacted by the reversal of $3.0 million in
royalty reserves. Without considering the reversal, gross profit as a
percentage of revenues would have been 48.0% in the fourth quarter of 1998.

Liquidity and Capital Resources

Six Months Ended June 30, 1998 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                1998     1999
                                                               -------  -------
<S>                                                            <C>      <C>
Net cash provided by operating activities..................... $ 1,080  $12,262
Net cash used in investing activities.........................    (149)  (6,980)
Net cash provided by (used in) financing activities...........   4,756   (1,018)
Cash and short-term investments at end of period..............  12,988   23,534
Working capital...............................................     N/A   18,778
--------------------------------------------------------------------------------
</TABLE>

   The increase in net cash provided by operating activities for the six months
ended June 30, 1999 compared to 1998 was primarily due to better collection in
accounts receivable due to the use of letters of credit and a higher net income
in 1999. Net cash used in investing activities for the six months ended June
30, 1999 reflected the purchases of short-term investments, property and
equipment, while net cash used in financing activities for the six months ended
June 30, 1999 reflected the repayment of principal of the notes payable
arrangements associated with the Communications Systems Division acquisition.

   As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $18.8 million. As of June 30,
1999, we had outstanding debt of $15.5 million under notes payable arrangements
which we will repay for $15.7 million, including a prepayment penalty,
following the closing of this offering.

Year Ended December 31, 1996, 1997 and 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                    1996     1997      1998
                                                   -------  -------  --------
<S>                                                <C>      <C>      <C>
Net cash provided by operating activities......... $ 4,753  $   917  $  2,719
Net cash provided by (used in) investing
 activities.......................................  (1,258)     576   (17,344)
Net cash provided by (used in) financing
 activities.......................................     414     (393)   20,928
Cash and equivalents at end of period.............   5,585    6,685    12,988
Working capital...................................   6,236   12,840    16,313
------------------------------------------------------------------------------
</TABLE>

   Since our inception through December 31, 1998, we have funded our operations
primarily through the sale of convertible preferred stock and cash generated
from operations. We received $388,000 and $5.0 million from the sale of
convertible preferred stock in 1996 and 1998, respectively. Net cash provided
by operating activities for 1996, 1997 and 1998 were $4.8 million, $917,000 and
$2.7 million, respectively. The decrease in net cash provided by operating
activities for 1997 compared to 1996 was primarily due to increased working
capital requirements associated with higher revenues as well as lower net
income in 1997. The increase in net cash provided by operating activities for
1998 compared to 1997 was primarily due to higher net income before considering
the write-off of acquired in-process research and development and also
increased accruals.

                                       34
<PAGE>

   Net cash provided by (used for) investing activities was $(1.3) million,
$576,000 and $(17.3) million for 1996, 1997 and 1998, respectively. Net cash
provided by investing activities for 1997 reflected proceeds from the sale of
short-term investments, net of purchases of property and equipment, while net
cash used in investing activities for 1998 represented the Communications
Systems Division acquisition, and purchases of property, plant and equipment.
The timing and amount of future capital expenditures will depend primarily on
our growth. Our principal commitments consist of leases for our office
facilities as well as other general obligations under our capital leases. We
anticipate that we will relocate to larger office facilities within the next
six months and we expect to incur additional capital expenditures of
approximately $500,000 per year. We currently have no other material
commitments for capital expenditures.

   As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $18.8 million. In December 1998,
we became obligated under notes payable in the aggregate principal amount of
$16.3 million in connection with the acquisition of Communications Systems
Division. We intend to repay these notes following the closing of this
offering. In connection with these notes payable, we issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be $1.4 million. We recorded the fair value of the
warrants as a deferred charge which will be amortized over the term of the
notes.

   We believe that the net proceeds from the offering, together with existing
sources of liquidity, will be sufficient to meet our working capital and
anticipated capital expenditure requirements for at least the next 12 months.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes, and may seek, even before such time, to
raise additional funds through public or private equity or debt financing or
from other sources. Additional financing may not be available at all, and if it
is available, such financing may not be obtainable on terms acceptable to us or
that are not dilutive to our stockholders.

Recent Accounting Pronouncements

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which we adopted in fiscal 1999. SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria has been met. The adoption did not have a
material impact on our financial position or results of operations.

   In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we adopted
in fiscal 1999. SOP No. 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were previously capitalized must be written off when SOP No. 98-5 is adopted.
The adoption did not have a material impact on our financial position or
results of operations.

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. We are subject to SFAS No. 133 for the
first quarter beginning January 1, 2001. Because we do not currently hold any
derivative instruments and do not engage in hedging activities, we do not
believe that the adoption of SFAS No. 133 will have a material impact on our
financial position or results of operations.

Qualitative and Quantitative Disclosures About Market and Interest Rate Risk

   We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which is comprised solely of highly-rated, short-term investments.
We do not hold or issue derivative, derivative commodity instruments or other
financial

                                       35
<PAGE>

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.

   We may be exposed to interest rate risks, as we may use additional financing
to fund additional acquisitions and fund other capital expenditures. The
interest rate that we may be able to obtain on financings will depend on market
conditions at that time and may differ from the rates we have secured in the
past.

Year 2000 Compliance

   We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of
our products are Year 2000 compliant. However, our products operate in complex
network environments and directly or indirectly interact with a number of other
hardware and software systems that we cannot adequately evaluate for Year 2000
compliance.

   We may face claims based on Year 2000 problems in other companies' products,
or issues arising from the integration of multiple products within an overall
system. We have not been a party to any litigation or arbitration proceeding
involving our products or services related to Year 2000 compliance issues. We
may in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.

   We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with significant suppliers to determine their Year 2000 readiness.
Based on our vendors' representations, we believe that the third-party hardware
and software we use is Year 2000 compliant.

   To date, we have not incurred any material costs directly associated with
Year 2000 compliance efforts, except for compensation expense associated with
salaried employees who have devoted some of their time to Year 2000 assessment
and remediation efforts. We do not expect the total cost of Year 2000 problems
to be material to our business, financial condition or operating results.
However, during the months prior to the century change, we will continue to
evaluate new versions of our products, new software and information systems
provided by third parties and any new infrastructure systems that we acquire,
to determine whether they are Year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant Year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could harm our business, financial
condition and operating results. We currently do not have any estimate of
potential costs related to potential Year 2000 problems. We currently have no
contingency plans to address the risks associated with unremediated Year 2000
problems.

                                       36
<PAGE>

                                    BUSINESS

Overview

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions. Our solutions enable Internet access and other
communications applications through existing analog and emerging broadband
networks. We have developed a proprietary software architecture that
substantially reduces the hardware, space and power requirements of
conventional hardware-based connectivity devices. Our software architecture is
also easily upgradeable, minimizing the risk of technological obsolescence. Our
communications products are designed to enable widespread Internet access and
other communication applications through, desktop PCs, notebook computers and
non-PC devices.

   We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective software-based
digital signal processing solutions. Host signal processing technology utilizes
the computational and processing resources of a host central processing unit
rather than requiring additional special-purpose hardware. The reduction of
hardware components in our architecture reduces space requirements by 50% and
power requirements by 70% compared to conventional solutions. The first
implementation of our host signal processing technology was in a software
modem, or soft modem, in 1995. Through June 1999, we have shipped 11.3 million
soft modems. Based on our unit shipments in 1998, we believe we are the largest
worldwide producer of soft modems, representing 68% of all soft modems sold
that year, as estimated by Vision Quest 2000. We also believe that in 1998 we
sold 6% of all analog modems estimated by Dataquest to have been 59.1 million
units. Various OEMs, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.

   We continue to innovate and expand upon our successful host signal
processing architecture so that we can provide high speed connectivity
solutions for broadband communications, including xDSL, cable and wireless
communications. These emerging opportunities include connectivity solutions for
client-side applications, enterprise servers, service providers and industrial
markets. We have extended our host signal processing architecture and have
developed a G.Lite solution, LiteSpeed, that enables downstream broadband data
transmission speeds of up to 1.5 Mbps and upstream broadband data transmission
speeds of 512 Kbps over existing copper telephone lines. We expect to begin
shipments of this product in the first half of 2000.

   We also have developed an embedded solution for non-PC devices that either
do not use a central processing unit or lack the excess processing capacity
necessary to support our host signal processing solution. These devices include
Internet appliances, such as set-top boxes and webphones, video game consoles
and remote monitoring devices. By offering reductions in size, cost and power
consumption, we also believe that this solution is ideal for service providers
and server-side applications such as single and multi-port remote access
servers and concentrators.

   We enhanced our position as an intellectual property leader with the
acquisition of our Communications Systems Division from General DataComm, Inc.
in the fourth quarter of 1998. As a result of this acquisition and our own
intellectual property development efforts, we hold 32 patents, a number of
which cover technology that is considered essential for International
Telecommunication Union, or ITU, standard communications solutions. We also
have 26 additional patent applications pending or filed.

Industry Overview

   In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high speed remote access.
The accelerated growth of content-rich applications, which require high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now a requirement for business, government, academic and home
environments. Businesses, ranging from large and small corporate enterprises to
home offices, are increasingly dependent upon data networks, not only for
communication within the office, but also to exchange information among
corporate sites, remote locations, telecommuters, business partners,

                                       37
<PAGE>

suppliers and customers. Consumers are also increasingly accessing data
networks such as the Internet to communicate, collect and publish information
and conduct retail purchases.

   These market trends have resulted in a significant increase in the demand
for connectivity devices. International Data Corporation estimates that by
2003, the number of Internet connectivity devices will grow to over 722
million.

 Analog Connectivity Solutions

   Although there has been significant publicity given to broadband
connectivity, the majority of Internet access is still through dial-up, or
analog, connections. Analog technology converts digital data into an analog
signal for transmission over telephone networks, and executes the reverse
analog-to-digital signal conversion to enable the host device to receive the
transmitted data. Analog modems, which, according to Dataquest, comprised 90%
of the modem market in 1998, are primarily utilized by PC devices. Dataquest
estimates that 59.1 million analog modems were sold in 1998, and expects this
number to reach 74.8 million units in 2001. Although the number of analog
modems is expected to grow in the near future, new technologies have emerged to
address the volume of bandwidth intensive data and demand for enhanced
multimedia capabilities.

 Broadband Connectivity Solutions

   The data transmission constraints of copper telephone wires have led the
communications industry to focus on broadband communications. In order to
address the demand for high-speed connectivity, telecommunications service
providers have developed and deployed cost-effective technologies in their
networks. However, the lack of ubiquitous low-cost, high-bandwidth connectivity
from the backbone network to the customer premises has been the underlying
issue preventing the majority of the market from taking advantage of the array
of high-bandwidth network services. Although the broadband access market is
underdeveloped, its potential size has attracted a high level of attention.
Telephone, cable and satellite companies each have different strategies and
capabilities for providing this broadband connectivity to the Internet. Each
has its advantages based on price, performance and availability.

   Digital Subscriber Line.  DSL utilizes the ubiquitous, existing public
switched telephone network, or PSTN, infrastructure, without the need for
expensive additions and upgrades. DSL technologies dramatically increase the
data transmission capacity of standard telephone lines and are expected to
enable a wide range of new services including high speed Internet access and
digital television. Most of the businesses and homes today are connected to the
PSTN by twisted-pair copper wire. It is estimated that there are nearly 700
million copper wire access lines in existence today worldwide, and that more
than 95% consist of a single twisted-pair copper wire.

   A wide array of DSL technologies known as xDSL products are rapidly
emerging. The "x" in xDSL represents the various kinds of digital subscriber
line technologies. Each type of DSL has distinguishing advantages and
disadvantages, depending on a variety of bandwidth and deployment features
suitable for different applications. DSL is either symmetric, which delivers
the same data rate both downstream and upstream, or asymmetric, which delivers
faster data rates downstream than upstream. The other distinguishing feature is
the data rate itself. DSL technologies allow for the transmission of data at
speeds ranging from 128 Kbps to 52 Mbps depending on the distance between the
central office and the subscriber. Common types of DSL technologies include:

     ADSL. Asymmetric digital subscriber line, or ADSL, allows more bandwidth
  downstream than upstream. This asymmetry, combined with "always-on" access,
  makes ADSL ideal for Internet surfing, video-on-demand and remote local
  area network access. Users of these applications typically download much
  more information than they send. In order to implement an ADSL solution, a
  splitter, which is a device that separates the voice signal from the data
  signal, must be installed both at the head-end and at the customer's
  premises. This process of installing splitters for each subscriber means a
  service truck needs to be sent to each customer site in order to initiate
  service. This process is expensive and time consuming

                                       38
<PAGE>

  and ultimately slows the overall service deployment. ADSL provides speeds
  up to 8 Mbps downstream and up to 1 Mbps upstream, depending on the line
  conditions and the length of the loop.

     G.Lite. G.Lite is a lower-speed version of ADSL that will eliminate the
  need for the service provider to install a splitter at the customer's
  premises. G.Lite allows for a downstream data transmission rate of up to
  1.5 Mbps and an upstream data transmission rate of up to 512 Kbps, and is
  expected to be as simple as the "plug-and-play" nature of traditional,
  analog dial-up modems.

     G.SHDSL. Single-pair HDSL, or G.SHDSL, requires only a single copper
  twisted-pair and has a maximum loop length of 10,000 feet from the
  telephone company's central office. G.SHDSL can offer symmetrical data
  transmission rates of up to 1.544 Mbps. Since G.SHDSL uses only one copper
  twisted-pair, the capacity of existing infrastructure is greatly increased.

     VDSL. Very-high-bit-rate digital subscriber line, or VDSL, technology is
  the fastest DSL technology, supporting a maximum downstream rate of 52 Mbps
  and an upstream rate of 10 Mbps over a single copper twisted-pair wire. The
  one limitation of VDSL is that the maximum loop length is only between
  1,000 and 4,500 feet from the telephone company's central office.

   Wireless. The main alternatives in wireless broadband access are wireless
and broadband satellite. Wireless provides advantages over wireline, the
primary benefits being speed and ease of installation. The strength of wireless
is that it can quickly provide high-speed Internet access within a 10, 20 or 35
mile radius depending on the frequency band used. In the next several years,
wireless is expected to help unlock broadband competition thereby enabling new
operators to bypass existing wireline networks and deliver local and long
distance telephone service and Internet access services.

   Cable Modems. Designed to provide broadband Internet access, cable modems
are targeted primarily at the consumer market. Cable lines pass by more than
100 million North American homes, but only 20% of those homes can now get cable
modem service. Cable lines offer downstream transmission speeds of up to 36
Mbps and upstream transmission speeds of up to 10 Mbps. In order to fully
realize the benefits of two way communications, cable operators must upgrade
their networks to improve the provisioning of existing cable services and to
support high-speed data and other new services.

 Non-PC Connectivity

   While existing Internet connectivity devices are primarily PC-based,
development of enabling technologies and the growth in consumer dependence are
spurring the deployment of non-PC devices. These devices include Internet
appliances such as set-top boxes and webphones, video game consoles and remote
monitoring devices. International Data Corporation predicts that as many as 42%
of all Internet access devices will be in the form of non-PC devices by 2001.
However, it is difficult to integrate modem functionality into these compact
devices due to the limited availability of power and space.

 Server-Side

   As the number of connectivity devices increases, service providers will be
required to increase the number of server-side access ports to ensure
reliability and quality service for their customers. Presently, communications
equipment providers are limited to using either expensive multiport chips or a
single modem port per chip. Internet service providers and other service
providers who locate their server-side equipment at the telephone companies'
central offices do not have the space or power available to accommodate the
expected growth in demand for client-side access. Service providers are
demanding connectivity solutions that increase the density of modem ports per
chip while reducing cost, space and power requirements.

 Evolution from Hardware to Software-based Connectivity Solutions

   The rapid development of emerging technologies for broadband access combined
with changing industry standards and protocols is driving manufacturers to turn
towards software-based connectivity solutions as

                                       39
<PAGE>

opposed to conventional hardware connectivity solutions. Further, trends such
as the acceptance of alternative access devices, the significant increase in
available processing power, cost reduction pressures and space and power
constraints have permitted software-based products to emerge as viable and
cost-effective alternatives.

   One of the primary reasons that PC manufacturers have been better able to
utilize software-based solutions has been the dramatic increase in central
processing unit processing power. Prior to the introduction of Intel's 266 MHz
Pentium II processor, most PCs lacked the processing power required to
effectively utilize software-based connectivity solutions. By 1998, a majority
of the PCs shipped were equipped with CPUs equivalent to or exceeding the
processing power of Intel's 350 MHz Pentium II. This significant increase in
processing power is expected to continue into the future as demonstrated by
Intel's announcement of its intention to deliver 1.0 GHz processors by 2001.
With microprocessor performance continuing to rapidly increase, technologies
that support software algorithms running off the central processing unit,
rather than on extraneous hardware, will become increasingly valuable and
feasible.

   Another significant trend driving the growth of software-based solutions is
the increasing pressure on OEMs to reduce costs. With the market acceptance of
low-cost, or sub-$1,000, PCs and a general decline in PC selling prices, OEMs
are demanding further price reductions, from suppliers of central processing
units and motherboard manufacturers. As a result, central processing unit
suppliers and motherboard manufacturers are increasingly employing software-
based solutions as a cost-effective way to meet these demands. This response
eliminates additional, special purpose hardware and replaces it with integrated
software. As a result, Cahners In-Stat estimates analog soft-modem annual sales
will grow from five million units in 1998 to over 40 million units by 2000.

   Software-based solutions are also increasingly utilized to address the power
and space requirements of non-PC devices. The limited availability of power and
space in these devices has hindered the successful integration of hardware-
based modem functionality. Because soft modems shift processing capacity into
software and, thus, significantly reduce power and space constraints, they are
increasingly integrated as a critical part in the development of the non-PC
device market.

PC-Tel Solution

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions that address Internet access and other communications
through existing analog and emerging broadband networks. These solutions are
based on our proprietary software algorithms which enable the movement of core
signal processing capabilities out of hardware and into software. Our host
signal processing architecture allows us to develop connectivity solutions that
provide significant benefits over traditional hardware-based solutions,
including:

     Extensibility and Scaleability. Our host signal processing architecture
  allows us to quickly and cost-effectively develop new products to
  capitalize on rapidly growing market segments. We believe that we can use
  our intellectual property portfolio to readily adapt to the speed and
  design requirements of additional emerging connectivity technologies. For
  example, in response to growing market acceptance, we have developed a host
  signal processing architecture solution for G.Lite, which we call
  LiteSpeed, that enables downstream data transmission speeds of up to 1.5
  Mbps and upstream data transmission speeds of up to 512 Kbps over existing
  copper telephone lines. As the broadband market develops, we believe we can
  capitalize on our proprietary technology to continue the cost-effective
  migration from hardware into software.

     Cost Effectiveness. By shifting the composition of connectivity devices
  from hardware into software, we are able to significantly reduce the
  hardware required in conventional connectivity solutions. Our proprietary
  software-based solution eliminates extraneous hardware and reduces our
  customers' manufacturing costs, while still offering superior or comparable
  performance. For example, our host signal processing technology eliminates
  as much as 40% of the hardware used in conventional connectivity solutions.

                                       40
<PAGE>

     Upgradeability, Adaptability and Flexibility. The software component of
  our architecture is upgradeable, minimizing the risk of technological
  obsolescence. By embedding core functionality in software, performance
  upgrades and the adaptation to new standards and protocols can be
  accomplished quickly and easily through software downloads rather than
  through costly replacements of existing hardware. For example, customers
  who purchased our 33.6K modems are able to easily upgrade the product to an
  ITU-compliant 56K modem through a simple software download. Ease of
  upgradeability is of considerable value in the rapidly changing
  communications marketplace and a substantial competitive advantage over
  conventional connectivity solutions. In addition, our LiteSpeed DSL
  technology will also provide a similar capability in offering an end-user
  the ability to easily upgrade to higher bandwidth services. Further, our
  G.Lite technology is completely compatible with analog transmission
  networks, offering the user complete flexibility in choosing access
  technology and transmission speed. By providing connectivity solutions that
  can be easily adapted to new standards and protocols, we reduce
  interoperability obstacles, which simplifies purchasing decisions and
  accelerates deployment times for OEMs.

     Reduced Space and Power Requirements. The reduction of hardware
  components enabled by our host signal processing architecture provides the
  dual benefits of 50% reduced space and 70% lower power requirements
  compared to conventional solutions. These benefits enable connectivity
  capabilities in non-PC devices that are difficult to implement with
  conventional hardware-based solutions. In addition, the efficiency of our
  proprietary algorithms increases the modem port density per chip in server-
  side devices, reducing power requirements and heat generation.

PC-Tel Strategy

   PC-Tel's goal is to be the leading provider of cost-effective software-based
connectivity solutions that enable Internet access and other communication
applications through existing analog and emerging broadband networks. Key
elements of our strategy include:

     Target Emerging High-Growth Communications Technologies. We identify
  emerging high-growth communications technologies and develop innovative
  software-based connectivity solutions to capitalize on these new market
  opportunities as they gain acceptance. Our software-based technology is
  extensible, allowing us to quickly and cost-effectively develop new
  applications. We have recently leveraged our core technologies to design
  and develop a fully functional software-based G.Lite solution, LiteSpeed.
  In addition, we are currently developing implementation options for
  extending HSP technology into the emerging wireless data network market,
  which includes devices that offer high speed access to Internet connections
  as well as wireless connections to computing on Internet devices within
  homes and businesses. We believe that our communications technology will
  enable us to develop significant applications in the broadband modem
  markets.

     Continue To Enhance Software-Based Solutions. We are committed to
  enhancing the scope of our host signal processing technology to further
  reduce the number of hardware components in our software-based solutions.
  We believe that our success in minimizing the hardware content of our soft
  modems will continue to enhance our ability to address emerging markets in
  non-PC devices that require smaller designs and reduced power consumption.
  This reduction of hardware content provides numerous benefits for our OEM
  customers, including:

       . reducing costs,

       . decreasing board space,

       . decreasing inventory,

       . minimizing technological obsolescence,

       . accelerating time to market, and

       . streamlining production flow.

                                       41
<PAGE>

   In addition, because of the software-based functionality of our products, we
   have developed a core expertise in ensuring the compatibility of our host
   signal processing products with multiple operating systems including Linux,
   OS/2, Windows 3.1, 95, 98, 2000, NT and CE, and VXWorks.

     Enable Migration to Emerging Communications Technologies. We aim to
  develop innovative products based on our host signal processing
  architecture that enable existing platforms to migrate to emerging
  broadband communications technologies. The current level of processing
  power available in PCs and non-PC devices does not support the amount of
  signal processing calculations required for higher speed broadband
  applications without overloading the central processing unit. For these
  applications, we have developed an accelerated host signal processing
  architecture that adds low-cost, application-specific hardware to
  efficiently handle a portion of the signal processing load. Accelerated
  host signal processing architecture enables us to deliver an ideal platform
  from which to migrate to a full host signal processing solution for next
  generation devices.

     Extend Our Intellectual Property Leadership Position and Establish
  Industry Standards. We are actively extending our intellectual property
  position through rapid internal development, strategic acquisitions and
  licensing of innovative communications technology. We hold 32 patents, with
  an additional 26 patents pending. We are actively pursuing the filing of
  additional patent applications to cover our intellectual property
  advancements. We believe that these intellectual property advancements will
  optimize the performance, efficiency and cost of our software-based
  connectivity solutions. Our intellectual property leadership position
  allows us to establish industry standards so that we can be well positioned
  to implement leading-edge second generation connectivity solutions in
  technologies in advance of our competitors.

     License Proprietary Digital Signal Processing Solutions. We are
  developing and intend to license reference designs for digital signal
  processing communications applications in non-PC devices. By using low cost
  digital signal processing chips coupled with our software-based technology,
  we are providing enhanced throughput and capacity per chip. In addition,
  because our digital signal processing algorithms are highly efficient, we
  can enable cost savings by reducing space requirements, lowering power
  consumption and port density for remote access.

Products

 Current Products

   In the fourth quarter of 1998, we began shipping our newest product, the
MicroModem. This product integrates our host signal processing technology with
a micro form-factor DAA. Our patented MicroModem features reduce power and size
requirements and replace approximately 90 discrete hardware components with two
mini DAA chips. The MicroModem has recently been certified as being compatible
with the telecommunications standards of most industrialized countries,
allowing OEMs to accomplish seamless global interoperability.

   As illustrated in Figure 1 below, in contrast to the conventional hardware
modem, our host signal processing soft architecture replaces the memory chip,
digital signal processing chip, universal asynchronous receiver and
transmitter, or UART, and controller chip with customized software that draws
upon the excess capacity of the host central processing unit. A single
proprietary Application Specific Integrated Circuit, or ASIC, acts as interface
between the analog and digital data. We have further reduced the cost, size and
design effort required for standardized worldwide PC modem use by using an
integrated Data Access Arrangement, or DAA, and a coder/decoder, or CODEC. This
integration reduces the number of components in a conventional DAA by
approximately 40%.

                                       42
<PAGE>

             FIGURE 1--CONVENTIONAL DSP vs. HSP MODEM ARCHITECTURE

 Schematic with two boxes. Caption is "Modem Evolution". First box describes a
  traditional hardware modem, second box describes PCtel's soft modem. Bottom
  text caption "CODEC--performs analog-to-digital and digital-to-analog signal
 conversions", "DAA--Data Access Arrangement interfaces and protects the modem
  with the telecommunications network.", "CONTROLLER--controls data and error
    compression function.", "DATAPUMP--performs modulation and demodulation
    calculations.", "Memory--handles the data buffering.", "UART--Universal
    Asynchronous Receive Transmit synchronizes incoming and outgoing data.",
  "INTEGRATED SILICON DAA and CODEC--Direct Access Arrangement interfaces and
protects the modem with the telecommunications network while the CODEC performs
              analog-to-digital and digital-to-analog conversion."

                                       43
<PAGE>

 Next Generation Products

   We are currently focusing our design and development efforts in the
following application areas:


<TABLE>
<CAPTION>
     Next Generation
        Technology                         Product Description
-------------------------------------------------------------------------------
  <C>                    <S>
  G.Lite                 We have developed a G.Lite solution, LiteSpeed, to
                         address the demand for DSL connectivity. LiteSpeed
                         uses less power and space and costs less than
                         conventional solutions for G.Lite. We expect to
                         commercially release this product in the first half of
                         2000.
-------------------------------------------------------------------------------
  USB External Modem     We have developed our first external modem, which
                         connects through the Universal Serial Bus, or USB,
                         interface. The USB is an open specification developed
                         to advance the use of peripheral devices with personal
                         computers. Major PC manufacturers now ship machines
                         with USB enabled hardware predominantly to Europe due
                         to the continent's differing telephony standards. We
                         believe that our external modem will allow us to
                         capture significant revenue opportunities in the
                         peripheral device market.
-------------------------------------------------------------------------------
  Home Networking        The number of private homes with multiple PCs or
                         multiple devices, such as printers, scanners and
                         notebook computers, has reached a critical mass,
                         driving consumer demand for home networking and shared
                         Internet access. In order to capitalize on this
                         emerging market opportunity, we are working with a
                         silicon supplier to include our soft modem on a
                         processor which will deliver home networking
                         functionality.
-------------------------------------------------------------------------------
  Industrial Modem       We are developing a small hardware platform for the
                         non-PC market. This platform uses one low cost digital
                         signal processor and our software performs both the
                         controller and the digital signal processing
                         functions. The v.34 version of our industrial modem is
                         currently being tested.
-------------------------------------------------------------------------------
  Remote Access Solution We are developing a reference design to deliver the
                         functionality of six modem ports per digital signal
                         processing chip in a server-side modem solution. Our
                         innovative design would reduce power, cost and space
                         requirements to nearly one-sixth of those used today
                         by providing alternatives to expensive chips or a
                         single modem port per chip. We intend to license our
                         design to the leading companies in the growing remote
                         access solution marketplace, the first version which
                         will support three modems per DSP and is currently
                         being tested.
</TABLE>

                                       44
<PAGE>

 Emerging Product Opportunities

   In addition to our products currently under development, we continue to
explore emerging opportunities in the area of broadband communications.


<TABLE>
<CAPTION>
       Emerging
     Opportunities                       Product Description
-------------------------------------------------------------------------------
  <C>                 <S>
  Wireless
-------------------------------------------------------------------------------
   Wireless Protocols Our HSP technology can be applied to various wireless
                      standards. We expect that the wireless solutions which
                      can take advantage of HSP architecture are optimal for
                      customers with capacity requirements between 19.2 Kbps
                      today, and up to 10 Mbps in the near future. We are
                      currently developing software enhancements to our
                      products in order to enable their use in wireless
                      environments with speeds of up to 384 Kbps by the end of
                      2000.
-------------------------------------------------------------------------------
  xDSL
-------------------------------------------------------------------------------
   ADSL               We expect to begin developing a G.DMT modem in 2000 which
   (G.DMT)            will provide downstream transmission speeds of up to 512
                      Kbps and upstream transmission speeds of up to 8 Mbps.
                      G.DMT is a full-rate ADSL standard and is being endorsed
                      by the ITU as a worldwide standard.
-------------------------------------------------------------------------------
   G.SHDSL            G.SHDSL modems will offer both downstream and upstream
                      transmission speeds of up to 1.5 Mbps. We have initiated
                      design and simulation studies for this product. These
                      efforts will position us to pursue the G.SHDSL
                      opportunity as it becomes widely adopted.
-------------------------------------------------------------------------------
   VDSL               We intend to develop a VDSL modem once VDSL technologies
                      become more fully deployed. We expect that this
                      technology will provide downstream transmission speeds of
                      up to 52 Mbps and upstream transmission speeds of up to
                      10 Mbps.
-------------------------------------------------------------------------------
  Server Side
-------------------------------------------------------------------------------
   VPN Controller     Our VPN Controller project is expected to enhance HIDRA
                      by integrating additional functionality to support
                      virtual private networks, or VPNs. The key to maximizing
                      the value of a VPN is the ability for companies to
                      upgrade their VPNs as their business needs change.
-------------------------------------------------------------------------------
   VOIP               The Voice Over Internet Protocol, or VOIP, project is
                      expected to enhance the HIDRA solution by integrating
                      voice capability into the HIDRA infrastructure such that
                      HIDRA will be able to provide VOIP gateway functionality.
                      HIDRA will implement voice compression and packetization
                      along with the signaling and addressing gateway functions
                      required for a complete VOIP solution.
-------------------------------------------------------------------------------
  Cable
-------------------------------------------------------------------------------
   Cable Modem        Cable modems connect PCs to the cable network and offer
                      downstream transmission speeds of up to 36 Mbps and
                      upstream transmission speeds of up to 10 Mbps. We are
                      researching cable technology to follow advancements and
                      will undertake an HSP cable modem development if and when
                      our studies show a significant advantage over existing
                      technologies.
</TABLE>



                                       45
<PAGE>

Intellectual Property Licensing

   We also offer our software-based solutions through intellectual property
licensing and product royalty arrangements. Current licensees of our
intellectual property, principally ITU-standard technology, include modem and
semiconductor manufacturers, such as Conexant, Texas Instruments and U.S.
Robotics, and RISC processor manufacturers including Hitachi, Intel and NEC.

Customers

   We sell our products directly and indirectly to the following principal
distributors and customers:


<TABLE>
<CAPTION>
                                                                        Embedded
                 Modem Board    Motherboard       PC OEM    Systems     Systems
  Distributors   Manufacturers  Manufacturers     Companies Integrators Integrators
  <S>            <C>            <C>               <C>       <C>         <C>
  Golden Way     Amigo          Asus              Acer      CTX         Casio
  InnoMicro      Askey Computer Chaintech         Dell      Everex      Fujitsu
  Silicon
   Application   Aztech         FIC               emachines MicroCenter Intel
   Corporation   BTC            Shuttle           Fujitsu   Mitsuba     NEC
                 E-Tech         Talent Trade Asia Mitac     Tiny        Yamaha
                 Zoltrix                          Sharp
                                                  TriGem
                                                  TwinHead
-----------------------------------------------------------------------------------
</TABLE>

   For the six months ended June 30, 1999, revenues derived from sales to
customers Talent Trade Asia, TriGem and Silicon Application Corporation
accounted for approximately 42%, 20%, and 10%, respectively, of product sales.
For the year ended December 31, 1998, revenues derived from sales to customers
Silicon Application Corporation, BTC, Askey Computer and Zoltrix accounted for
15%, 13%, 12% and 12%, respectively, of our product sales. No other customers
represented more than 10% of our product sales for these periods.

Sales, Marketing and Support

   We sell our products directly to modem board and motherboard manufacturers
who assemble and distribute the end product both directly to OEMs and systems
integrators and indirectly through distributors. In the United States, we
primarily sell our products through direct sales. In Taiwan, we sell our
products through distributors such as Golden Way and Silicon Application
Corporation, and in Japan, through distributors such as InnoMicro. In many
cases, modems are manufactured by third parties on behalf of the final brand
name OEM. We focus on developing long-term customer relationships with our
direct and indirect customers. In many cases, our indirect OEM customers
specify that our products be included on the modem boards or motherboards that
they purchase from board manufacturers, and we sell our products directly to
the board manufacturers for resale to our indirect OEM customers.

   We employ a direct sales force with a thorough level of technical expertise,
product background and industry knowledge. Our sales force includes a highly
trained team of application engineers to assist customers in designing, testing
and qualifying system designs that incorporate our products. Our sales force
also supports the sales efforts of our distributors. We believe the depth and
quality of our sales support team is critical to:

  . achieving design wins,

  . improving customers' time to market,

  . maintaining a high level of customer satisfaction, and

  . engendering customer loyalty for our next generation of products.

   Our marketing strategy is focused on further building market awareness and
acceptance of our new products. We market our products directly to both
prospective and existing customers. Additionally, we undertake broad scale
marketing programs in conjunction with key local and global partners. Our
marketing organization also provides a wide range of programs, materials and
events to support the sales organization.

                                       46
<PAGE>

   As of June 30, 1999, we employed 54 individuals in sales, marketing and
support and maintained regional sales support operations in Tokyo, Japan,
Taipei, Taiwan and Paris, France.

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. As an example of our
commitment to technical leadership, we have developed expertise in the
following major areas:

  . Digital Signal Processing Algorithms. This expertise enables us to
    recognize ongoing revenue from the licensing of our reference designs, as
    well as further optimization for our software digital signal processing
    implementations.

  . Software Digital Signal Processing. This expertise has allowed us to
    provide the modem data pump functionality in the form of software. An
    expensive and power consuming digital signal processing chip is no longer
    needed.

  . Modem Protocol. This expertise has enabled us to develop software
    containing the necessary error correction and data compression protocols
    such as v.42, v.42bis, MNP 2-5, Soft ATM and SAR.

  . Telecommunications Infrastructure Interface. This expertise has allowed
    us to develop the software connection to the public telephone network
    through relays and the DAA. This portion of the software also performs
    the functionality of the UART, controller and memory while eliminating
    significant amounts of hardware.

  . Microsoft Windows Device Drivers. We have developed software expertise in
    working within the Windows environment. The interrupt-driven architecture
    of Windows operating systems presents many difficulties for software-
    based connectivity solutions, including latency and other technical
    issues. We have patented these solutions.

  . Central Processing Units and Operating Systems. We have demonstrated our
    expertise in porting our soft modem solution to all Windows operating
    systems, including Windows NT and Windows CE, in addition to other
    operating systems, such as OS/2, VXWorks and Linux. We have also ported
    our technology to various high performance processor platforms, such as
    those from Advanced Micro Devices, Cyrix, ARM, Intel StrongARM and MIPS.
    Expertise in these systems, which are utilized in embedded systems
    applications, allows us to integrate our technology into devices such as
    Internet appliances.

  . Host Signal Processing Architecture. We have leveraged our leadership in
    host signal processing and extended the architecture to include
    innovations such as accelerated host signal processing, which will be
    used in our future G.Lite product. This modification delivers maximum
    software content along with any required application-specific hardware to
    deliver the most cost-effective solution in the market.

   These multiple areas of expertise represent distinct disciplines which are
combined in one unique cross-functional development team. Communications
Systems Division, which we acquired in December 1998, provides us with
additional areas of expertise, including the experience of successfully
introducing intellectual property for inclusion into ITU standards. We believe
these technical and organizational skills provide us significant competitive
advantages. As of June 30, 1999, we employed 58 employees in research and
development, 36 of whom have advanced degrees, including nine who have earned
PhDs.

Manufacturing

   We outsource the manufacturing of our ASIC, CODEC and DAA chips to
independent foundries in order to avoid significant fixed overhead, staffing
and capital requirements associated with semiconductor fabrication.


                                       47
<PAGE>

   Our primary chipset suppliers are Delta Integration, Kawasaki/LSI, ST Micro
Electronics, Silicon Labs and Taiwan Semiconductor Manufacturing Corporation.
The major operations of each of these manufacturers meet ISO-9001 international
manufacturing standards. Our DAA chips are currently purchased from Silicon
Labs on a purchase order basis. We have a limited guaranteed supply of DAA
chips through a long-term contract arrangement with Silicon Labs. We have no
guaranteed supply or long-term contract agreements with any other of our
suppliers.

Licenses, Patents and Trademarks

   We seek to protect our technology through a combination of patents,
copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. We hold a total of 32 patents and also
have 26 additional patent applications pending or filed. We believe that our
patent portfolio is one of the largest in the analog modem market. To
supplement our proprietary technology, we have licensed rights to use patents
held by third parties.

   Our industry is characterized by frequent litigation regarding patent and
other intellectual property rights. We have been sued by Motorola, Inc. and by
ESS Technology on patent related claims. See "Business--Legal Proceedings" and
"Risk Factors--We have been sued by Motorola for patent infringement. If this
litigation resolves unfavorably to us, our business is likely to be harmed,"
and "--Other third parties may also assert that our products infringe their
intellectual property rights."

   In addition, there are numerous risks that result from our reliance on our
proprietary technology in the conduct of our business. See "Risk Factors--We
rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. If we cannot protect these rights,
this could adversely affect our business."

Competition

   The connectivity device market is intensely competitive. Our current
competitors include 3Com, Conexant, ESS Technology, Lucent Technologies and
Motorola. Motorola introduced soft modems in the third quarter of 1998 and
Conexant introduced soft modems in the fourth quarter of 1998. We expect
competition to increase in the future as current competitors enhance their
product offerings, new suppliers enter the connectivity device market, new
communication technologies are introduced and additional networks are deployed.

   We may in the future also face competition from other suppliers of products
based on host signal processing technology or new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Analog
Devices, Alcatel, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.

   Compared to us, many of our competitors, including those described above,
have:

  . longer operating histories with more experience in designing and selling
    connectivity device products and services,

  . greater presence in our connectivity device markets, which can provide an
    immediate advantage in marketing new product introductions,

  . greater name recognition, which can facilitate customer acceptance of new
    products and technologies,

  . access to a larger customer base,

  . substantially greater financial resources, which could enable a
    competitor to significantly reduce the price of new products below
    prevailing market rates to capture market share,

  . significantly greater research and development and other technical
    resources, which may enable a competitor to respond more quickly to new
    or emerging technologies and changes in customer requirements, or to
    introduce new products that are superior to our products, and

                                       48
<PAGE>

  . significantly greater sales and marketing resources to devote to the
    promotion, sale and support of competitive products which could be
    deployed to overcome business challenges.

   We believe that the principal competitive factors required by users and
customers in the connectivity device market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
We believe that our products currently compete favorably with respect to these
factors.

Employees

   As of June 30, 1999, we employed 125 people full-time, including 54 in sales
and marketing, 58 in research and development, and 13 in general and
administrative functions. Over 50% of our employees have advanced degrees, with
10 having earned doctoral level degrees. None of our employees is represented
by a labor union. We consider our employee relations to be good.

Properties

   Our administrative offices are located in San Jose, California, where we
currently lease approximately 32,000 square feet under a lease that expires in
2001. Our Communications System Division is located in Waterbury, Connecticut,
where we currently lease approximately 6,000 square feet under a lease that
expires in 2001. We also have a lease in Taipei, Taiwan for approximately 3,000
square feet which expires in 2002 and a lease in Tokyo, Japan for approximately
700 square feet which expires this June. We anticipate that we will relocate to
larger office facilities within the next six months.

Legal Proceedings

   We have been sued by Motorola, Inc., for patent infringement in an action
filed in the fall of 1998. See "Risk Factors--We have been sued by Motorola for
patent infringement. If this litigation resolves unfavorably to us, our
business is likely to be harmed."

   In April 1999, ESS Technology Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California, alleging that we failed
to grant licenses for some of our ITU-related patents to ESS on fair,
reasonable and non-discriminatory terms. ESS's complaint includes claims based
on antitrust law, patent misuse, equitable estoppel, breach of contract
mandating specific performance and unfair competition. In its complaint, ESS
also seeks a declaration that some of our ITU-related patents are unenforceable
and that we should be ordered by the court to grant a license to ESS on fair,
reasonable and non-discriminatory terms.

   Due to the nature of litigation generally and because the lawsuit brought by
ESS is at an early stage, we cannot ascertain the outcome of the final
resolution of the lawsuit, the availability of injunctive relief or other
equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with ESS's
suit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. However, we
believe that we have valid defenses to this litigation, including the fact that
other companies license these ITU-related patents from us on the same terms
that are being challenged by ESS. We believe that it is unlikely this
litigation will have a material adverse effect on our financial condition or
results of operations. We are vigorously contesting, and intend to continue to
vigorously contest, all of ESS's claims. See "Risk Factors--Other third parties
may also assert that our products infringe their intellectual property rights."

                                       49
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to the executive
officers and directors of PC-Tel as of August 2, 1999.

<TABLE>
<CAPTION>
Name                      Age Position
----                      --- --------
<S>                       <C> <C>
Peter Chen...............  44 Chief Executive Officer, Chairman of the Board
William F. Roach.........  55 President and Chief Operating Officer
Andrew D. Wahl...........  50 Vice President, Finance, Chief Financial Officer
Steve Manuel.............  34 Vice President, Marketing
Frank Reo................  54 Vice President, Business Development
William Wen-Liang Hsu....  44 Vice President, Engineering, Director
Han Yeh..................  45 Vice President, Technology, Director
Derek S. Obata...........  41 Vice President, Sales
Richard C.
 Alberding(1)(2).........  68 Director
Martin H. Singer(2)......  48 Director
Wen C. Ko................  50 Director
Giacomo Marini(1)........  47 Director
Mike Min-Chu Chen........  50 Director
</TABLE>
--------
(1)Member of audit committee
(2)Member of compensation committee

   Mr. Peter Chen co-founded PC-Tel in March 1994 and has served as Chief
Executive Officer and Chairman of the Board, since PC-Tel's inception. Mr. Chen
is also the cousin of one of our directors, Dr. Mike Min-Chu Chen. Mr. Chen has
over 14 years experience in data communications and modem development at
Digicom Systems, Inc. (a company which he co-founded), Cermetek, Inc., and
Anderson-Jacobson, Inc., all data communications companies. Mr. Chen has a
Bachelor of Science in Control Engineering from National Chiao-Tung University,
Taiwan, and holds a Master of Science in Electrical Engineering from Arizona
State University.

   Mr. William F. Roach has been the President and the Chief Operations Officer
of PC-Tel since August 1999. From January 1997 until joining PC-Tel, Mr. Roach
served as a Senior Vice President, Worldwide Sales and Marketing for Maxtor
Corporation, a data storage company, from November 1996 to January 1997 as
Executive Vice President for Worldwide Marketing for Wyle Electronics, an
electronic component distribution company, and from 1989 to November 1996, as
Executive Vice President, Worldwide Sales, for Quantum Corporation, a data
storage company. Mr. Roach received a Bachelor of Science in Industrial
Economics from Purdue University.

   Mr. Andrew D. Wahl has been the Vice President of Finance and Chief
Financial Officer of PC-Tel since January 1997. From March 1995 to April 1996,
Mr. Wahl served as Chief Financial Officer and, from April 1996 to January
1997, as President and Chief Executive Officer for Designs for Education, Inc.,
an apparel company. From 1993 to March 1995, Mr. Wahl served as Chief Financial
and Operations Officer for StarBase Corporation, an object-oriented database
developer. Prior to that, Mr. Wahl held various senior positions in general
management, finance and management consulting. Mr. Wahl received a Bachelor of
Arts in Political Science from Villanova University and a Master in Business
Administration in Accounting from Rutgers University.

   Mr. Steve Manuel has been Vice President of Marketing of PC-Tel since
September 1997. Prior to that, Mr. Manuel served as Vice President of Sales
between January 1997 and September 1997. From March 1992 to June 1995 he worked
at Logitech, Inc., a computer input devices company, where he served as the
Strategic OEM Account Development Manager and the Director of OEM Sales and
Marketing for the Imaging Division from June 1995 to January 1997. At Logitech,
Inc., Mr. Manuel was initially responsible for worldwide account

                                       50
<PAGE>

management for numerous OEM customers, and later worldwide sales and sales
strategy development and implementation. Mr. Manuel received an Associate of
Science from Control Data Institute.

   Mr. Frank V. Reo has been PC-Tel's Vice President of Business Development
since February 1998. From February 1993 to February 1998, Mr. Reo served
initially as Manager and later as Director of Business Development for the
modem group at Cirrus Logic, a semiconductor company. In this position, he was
responsible for product marketing, business development and applications
engineering. Mr. Reo is a graduate in electronic engineering from Philco
Technical Institute, Philadelphia.

   Mr. William Wen-Liang Hsu co-founded PC-Tel and has served as the Vice
President of Engineering and a director since its inception in March 1994. From
August 1988 to March 1994, Mr. Hsu served in various positions with Sierra
Semiconductor, a semiconductor company, including Engineering Director. At
Sierra Semiconductor, Mr. Hsu managed a development group, and was responsible
for digital signal processing firmware development for modem products with
data, fax and voice features. Mr. Hsu received a Bachelor of Science in
Communication Engineering from National Chiao-Tung University, Taiwan, and a
Master of Science in Computer Engineering from Oregon State University.

   Mr. Han Yeh co-founded PC-Tel and has served as the Vice President of
Technology and a director since its inception in March 1994. Mr. Yeh was a
staff engineer at Sierra Semiconductor, a semiconductor company, from September
1993 to March 1994. Mr. Yeh holds a Bachelor of Science in Control Engineering
from National Chiao-Tung University, Taiwan, and a Master of Science in
Electrical Engineering from New York State University at Stony Brook.

   Mr. Derek S. Obata has been Vice President of Sales for PC-Tel since April
1998. From 1997 until joining PC-Tel, Mr. Obata was an independent consultant
providing strategic planning, business development, marketing and sales support
to emerging high technology companies. Mr. Obata served from 1996 to 1998 as
Vice President, Worldwide Sales for Network Peripherals Incorporated, a
networking company, and from 1992 to 1995 as Vice President, Worldwide Sales at
Ministor Peripherals Corporation, a data storage company. Prior to this period,
Mr. Obata served in a number of sales and sales management positions with
Conner Peripherals and Seagate Technologies, which are data storage companies.
Mr. Obata holds a Bachelor of Science in Engineering Sciences from the
University of California, Berkeley.

   Mr. Richard C. Alberding has been a director of PC-Tel since August 1999.
Mr. Alberding retired from the Hewlett-Packard Company, a computer, peripherals
and measurement products company, in June 1991, serving at that time as an
Executive Vice President with responsibility for worldwide company sales,
support and administration activities for measurement and computation products,
as well as all corporate level marketing activities. Mr. Alberding is a
director of Digital Link Corporation, Digital Microwave Corporation (which
included a nine month period as interim Chairman/CEO), JLK Direct Distribution
Inc., Paging Network, Inc., Sybase Inc. and Walker Interactive Systems. Mr.
Alberding holds a B.A. degree in Business Administration/Marketing from Augusta
College in Rock Island, Illinois, and an Associate of Science degree in
Electrical Engineering from DeVry Technical Institute in Chicago.

   Dr. Martin H. Singer has been a director of PC-Tel since August 1999. Since
December 1998, Dr. Singer has been President and CEO of SAFCO Technologies,
Inc., a wireless communications company. From 1994 to 1997, Mr. Singer served
as Vice-President and General Manger 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. Wen C. Ko has been a director for PC-Tel since May 1999. Since 1990, Mr.
Ko has served as Chairman of seven WK Investment Funds, which are high-tech
venture capital investment companies, and during 1992 to 1995 as Chairman of
Taipei Venture Capital Association. Prior to this, Mr. Ko served in a

                                       51
<PAGE>

number of positions including Chairman & President and Computer Country Manager
at Hewlett Packard Taiwan Ltd., a computation and communication system
manufacturer and Research & Development Manager at International Business
Machines, an information system technology company. Mr. Ko holds a Bachelor of
Science in Electrical Engineering from National Cheng Kung University, Taiwan,
and a Master of Science in System Science from Michigan State University.

   Mr. Giacomo Marini has been a director of PC-Tel since October 1996. Since
March 1995 Mr. Marini has served as President of MK Group LLC, a private
investment and management consulting business that invests in and advises high
technology companies, and from February 1998 to February 1999 as Interim Chief
Executive Officer at FutureTel, Inc., a digital video capture company. From
August 1993 to February 1995, Mr. Marini served as President and Chief
Executive Officer of Common Ground Software, Inc. (formerly No Hands Software,
Inc.), an electronic publishing software company. He is currently on the board
of various private companies. He holds a Computer Science Laureate Degree from
the University of Pisa, Italy.

   Dr. Mike Min-Chu Chen has been a director of PC-Tel since February 1994 and
is the cousin of our Chief Executive Officer and Chairman of the Board, Peter
Chen. From May 1985 to August 1998, Dr. Chen served as the Executive Vice
President, Chief Executive Officer and Director of C & C International
Services, Inc., an engineering and procurement service company. From March 1987
to August 1998, Dr. Chen served as Executive Vice President, Chief Executive
Officer and Director of Act Engineering, Inc., an engineering design and
trading company. From December 1996 to February 1997, Dr. Chen served as
director of ERT Holding, Inc., a company engaged in the environmental rubber
recycling manufacturing business, and served as President of International
Operations from December 1996 to February 1997 and then as Chairman from
February 1997 to October 1997. He is currently on the board of various private
companies. Dr. Chen holds a Bachelor of Science in Naval Architecture from
National Taiwan Ocean University, a Master in Science in Mechanical Engineering
and Naval Architecture from National Taiwan University, Taiwan, and a Doctorate
in Ocean Engineering from Oregon State University.

Board Composition

   Our board of directors currently consists of eight members. Upon completion
of this offering, our bylaws will provide for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. As a result, a portion of our board of directors will be elected each
year. Class I directors' terms will expire at the annual meeting of
stockholders to be held in 2000, Class II directors' terms will expire at the
annual meeting of stockholders to be held in 2001 and Class III directors'
terms will expire at the annual meeting of stockholders to be held in 2002. The
Class I directors will be Peter Chen and Han Yeh, the Class II directors will
be Wen C. Ko, Richard C. Alberding and William Wen-Liang Hsu, and the Class III
directors will be Mike Min-Chu Chen, Giacomo Marini and Martin H. Singer. At
each annual meeting of stockholders held after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our bylaws provide that the authorized number
of directors may be changed by an amendment to the bylaws, duly adopted by the
board of directors or by the stockholders or by a duly adopted amendment to the
certificate of incorporation. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
total number of directors. This classification of the board of directors may
delay or prevent a change in control of our company or in our management.

   Executive officers are appointed by the board of directors in accordance
with our bylaws, subject to the rights, if any, of an officer under any
contract of employment.

Board Committees

   We established an audit committee and a compensation committee in August
1999. The audit committee consists of Giacomo Marini and Richard C. Alberding.
The audit committee reviews our internal accounting

                                       52
<PAGE>

procedures and consults with and reviews the services provided by our
independent accountants. The compensation committee consists of Richard C.
Alberding and Martin H. Singer. The compensation committee reviews and
recommends to the board of directors the compensation and benefits of all our
officers and directors, including stock compensation and loans, and establishes
and reviews general policies relating to the compensation and benefits of our
employees.

Compensation Committee Interlocks and Insider Participation

   Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.

Director Compensation

   We do not pay our directors cash compensation for their service as members
of the board of directors, although they are reimbursed for expenses in
connection with attendance at board and committee meetings. Under our 1998
director option plan, non employee directors automatically receive stock option
grants subject to the terms and conditions.

Limitations On Directors' Liability And Indemnification

   Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

  . any breach of their duty of loyalty to the corporation or its
    stockholders;

  . acts of omissions not in good faith or which involve intentional
    misconduct or a knowing violation of law;

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions; or

  . any transaction from which the director derived an improper personal
    benefit.

   The limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable
remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in their capacity as an officer, director, employee or other
agent, regardless of whether the bylaws would permit indemnification.

                                       53
<PAGE>

   We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of
our directors, executive officers and controller for judgment, fines,
settlement amounts and expenses, including attorneys' fees incurred by the
director, executive officer or controller in any action or proceeding,
including any action by or in the right of PC-Tel, arising out of the person's
services as a director, executive officer or controller of us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

   The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors
and officers under these indemnification provisions.

   At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.

   Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of us pursuant
to the foregoing provisions or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

Executive Compensation

                           Summary Compensation Table

   The following table sets forth the compensation earned, awarded or paid for
services rendered to us in all capacities for the fiscal year ended December
31, 1998, by our Chief Executive Officer and our four next most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the fiscal year ended December 31, 1998 whom we refer to in this
prospectus collectively as the named executive officers:

<TABLE>
<CAPTION>
                                                                Long-Term
                                                               Compensation
                                  Annual Compensation             Awards
                         ------------------------------------- ------------
                                                 All Other      Securities
                                                   Annual       Underlying     All Other
                         Salary ($) Bonus ($) Compensation ($) Options (#)  Compensation ($)
                         ---------- --------- ---------------- ------------ ----------------
<S>                      <C>        <C>       <C>              <C>          <C>
Peter Chen..............  $173,750   $56,316         --          125,000          $102(1)
 Chief Executive Officer
  and Chairman
Andrew D. Wahl..........   136,500    31,833         --           15,000           288(1)
 Vice President, Finance
  and Chief Financial
  Officer
William Wen-Liang Hsu...   136,876    31,244         --           90,000           102(1)
 Vice President,
  Engineering
Han Yeh.................   136,876    31,244         --           90,000           174(1)
 Vice President,
  Technology
Derek Obata.............   105,192    68,641         --          195,000            72(1)
 Vice President, Sales
</TABLE>
--------
(1) Consists of premiums paid by us for term life insurance.

                                       54
<PAGE>

                     OPTION GRANTS DURING LAST FISCAL YEAR

   The following table shows information regarding stock options granted to the
named executive officers during the fiscal year ended December 31, 1998. The
potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
projections or estimates of future stock price growth. Potential realizable
values are computed by:

  . Multiplying the number of shares of common stock subject to a given
    option by the exercise price;

  . Assuming that the total stock value derived from that calculation
    compounds at the annual 5% or 10% rate shown in the table for the entire
    ten-year term of the option; and

  . Subtracting from that result the total option exercise price.

   Actual gains, if any, on stock option exercises will be dependent on the
future performance of the common stock. The percentage of total options is
based on an aggregate of 1,393,900 options granted by us during the fiscal year
ended December 31, 1998, to our employees, directors and consultants, including
the named executive officers. Options were granted with an exercise price equal
to the fair market value of our common stock, as determined in good faith by
our board of directors.

<TABLE>
<CAPTION>
                                     Individual Grants
                         -------------------------------------------
                                                                     Potential Realizable
                                      % of Total                       Value at Assumed
                          Number of    Options                          Annual Rates of
                         Securities   Granted to Exercise             Stock Appreciation
                         Underlying   Employees   Price                 for Option Term
                           Options      During     Per    Expiration ---------------------
Name                     Granted (#)    Period    Share      Date     5% ($)     10% ($)
----                     -----------  ---------- -------- ---------- --------- -----------
<S>                      <C>          <C>        <C>      <C>        <C>       <C>
Peter Chen..............   125,000(1)    8.97%    $7.45    1/30/08     585,658   1,484,173
Andrew D. Wahl..........    15,000(2)    1.08%    $7.45    2/27/08      70,279     178,101
William Wen-Liang Hsu...    90,000(3)    6.46%    $7.45    1/30/08     421,674   1,068,604
Han Yeh.................    90,000(4)    6.46%    $7.45    1/30/08     421,674   1,068,604
Derek S. Obata..........   130,000(5)    9.33%    $7.45    3/31/08     609,084   1,543,540
                            65,000(6)    4.66%    $4.85    4/30/08     198,259     502,427
</TABLE>
--------
(1) As of June 30, 1999, 44,271 shares of the option to purchase 125,000 shares
    of common stock have vested. The options for Mr. Chen vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(2) As of June 30, 1999, 5,000 shares of the option to purchase 15,000 shares
    of common stock have vested. The options for Mr. Wahl vested as to 25% on
    February 1, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(3) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
    of common stock have vested. The options for Mr. Hsu vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(4) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
    of common stock have vested. The options for Mr. Yeh vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(5) As of June 30, 1999, 32,500 shares of the option to purchase 130,000 shares
    of common stock have vested. The options for Mr. Obata vested as to 25% on
    April 20, 1999, and the balance vests in a series of yearly installments
    over the next three years of service.
(6) The fair market value of our common stock on the date of grant was $7.45.
    As of June 30, 1999, 18,958 shares of the non-qualified option to purchase
    65,000 shares of common stock have vested. The shares for Mr. Obata under
    this option vests five years from the anniversary date of the grant (April
    20, 2003) or vesting may accelerate for a portion of the options based on a
    performance based vesting schedule.

                                       55
<PAGE>

               AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

   The following table sets forth information with respect to the named
executive officers concerning option exercises for the year ended December 31,
1998 and exercisable and unexercisable options held as of December 31, 1998.
The value of unexercised in-the-money options is based on a price of $9.25 per
share, the fair market value of our stock on December 31, 1998 as determined by
our board of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option. As of June 30, 1999, no options to
purchase our common stock granted since January 1, 1998 have been exercised by
the named executive officers.

<TABLE>
<CAPTION>
                                                                  Value of Unexercised
                         Number of Securities Underlying         In-the-Money Options at
                          Options at December 31, 1998              December 31, 1998
                         -----------------------------------    -------------------------
                          Exercisable        Unexercisable      Exercisable Unexercisable
                         ---------------    ----------------    ----------- -------------
<S>                      <C>                <C>                 <C>         <C>
Peter Chen..............            87,502              162,498  $767,830     $554,045
Derek Obata.............                --              195,000        --      520,000
Andrew Wahl.............            62,292               82,708   498,336      568,664
Han Yeh.................            45,000              135,000   394,875      556,875
William Wen-Liang Hsu...            45,000              135,000   394,875      556,875
</TABLE>

Incentive Stock Plans

1995 Stock Plan

   Our 1995 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or the Code, and for the granting to employees and
consultants of nonstatutory stock options. The maximum aggregate number of
shares which may be optioned and sold under the 1995 stock plan is 3,200,000
shares of common stock. As of December 31, 1998, options to purchase an
aggregate of 662,753 shares of common stock were outstanding under the 1995
stock plan, with a weighted average exercise price of $0.234. The board of
directors has determined that no further options will be granted under the 1995
stock plan after this offering. The 1995 stock plan provides that in the event
of a merger of our company with or into another corporation, or the sale of
substantially all of our assets, each outstanding option will be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the options, the options will terminate as
of the closing of the merger or sale of assets.

1997 Stock Plan

   Our 1997 stock plan, as amended and restated August 3, 1999, provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Code, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights, or SPRs. The 1997 stock
plan was originally approved by the board of directors in November 1996 and was
amended by our board of directors in August 1999, and was approved by our
stockholders in August 1999. As of December 31, 1998, options to purchase an
aggregate of 2,422,555 shares of common stock were outstanding under the 1997
stock plan with a weighted price of $5.575. Unless terminated sooner, the 1997
stock plan will terminate automatically in 2007. A total of 5,500,000 shares of
common stock are currently reserved for issuance pursuant to the 1997 stock
plan, plus annual increases equal of the lesser of:

  . 700,000 shares,

  . 4% of the outstanding shares on such date, or

  . a lesser amount determined by the board.

   The 1997 stock plan may be administered by the board of directors or a
committee of the board. The board of directors or committee of the board has
the power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability

                                       56
<PAGE>

thereof, and the form of consideration payable upon such exercise. In addition,
the board of directors or committee of the board has the authority to amend,
suspend or terminate the 1997 stock plan, provided that no such action may
affect any share of common stock previously issued and sold or any option
previously granted under the 1997 stock plan.

   Options and SPRs granted under the 1997 stock plan are not generally
transferable by the optionee, and each option and SPR is exercisable during the
lifetime of the optionee only by such optionee. Options granted under the 1997
stock plan must generally be exercised within three months of the end of
optionee's status as an employee or consultant of our company, or within twelve
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's ten year term. The exercise
price of all incentive stock options granted under the 1997 stock plan must be
at least equal to 100% of the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1997 stock plan is determined by the board of directors or a
committee of the board, but with respect to nonstatutory stock options intended
to qualify as "performance based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to 100% of the
fair market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1997 stock plan may not
exceed ten years.

   The 1997 stock plan provides that in the event of a merger of our company
with or into another corporation, a sale of substantially all of our assets,
each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or SPR as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable for a
period of fifteen days from the date of such notice, and the option or SPR will
terminate upon the expiration of such period.

1998 Employee Stock Purchase Plan

   Our 1998 employee stock purchase plan was adopted by the board of directors
in May 1998 but will not become effective until the closing date of this
offering. A total of 800,000 shares of common stock has been reserved for
issuance under the 1998 employee stock purchase plan, plus annual increases
equal to the lesser of:

  . 350,000 shares,

  . 2% of the outstanding stock on such date, or

  . a lesser amount determined by the board of directors.

   The 1998 employee stock purchase plan, which is intended to qualify under
Section 423 of the Code, contains successive six-month offering periods. The
offering periods generally start on the first trading day on or after February
15 and August 15 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before February 14, 2000.

   Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However any employee who:

  . immediately after grant owns stock possessing 5% or more of the total
    combined voting power or value of all classes of our capital stock, or

  . whose rights to purchase stock under all employee stock purchase plans of
    our company accrues at a rate which exceeds $25,000 worth of stock for
    each calendar year

may not be granted an option to purchase stock under the 1998 employee stock
purchase plan.

                                       57
<PAGE>

   The 1998 employee stock purchase plan permits participants to purchase
common stock through payroll deductions of up to 15% of the participant's
compensation. The maximum number of shares a participant may purchase during a
single offering period is 2,000 shares.

   Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1998 employee stock purchase plan is 85% of either the fair
market value of the common stock at the beginning or end of the offering period
whichever is lower. Participants may end their participation at any time during
an offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.

   Rights granted under the 1998 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 1998 employee stock purchase
plan. The 1998 employee stock purchase plan provides that, in the event of a
merger of our company with or into another corporation or a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date, before the
date of the proposed sale or merger, will be set. The 1998 employee stock
purchase plan will terminate in 2008. The board of directors has the authority
to amend or terminate the 1998 employee stock purchase plan, except that no
such action may adversely affect any outstanding rights to purchase stock under
the 1998 employee stock purchase plan.

1998 Director Option Plan

   Non employee directors are entitled to participate in the 1998 director
option plan. The 1998 director option plan was adopted by the board of
directors in May 1998, but it will not become effective until the closing date
of this offering. The 1998 director option plan has a term of ten years, unless
terminated sooner by the board of directors. A total of 200,000 shares of
common stock have been reserved for issuance under the 1998 director option
plan.

   The 1998 director option plan provides for the automatic grant of options to
purchase 15,000 shares of common stock to each new non employee director upon
election to the board of directors. Options to purchase 15,000 shares will vest
one-third on 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 option is granted to the non employee
director, he or she shall automatically be granted an option to purchase 7,500
shares on January 1 of each year, if on such date he or she shall have served
on the board of directors for at least six months. The 7,500 share options
shall vest completely on the anniversary of their date of grant, provided that
the optionee continues to serve as a director on such dates. All of the options
granted under the 1998 director option plan shall have a term of 10 years. 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.

   The 1998 director option plan provides that in the event of a merger of our
company with or into another corporation, a sale of substantially all of our
assets, each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or SPR as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable for a
period of thirty days from the date of such notice, and the option or SPR will
terminate upon the expiration of such period. Options granted under the 1998
director option plan must be exercised within three months of the end of the
optionee's tenure as a director of our company, or within twelve months after
such director's termination by death or disability, but in no event later than
the expiration of the option's ten year term. No option granted under the 1998
director option plan is transferable by the optionee other than by will or the
laws of descent and distribution, and each option is exercisable, during the
lifetime of the optionee, only by such optionee.

                                       58
<PAGE>

401(k) Plan

   Our 401(k) plan covers all of our employees beginning the first of the month
following the month of their employment. Pursuant to this plan, employees may
elect to contribute up to 15% of their current compenation to the 401(k) plan
up to the statutorily prescribed annual limit, which was $10,000 in 1998.
Contributions by employees to the 401(k) plan, and income earned on plan
contributions, are not taxable to employees until withdrawn. Further,
contributions by PC-Tel, if any, will be deductible by PC-Tel, when made.
Participating employees vest in employer contributions over five years at a
rate of 20% for each year of service. There have been no employer contributions
to the 401(k) plan during the year.

Employment Agreements and Change of Control Arrangements

   We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination the employee will not solicit our employees. At the time of
commencement of employment, our employees also generally sign offer letters
specifying basic terms and conditions of employment. In general, our employees
are not subject to written employment agreements.

   We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides, among other things, that his employment is at-will, he will receive
an annual salary of $150,000 and that in the event of a change in control of
our company, he will be entitled to one year severance pay.

   We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides, among other things, that his employment will be at-will and
his annual salary will be initially set at $250,000 per year with an annual
bonus of $150,000 payable upon our achieving quarterly net income targets.

   In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares of our common stock which vests according to the
following schedule: 30% at the end of his first year of employment, 25% in
years two and three and 20% in year four. Vesting after the twelfth month of
employment is on a monthly basis. If this offering should take place within the
first year of his employment, 50% of his first year's options will vest at the
time of the offering, and the remaining 50% of his first year's options will
vest upon reaching the completion of his twelfth month of employment. In
addition, if his employment is terminated for any reason, other than for cause,
he will be entitled to one year of severance. If the termination occurs within
the first year of employment, he will be entitled to exercise his entire first
year stock options.

                                       59
<PAGE>

                              CERTAIN TRANSACTIONS

   Since January 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount exceeds $60,000, and in which any director,
executive officer, holder of more than 5% of our common stock or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest other than compensation agreements and other
agreements, which are described under "Management," and the transactions
described below.

Transactions with Directors, Executive Officers and 5% Stockholders

   Series A preferred stock. Between February 10, 1994 and March 14, 1995 we
sold 4,413,333 shares of our common stock at a per share price between $0.10
and $0.30. On May 9, 1995 we effected a recapitalization of our outstanding
stock converting each share of common stock into 1 share of Series A preferred
stock. On June 29, 1995 we sold 222,222 shares of our Series A preferred stock
at a price per share of $0.30. The following table lists the number of shares
of Series A preferred stock sold to our directors, executive officers, or 5%
stockholders (and any members of the immediate family of such persons):

<TABLE>
<CAPTION>
                                                                   Shares of
                                                                   Series A
                                                                preferred stock
   Purchaser                                                       purchased
   ---------                                                    ---------------
   <S>                                                          <C>
   Peter & Sophia Chen.........................................     666,666
   Han C. Yeh..................................................     280,000
   I-Chung Yeh.................................................     133,333
   Der-Chin Yeh................................................      66,666
   Yan-Chiou Yeh...............................................      26,666
   Mike Min-Chu Chen...........................................     666,666
   Wen-Liang Hsu...............................................     200,000
   Rai-Yei Lee.................................................     800,000
   Steel Su....................................................     800,000
   Ming-Hsiung Michael Ho......................................     106,666
</TABLE>

   Series B preferred stock. Between October 18, 1995 and January 10, 1996 we
sold 3,250,000 shares of our Series B preferred stock at a price per share of
$1.20. The following table lists the number of shares of Series B preferred
stock sold to our directors, executive officers, and 5% stockholders (and any
members of the immediate family of such persons):

<TABLE>
<CAPTION>
                                                                   Shares of
                                                                   Series B
                                                                preferred stock
   Purchaser                                                       purchased
   ---------                                                    ---------------
   <S>                                                          <C>
   WK Technology Fund..........................................     555,800
   WK Technology Fund II.......................................     402,500
   WK Technology Fund III......................................     958,366
</TABLE>

   Series C preferred stock. On February 4, 1998, we sold 625,200 shares of its
Series C preferred stock at a price per share of $8.00. The sale of Series C
preferred stock included, among others, the sale of 125,000 shares of Series C
preferred stock to WK Technology Funds, which is a holder of more than 5% of
our common stock. In addition, Wen C. Ko, one of our directors, is Chairman of
WK Technology Fund, WK Technology Fund II and WK Technology Fund III.


                                       60
<PAGE>

Employment Agreements With Executive Officers

   We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides, among other things, that his employment is at-will and he will
receive an annual salary of $150,000.

   We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides, among other things, that his employment will be at-will and
his annual salary will be initially set at $250,000 per year with an annual
bonus of $150,000 payable upon our achieving quarterly net income targets.

   In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares of our common stock which vests according to the
following schedule: 30% at the end of his first year of employment, 25% in
years two and three and 20% in year four. Vesting after the twelfth month of
employment is on a monthly basis. If this offering should take place within the
first year of his employment, 50% of his first year's options will vest at the
time of the offering, and the remaining 50% of his first year's options will
vest upon reaching the completion of his twelfth month of employment. In
addition, if his employment is terminated for any reason, other than for cause,
he will be entitled to one year of severance. If the termination occurs within
the first year of employment, he will be entitled to exercise his entire first
year stock options.

Loan to Executive Officer

   On August 3, 1999, our board authorized an unsecured loan to William F.
Roach, our President and Chief Operating Officer, pursuant to a full-recourse
promissory note, for a principal amount of $54,000 with a per annum interest
rate of 8%. The promissory note shall become immediately due and payable upon
the earlier of (i) one year from the date the promissory note is executed or
(ii) the termination of Mr. Roach's employment with us.

Other Transactions

   Steel Su, a holder of more than 5% of our common stock and a member of our
board of directors from March 1995 until November 1997, served as the President
of BTC, a significant customer. For the years ended December 31, 1995, 1996,
1997 and 1998, the revenues generated from BTC were approximately $99,000,
$1,660,000, $2,153,000 and $4,953,000, respectively.

Indemnification

   We have entered into indemnification agreements with each of our directors,
officers and controller. These indemnification agreements will require us to
indemnify our officers to the fullest extent permitted by Delaware law.

   All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors or, if required by law, a majority of disinterested
stockholders, and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.

                                       61
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted
to reflect the sale of common stock in this offering by:

  . each stockholder known by us to own beneficially more than 5% of our
  common stock,

  . each of the named executive officers,

  . each of our directors, and

  . all of our directors and executive officers as a group.

   The table below assumes no exercise of the underwriters' over-allotment
option. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after June
30, 1999 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Unless
otherwise indicated in the footnotes below (i) the persons and entities named
in the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable and
(ii) except as set forth in the footnotes to the table, the address of each of
the individuals listed in the table is PC-Tel, Inc., 70 Rio Robles, San Jose,
California 95134. As of June 30, 1999, there were 11,204,495 shares of common
stock outstanding, as adjusted to reflect the conversion of all outstanding
shares of preferred stock and warrants upon closing of this offering.

<TABLE>
<CAPTION>
                                                             Shares
                                                       Beneficially Owned
                                                   ---------------------------
                                                             Percent  Percent
                                                             prior to  after
Name of Beneficial Owner                            Number   offering offering
------------------------                           --------- -------- --------
<S>                                                <C>       <C>      <C>
5% Stockholders
Entities affiliated with the WK Technology
 Funds(1)......................................... 1,932,812   17.2     12.2
Steel Su(2).......................................   599,479    5.1%     3.8%
Directors and Executive Officers
Peter Chen(3).....................................   726,980    6.4      4.3
Andrew D. Wahl(4).................................    89,583      *        *
Steve Manuel(5)...................................    55,417      *        *
William Wen-Liang Hsu(6)..........................   548,958    4.9      3.5
Han Yeh(7)........................................   688,958    6.1      4.3
Derek S. Obata(8).................................    54,176      *        *
Frank Reo(9)......................................    32,500      *        *
Mike Min-Chu Chen(10).............................   232,812    2.1      1.5
Giacomo Marini(11)................................    26,146      *        *
Richard C. Alberding..............................         0      *        *
William F. Roach..................................         0      *        *
Martin H. Singer..................................         0      *        *
Wen C. Ko(1)...................................... 1,932,812   17.2     12.2
All directors and executive officers as a group
 (13 persons)(12)................................. 4,388,333   37.2     26.7
</TABLE>
--------
*Less than 1% of the outstanding shares of common stock.
(1) Includes 555,800 shares held by WK Technology Fund, 402,500 shares held by
    WK Technology Fund II, and 958,366 shares held by WK Technology Fund III
    and options to purchase 16,146 shares of our common stock held by WK
    Associates which are exercisable within 60 days of June 30, 1999. Wen C. Ko
    is one of our directors and is Chairman of the WK Technology Funds. The WK
    Technology Funds'

                                       62
<PAGE>

    principal addresses is 10th Floor, 115, Sec. 3, Ming Sheng East Road,
    Taipei, Taiwan 23136. Mr. Ko disclaims beneficial ownership of the shares
    held by WC Technology Fund, WC Technology Fund II, and WK Technology Fund
    III, except to the extent of his pecuniary interest therein.
 (2) Includes 583,333 shares held by Mr. Su individually and options to
     purchase 16,146 shares exerciseable within 60 days of June 30, 1999.
 (3) Includes 240,666 shares held by Mr. Chen with his wife as community
     property, 333,333 owned by himself individually, and 8,000, held by each
     of his minor children living at home, Robert and Michael Chen.
     Additionally includes options held by Mr. Chen to purchase 136,981 shares
     of our common stock exercisable within 60 days of June 30, 1999. Mr. Chen
     disclaims beneficial ownership of the shares held by his children, except
     to the extent of his pecuniary interest therein.
 (4) Includes options to purchase 89,583 share of our common stock exercisable
     within 60 days June 30, 1999.
 (5) Includes options to purchase 55,417 shares of our common stock
     exercisable within 60 days of June 30, 1999.
 (6) Includes 285,300 shares held by the William Wen-Liang Hsu and Rai-Yun Lee
     Family Trust, a revocable trust, over which shares Mr. Hsu has joint
     dispositive power, 123,700 shares held by himself personally, 20,830 held
     by each of his children living at home, Frederick and Joanne Hsu, 2,673
     shares held by Hui-Ju Wang, Mr. Hsu's mother, and options to purchase
     95,625 shares of our common stock exercisable within 60 days of June 30,
     1999. Mr. Hsu disclaims the beneficial ownership of the shares held by
     his children and mother, except to the extent of his pecuniary interest
     therein.
 (7) Includes 577,333 shares owned by Mr. Yeh individually. Additionally
     includes 16,000 shares held by Emily C. Yeh, a minor daughter who lives
     in Mr. Yeh's home, and options to purchase 95,625 share of our common
     stock exercisable within 60 days of June 30, 1999. Mr. Yeh disclaims
     beneficial ownership of the shares held by Emily G. Yeh, except to the
     extent of his pecuniary interest therein.
 (8) Includes options to purchase 54,167 shares of our common stock
     exercisable within 60 days of June 30, 1999.
 (9) Includes options to purchase 32,500 shares of our common stock
     exercisable within 60 days of June 30, 1999.
(10) Includes 193,966 shares owned by Mr. Chen individually. Additionally
     includes 11,350 shares held by each of his children living at home.
     Willis and Thomas L. Chen, a minor son living at Mr. Chen's home, and
     options to purchase 16,146 shares exercisable within 60 days of June 30,
     1999. Mr. Chen disclaims beneficial ownership of the shares held by his
     children, except to the extent of his pecuniary interest therein.
(11) Includes 12,800 shares held by Mr. Marini individually and options to
     purchase 13,346 shares exerciseable within 60 days of June 30, 1999.
(12) Includes shares held by each director and executive officer and family
     members in each of their households. Additionally includes options to
     purchase our common stock, held by each director and executive officer,
     exerciseable within 60 days of June 30, 1999.

                                      63
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

General

   Upon completion of the offering we will be authorized to issue 50,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock does not purport to be complete and is subject to and qualified in its
entirety by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.

Common Stock

   As of June 30, 1999, there were 11,002,078 shares of common stock
outstanding which were held of record by 163 stockholders, as adjusted to
reflect the conversion of all outstanding shares of preferred stock upon
closing of this offering.

   The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of PC-Tel, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and nonassessable,
and the shares of common stock to be issued upon the closing of this offering
will be fully paid and nonassessable.

Preferred Stock

   Immediately prior to this offering, our certificate of incorporation
provided for three series of preferred stock, Series A preferred stock of which
4,635,548 shares were issued and outstanding, Series B preferred stock, of
which 3,250,000 shares were issued and outstanding, and Series C preferred
stock, of which 625,200 shares were issued and outstanding. Upon the closing of
this offering, each outstanding share of Series A preferred stock, Series B
preferred stock, and Series C preferred stock will automatically convert into
one share of common stock.

   Upon the closing of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
preferred stock, $0.001 par value per share, in one or more series, each of the
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the board of directors. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights
of holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for others to acquire, or of discouraging others from
attempting to acquire, a majority of the outstanding voting stock of PC-Tel. We
have no present plans to issue any shares of preferred stock.

Warrants

   At June 30, 1999, there were warrants outstanding to purchase a total of
200,000 shares of Series C preferred stock and 2,417 shares of common stock.
Upon the closing of this offering, the warrants to purchase 200,000 shares of
Series C preferred stock will become exercisable for an aggregate of 200,000
shares of common stock and will expire on December 31, 2008, unless earlier
exercised. The warrants to purchase 2,417 shares of common stock will expire on
February 4, 2001, unless earlier exercised. All warrants may be exercised on a
"net" basis whereby, in lieu of paying the exercise price in cash, the holder
may instruct us to retain a number of shares that has a fair market value at
the time of exercise equal to the aggregate exercise price.

                                       64
<PAGE>

Registration Rights

   The holders of 3,875,200 shares of common stock, and the holders of warrants
to purchase 200,000 shares of common stock or their permitted transferees, are
entitled to rights with respect to registration of the shares under the
Securities Act at any time after 180 days following the closing of this
offering. These rights are provided under the terms of an agreement between us
and the holders of registrable securities. Subject to limitations in the
agreement, the holders of at least 30% of the registrable securities then
outstanding may require, on two occasions beginning after the date of this
prospectus, that we use our best efforts to register the registrable securities
for public resale. If we register any of our securities either for our own
account or for the account of other security holders, the holders of
registrable securities are entitled to include their shares of common stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. The holders of registrable
securities may also require us to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
us, provided, among other limitations, that the proposed aggregate selling
price (net of any underwriters' discounts and expenses of sale) is at least
$1.0 million. All registration expenses must be borne by us and all selling
expenses relating to registrable securities must be borne by the holders of the
securities being registered.

Delaware Anti-Takeover Law and Charter and Bylaw Provisions

   Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of us to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposed to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.

   We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.

   Upon the closing of this offering, our certificate of incorporation and
bylaws will require that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition, upon
the close of this offering, special meetings of our stockholders may be called
only by the board of directors or some of our officers. Our certificate of
incorporation and bylaws also provide that, effective upon the closing of this
offering, our board of directors will be divided into three classes, with each
class serving staggered three-year terms. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
PC-Tel.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, St. Paul, Minnesota,
55075 and its telephone number at this location is (615) 450-4189.

                                       65
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no market for our common stock, and a
significant public market for the common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of common stock
(including shares issued upon exercise of outstanding options and warrants) in
the public market following this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sale of our equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering because
of contractual restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.

   Upon completion of this offering we will have outstanding 15,602,078 shares
of common stock (based upon shares outstanding as of June 30, 1999), assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants that do not expire prior to completion of this
offering. Of these shares, the 4,600,000 shares sold in this offering will be
freely tradable without restriction under the Securities Act except for any
shares purchased by "affiliates" of PC-Tel as that term is defined in Rule 144
under the Securities Act.

   The remaining 11,204,495 shares of common stock, including common stock
equivalents of 202,417 shares, held by existing stockholders were issued and
sold by us in reliance on exemptions from the registration requirements of the
Securities Act. All of our stockholders and all of our directors and officers
have entered into lock-up agreements with the underwriters that provide that we
and those holders of stock and options may not dispose of or hedge any common
stock or securities convertible into or exchangeable for shares of common
stock. These restrictions will be in effect for a period of 180 days after the
date of this prospectus. At any time and without notice, Banc of America
Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements. In addition, holders of stock options
could exercise such options and sell some of the shares issued upon exercise as
described below:

<TABLE>
<CAPTION>
                                    Approximate
                                  Shares Eligible
           Relevant Dates         for Future Sale                  Comment
   ------------------------------ --------------- ------------------------------------------
   <S>                            <C>             <C>
   On effective date(1)..........                 Shares sold in this offering and eligible
                                                  for sale under Rule 144(k)

   90 days after effective                        Additional shares eligible for sale under
    date(2)......................                 Rules 144 and 701

   180 days after effective                       All shares subject to lock-up released;
    date(2)......................                 additional shares eligible for sale under
                                                  Rules 144 and 701

   More than 181 days after ef-                   Additional shares becoming eligible for
    fective date(2)..............                 sale under Rule 144 more than 180 days
                                                  after the effective date
</TABLE>
  --------
  (1) Assumes no exercise of the underwriters' over-allotment option.
  (2) Assumes an effective date of September 30, 1999.

   In addition, as of June 30, 1999, there were outstanding options and
warrants to purchase 4,018,127 shares of common stock. All such options and
warrants are subject to lock-up agreements.

Rule 144

   In general, under Rule 144, an affiliate of PC-Tel, or person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of

  . 1% of the then outstanding shares of common stock (approximately 15,804
    shares immediately after this offering) or

                                       66
<PAGE>

  . the average weekly trading volume during the four calendar weeks
    preceding the date on which notice of the sale is filed with the SEC.

   Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about PC-Tel.

Rule 144(k)

   Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.

Rule 701

   Rule 701, as currently in effect, permits resale of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to PC-Tel who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provision of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. All holders of Rule 701
shares are required to wait until 90 days after the date of this Prospectus
before selling such shares. However, all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after
the offering upon obtaining the prior written consent of Banc of America
Securities LLC.

   We are unable to estimate the number of shares that will be sold under Rule
144, as this will depend on the market price for the common stock, the personal
circumstances of the sellers and other factors.

   180 days following the date of this prospectus, we intend to file a
registration statement on Form S-8 under the Securities Act covering, among
other things, shares of common stock subject to outstanding options under the
1995 stock plan, the 1997 stock plan, the 1998 director option plan and the
1998 employee stock purchase plan. Based on the number of shares subject to
outstanding options as of September 30, 1999 and currently reserved for
issuance under the incentive plans, such registration statement would cover
approximately 9,700,000 shares. Such registration statement will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of PC-Tel, be available for sale in the open market immediately
after the 180-day lock-up agreements expire.

Registration Rights

   Also beginning six months after the date of this offering, holders of
3,875,200 shares of common stock, as converted, and the holders of warrants to
purchase 200,000 shares of common stock, as converted, or their permitted
transferees will be entitled to certain rights with respect to registration of
such shares for sale in the public market. See "Description of Capital Stock--
Registration Rights." Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchase by affiliates) immediately upon
the effectiveness of such registration.

                                       67
<PAGE>

                                  UNDERWRITING

   We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, Warburg
Dillon Read LLC and Needham & Company, Inc., are the representatives of the
underwriters. We have entered into an underwriting agreement with the
representatives. Subject to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and each of the
underwriters has agreed to purchase, the number of shares of common stock
listed next to its name in the following table:

<TABLE>
<CAPTION>
                                                                       Number of
   Underwriter                                                          Shares
   -----------                                                         ---------
   <S>                                                                 <C>
   Banc of America Securities LLC.....................................
   Warburg Dillon Read LLC............................................
   Needham & Company, Inc.............................................
                                                                       ---------
     Total............................................................ 4,600,000
                                                                       =========
</TABLE>

   The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $    per share. The underwriters
also may allow, and any other dealers may reallow, a concession of not more
than $    per share to some other dealers. If all the shares are not sold at
the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered subject to a
number of conditions, including:

  . receipt and acceptance of our common stock by the underwriters and

  . the right to reject orders in whole or in part.

   We have granted an option to the underwriters to buy up to 690,000
additional shares of common stock. These additional shares would cover sales of
shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.

   We, all our stockholders and all of our officers and directors have entered
into lock-up agreements with the underwriters. Under those agreements, we and
those holders of stock and options may not dispose of or hedge any common stock
or securities convertible into or exchangeable for shares of common stock.
These restrictions will be in effect for a period of 180 days after the date of
this prospectus. At any time and without notice, Banc of America Securities LLC
may, in its sole discretion, release all or some of the securities from these
lock-up agreements.

   We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.

   The shares of common stock have been approved for listing on the Nasdaq
National Market under the symbol "PCTI."

   In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:

  . short sales,

  . stabilizing transactions, and

  . purchase to cover positions created by short sales.


                                       68
<PAGE>

   Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.

   The underwriters also may impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.

   The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:

  . over-allotment,

  . stabilization,

  . syndicate covering transactions, and

  . imposition of penalty bids.

   As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.

   The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.

   Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and the
underwriters. Among the factors to be considered in such negotiations are:

  . our history and prospects, and the history and prospectus of the industry
    in which we compete,

  . our past and present financial performance,

  . an assessment of our management,

  . the present state of our development,

  . our prospects for future earnings,

  . the prevailing market conditions of the applicable U.S. securities market
    at the time of this offer,

  . market valuations of publicly traded companies that we and the
    underwriters believe to be comparable to us, and

  . other factors deemed relevant by us and the underwriters.

   The underwriters have reserved up to 200,000 shares of the common stock
offered hereby for sale to certain of our employees, directors, and friends at
the initial public offering price set forth on the cover page of this
prospectus. Such persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase these reserved shares.

                                       69
<PAGE>

                                 LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Brobeck Phleger & Harrison, LLP, San Francisco, California. Certain legal
matters related to intellectual property will be passed on for PC-Tel by
Knobbe, Martens, Olson & Bear, LLP, Newport Beach, California.

                                    EXPERTS

   The consolidated financial statements and schedule of PC-Tel, Inc. included
in this prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.

   The financial statements of the Communications Systems Division, a division
of General DataComm, Inc. included in this prospectus and elsewhere in the
registration statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein, in reliance upon the authority of said firm
as experts in giving said report.

                   WHERE YOU CAN FIND ADDITIONAL INFORMATION

   We filed with the Securities and Exchange Commission, Washington, D.C., a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock sold in this offering. This prospectus does not contain
all the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to PC-Tel and our
common stock, we refer you to the registration statement and to the exhibits
and schedules that were filed with the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Securities
and Exchange Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the site is http://www.sec.gov.

   Upon completion of this offering, PC-Tel will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and, in accordance with the requirements of the Securities Exchange
Act of 1934, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. These periodic reports, proxy
statements and other information will be available for inspection and copying
at the regional offices, public reference facilities and web site of the
Securities and Exchange Commission referred to above.


                                       70
<PAGE>

                                  PC-TEL, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
PC-Tel, Inc.
  Report of Independent Public Accountants...............................  F-2
  Consolidated Balance Sheets............................................  F-3
  Consolidated Statements of Operations..................................  F-4
  Consolidated Statements of Stockholders' Equity........................  F-5
  Consolidated Statements of Cash Flows..................................  F-6
  Notes to the Consolidated Financial Statements.........................  F-7
Communications Systems Division, a division of General DataComm, Inc.
  Report of Independent Public Accountants...............................  F-22
  Balance Sheets.........................................................  F-23
  Statements of Income and Divisional Equity.............................  F-24
  Statements of Cash Flows...............................................  F-25
  Notes to Financial Statements..........................................  F-26
Unaudited Pro Forma Condensed Combined Statement of Operations of PC-Tel,
 Inc. and Communications Systems Divison
  Pro Forma Condensed Combined Statement of Operations for the Year Ended
   December 31, 1998 (unaudited).........................................  P-1
  Notes to Pro Forma Condensed Combined Statement of Operations
   (unaudited) ..........................................................  P-3
</TABLE>

                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PC-Tel, Inc.:

   We have audited the accompanying consolidated balance sheets of PC-Tel, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PC-Tel,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

                                          ARTHUR ANDERSEN LLP

San Jose, California
March 4, 1999


                                      F-2
<PAGE>

                                  PC-TEL, INC.

                          CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share data)
<TABLE>
<CAPTION>
                                         December 31,
                                        ---------------
                                                                  June 30, 1999
                                                                    Pro Forma
                                                          June    Stockholders'
                                                           30,       Equity
                                         1997    1998     1999      (Note 8)
                                        ------- -------  -------  -------------
                                                              (unaudited)
                                     ASSETS
<S>                                     <C>     <C>      <C>      <C>
CURRENT ASSETS:
  Cash and cash equivalents............ $ 6,685 $12,988  $17,252
  Short-term investments...............      --      --    6,282
  Accounts receivable, net of allowance
   for doubtful accounts of $604,
   $1,689 and $3,382, respectively.....   6,058  12,931    5,516
  Subscriptions receivable.............   5,002      --       --
  Inventories..........................     989   2,073    3,590
  Prepaid expenses and other assets....     926     264      472
  Deferred tax asset...................   2,680   4,205    4,658
                                        ------- -------  -------
    Total current assets...............  22,340  32,461   37,770
PROPERTY AND EQUIPMENT, net............     713   1,042    1,475
GOODWILL AND OTHER INTANGIBLE ASSETS,
 net...................................      --  10,812    9,730
OTHER ASSETS...........................      95   1,681    1,508
                                        ------- -------  -------
                                        $23,148 $45,996  $50,483
                                        ======= =======  =======
                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of long-term debt.... $    -- $ 1,640  $ 1,847
  Accounts payable.....................   1,577   5,155    3,564
  Accrued royalties....................   6,505   5,144    6,516
  Income taxes payable.................      --   1,207    2,044
  Accrued liabilities..................   1,418   3,002    5,021
                                        ------- -------  -------
    Total current liabilities..........   9,500  16,148   18,992
                                        ------- -------  -------
LONG-TERM DEBT, net of current
 portion...............................      38  14,709   13,630
                                        ------- -------  -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.001 par value;
   aggregate liquidation preference of
   $10,015 as of December 31, 1998 and
   June 30, 1999
   Authorized--9,385,548
   Outstanding--7,885,548, 8,510,748,
    8,510,748 and 0 shares pro forma,
    respectively; subscribed--625,200,
    0, 0 and 0 shares pro forma,
    respectively.......................       9       9        9     $    --
  Common stock, $0.001 par value
   Authorized--50,000,000
   Outstanding--2,208,990, 2,412,247,
    2,491,330 and 11,002,078 shares pro
    forma, respectively................       2       2        2          11
  Additional paid-in capital...........   9,667  10,915   12,881      12,881
  Deferred compensation................      --    (214)  (2,162)     (2,162)
  Retained earnings....................   3,932   4,427    7,131       7,131
                                        ------- -------  -------     -------
    Total stockholders' equity.........  13,610  15,139   17,861      17,861
                                        ------- -------  -------     -------
                                        $23,148 $45,996  $50,483     $50,483
                                        ======= =======  =======     =======
</TABLE>

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

                                      F-3
<PAGE>

                                  PC-TEL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                Six Months
                                                                   Ended
                                     Year Ended December 31,     June 30,
                                     -----------------------  ----------------
                                      1996    1997    1998     1998     1999
                                     ------- ------- -------  -------  -------
                                                                (unaudited)
<S>                                  <C>     <C>     <C>      <C>      <C>
REVENUES............................ $16,573 $24,009 $33,004  $12,343  $33,046
COST OF REVENUES....................   9,182  12,924  13,878    5,948   16,997
                                     ------- ------- -------  -------  -------
GROSS PROFIT........................   7,391  11,085  19,126    6,395   16,049
                                     ------- ------- -------  -------  -------
OPERATING EXPENSES:
  Research and development..........   2,152   3,348   4,932    2,455    4,423
  Sales and marketing...............     839   3,168   5,624    2,407    4,945
  General and administrative........     477   1,612   2,169      791    2,063
  Acquired in-process research and
   development (Note 4).............      --      --   6,130       --       --
  Amortization of deferred
   compensation.....................      41      --      43       10      164
                                     ------- ------- -------  -------  -------
    Total operating expenses........   3,509   8,128  18,898    5,663   11,595
                                     ------- ------- -------  -------  -------
INCOME FROM OPERATIONS..............   3,882   2,957     228      732    4,454
                                     ------- ------- -------  -------  -------

OTHER INCOME (EXPENSE), NET:
  Interest income...................     127     299     504      254      303
  Interest expense..................      --      --     (25)     (11)    (895)
                                     ------- ------- -------  -------  -------
    Total other income (expense),
     net............................     127     299     479      243     (592)
                                     ------- ------- -------  -------  -------

INCOME BEFORE PROVISION FOR INCOME
 TAXES..............................   4,009   3,256     707      975    3,862
PROVISION FOR INCOME TAXES..........   1,005     955     212      292    1,158
                                     ------- ------- -------  -------  -------

NET INCOME.......................... $ 3,004 $ 2,301 $   495  $   683  $ 2,704
                                     ======= ======= =======  =======  =======


Basic earnings per share............ $  4.79 $  1.13 $  0.21  $  0.29  $  1.10
Diluted earnings per share.......... $  0.29 $  0.20 $  0.04  $  0.06  $  0.21
Shares used in computing basic
 earnings per share.................     627   2,032   2,355    2,320    2,461
Shares used in computing diluted
 earnings per share.................  10,280  11,645  12,325   12,400   12,638
</TABLE>


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


                                      F-4
<PAGE>

                                  PC-TEL, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                   (Accumulated
                         Preferred Stock    Common Stock   Additional               Deficit)/
                         ---------------- ----------------  Paid-In     Deferred     Retained
                          Shares   Amount  Shares   Amount  Capital   Compensation   Earnings    Total
                         --------- ------ --------- ------ ---------- ------------ ------------ -------
<S>                      <C>       <C>    <C>       <C>    <C>        <C>          <C>          <C>
BALANCE, DECEMBER 31,
 1995................... 7,562,208  $ 8          --  $--    $ 4,593     $    --      $(1,373)   $ 3,228
 Issuance of Series B
  convertible preferred
  stock for cash at
  $1.20 per share.......   323,340   --          --   --        388          --           --        388
 Issuance of common
  stock on exercise of
  stock options.........        --   --   1,454,999    1         27          --           --         28
 Stock compensation
  expense for stock
  option grants.........        --   --          --   --         41          --           --         41
 Net income.............        --   --          --   --         --          --        3,004      3,004
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1996................... 7,885,548    8   1,454,999    1      5,049          --        1,631      6,689
 Subscription for Series
  C convertible
  preferred stock for
  cash at $8.00 per
  share, net of issuance
  costs of $406.........   625,200    1          --   --      4,595          --           --      4,596
 Issuance of common
  stock on exercise of
  stock options.........        --   --     753,991    1         23          --           --         24
 Net income.............        --   --          --   --         --          --        2,301      2,301
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1997................... 8,510,748    9   2,208,990    2      9,667          --        3,932     13,610
 Issuance costs for
  Series C convertible
  preferred stock.......        --   --          --   --        (44)         --           --        (44)
 Deferred compensation
  expense for stock
  option grants.........        --   --          --   --        257        (257)          --         --
 Stock compensation
  expense for stock
  option grants.........        --   --          --   --         --          43           --         43
 Issuance of common
  stock on exercise of
  stock options.........        --   --     203,257   --         34          --           --         34
 Issuance of Series C
  convertible stock
  warrants in
  conjunction with notes
  payable...............        --   --          --   --      1,350          --           --      1,350
 Costs incurred related
  to initial public
  offering..............        --   --          --   --       (349)         --           --       (349)
 Net income.............        --   --          --   --         --          --          495        495
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1998................... 8,510,748    9   2,412,247    2     10,915        (214)       4,427     15,139
 Deferred compensation
  expense for stock
  option grants
  (unaudited)...........        --   --          --   --      2,112      (2,112)          --         --
 Stock compensation
  expense for option
  grants (unaudited)....        --   --          --   --         --         164           --        164
 Issuance of common
  stock on exercise of
  stock options
  (unaudited)...........        --   --      79,083   --         10          --           --         10
 Costs incurred related
  to initial public
  offering (unaudited)..        --   --          --   --       (156)         --           --       (156)
 Net income
  (unaudited)...........        --   --          --   --         --          --        2,704      2,704
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, JUNE 30, 1999
 (unaudited)............ 8,510,748  $ 9   2,491,330  $ 2    $12,881     $(2,162)     $ 7,131    $17,861
                         =========  ===   =========  ===    =======     =======      =======    =======
</TABLE>

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

                                      F-5
<PAGE>

                                  PC-TEL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                 Year Ended December 31,         June 30,
                                 --------------------------  ------------------
                                  1996     1997      1998      1998      1999
                                 -------  -------  --------  --------  --------
                                                                (unaudited)
<S>                              <C>      <C>      <C>       <C>       <C>
CASH FLOWS FROM OPERATING AC-
 TIVITIES:
 Net income....................  $ 3,004  $ 2,301  $    495  $    683  $  2,704
 Adjustments to reconcile net
  income to net cash provided
  by operating activities:
 Acquired in-process research
  and development..............       --       --     6,130        --        --
 Depreciation and
  amortization.................       59      193       303       139     1,350
 Amortization of deferred debt
  costs........................       --       --        --        --       152
 Increase in allowance for
  doubtful accounts............       70      534     1,085       484     1,693
 Increase in inventory
  reserves.....................    1,514      488       330       146       525
 Stock compensation expense for
  stock option grants..........       41       --        43        10       164
 Changes in assets and
  liabilities, net of
  acquisitions:
  (Increase) decrease in
   accounts receivable.........   (2,247)  (4,363)   (8,391)   (3,196)    5,722
  (Increase) decrease in
   inventories.................   (1,850)     869    (1,352)     (135)   (2,042)
  (Increase) decrease in
   prepaid expenses and other
   assets......................      (16)    (975)      598       685      (190)
  Increase in deferred tax
   asset.......................   (2,489)    (191)   (1,525)      (73)     (453)
  Increase in accounts payable
   and accrued liabilities.....    1,053    1,170     5,157       516       428
  Increase (decrease) in
   accrued royalties...........    2,531    3,974    (1,361)    1,758     1,372
  Increase (decrease) in income
   taxes payable...............    2,532   (2,532)    1,207        63       837
  Increase (decrease) in
   deferred revenue............      551     (551)       --        --        --
                                 -------  -------  --------  --------  --------
  Net cash provided by
   operating activities........    4,753      917     2,719     1,080    12,262
                                 -------  -------  --------  --------  --------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
 Purchase of property and
  equipment....................     (310)    (427)     (512)     (149)     (698)
 Proceeds from sale of
  available-for-sale
  investments..................       --    1,003        --        --     3,254
 Purchase of available-for-sale
  investments..................     (948)      --        --        --    (9,536)
 Purchase of Communications
  Systems Division, net of cash
  acquired.....................       --       --   (16,832)       --        --
                                 -------  -------  --------  --------  --------
  Net cash provided by (used
   in) investing activities....   (1,258)     576   (17,344)     (149)   (6,980)
                                 -------  -------  --------  --------  --------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
 Proceeds from notes payable...       --       --    16,313        --        --
 Principal payments on notes
  payable......................       --       --        --        --      (859)
 Proceeds from issuance of
  preferred stock..............      388       --     5,002     5,002        --
 Costs incurred related to
  issuance of preferred stock..       --     (406)      (44)       --        --
 Costs incurred related to
  proposed initial public
  offering.....................       --       --      (349)     (262)     (156)
 Proceeds from issuance of
  common stock.................       28       24        34        30        10
 Principal payments on capital
  lease obligations............       (2)     (11)      (28)      (14)      (13)
                                 -------  -------  --------  --------  --------
  Net cash provided by (used
   in) financing activities....      414     (393)   20,928     4,756    (1,018)
                                 -------  -------  --------  --------  --------
  Net increase in cash and cash
   equivalents.................    3,909    1,100     6,303     5,687     4,264
CASH AND CASH EQUIVALENTS,
 beginning of period...........    1,676    5,585     6,685     6,685    12,988
                                 -------  -------  --------  --------  --------
CASH AND CASH EQUIVALENTS, end
 of period.....................  $ 5,585  $ 6,685  $ 12,988  $ 12,372  $ 17,252
                                 =======  =======  ========  ========  ========
SUPPLEMENTAL CASH FLOW
 INFORMATION:
 Cash paid for interest........  $    --  $    --  $     25  $     11  $    895
 Cash paid for income taxes....  $   961  $ 4,372  $    462  $    317  $    775
 Property and equipment
  acquired under capital
  leases.......................  $     7  $    67  $     --  $     --  $     --
 Issuance of warrants for
  preferred and common stock...  $    --  $    --  $  1,400  $     50  $     --
</TABLE>

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

                                      F-6
<PAGE>

                                  PC-TEL, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Information relating to the six months ended June 30, 1998 and June 30, 1999
                                 is unaudited)

                               DECEMBER 31, 1998

1. ORGANIZATION AND OPERATIONS OF THE COMPANY:

   PC-Tel, Inc. ("the Company") is a corporation that was originally
incorporated in California in February 1994. In July 1998, the Company
reincorporated in Delaware and this reincorporation has been reflected
retroactively in the accompanying consolidated financial statements. The
Company is a leading provider of software based connectivity solutions to
individuals and businesses worldwide. The Company designs, develops, produces
and markets advanced software-based high performance, low cost modems that are
flexible and upgradeable, with functionality that can include data/fax
transmission at various speeds, video conferencing and telephony features. The
Company's host signal processing software architecture utilizes the host PC's
central processing unit to perform digital signal processing and other
operations typically handled by dedicated hardware found in conventional
hardware-based modems. The Company's host signal processing technology allows
the elimination of this dedicated hardware, lowering costs and enhancing
capabilities.

   The Company is subject to certain risks including, but not limited to,
competition from larger, more established companies, reliance on a limited
number of customers, dependence on new product introductions, short product
life cycles, the Company's ability to develop and bring to market new products
on a timely basis, volatility of the industry including technical obsolescence,
dependence on key employees and the ability to attract and retain additional
qualified personnel to manage the anticipated growth of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 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 period.
Actual results could differ from those estimates.

 Consolidation and Foreign Currency Translation

   The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany accounts
and transactions. The functional currency of the Company's subsidiaries is the
United States dollar, accordingly, all translation gains and losses resulting
from transactions denominated in currencies other than United States dollars
are included in net income. As of December 31, 1998, the Company has
subsidiaries in the Cayman Islands and Japan.

 Cash and Cash Equivalents

   For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments or money-market type funds with an original maturity of three
months or less to be cash equivalents.

 Short-Term Investments

   At June 30, 1999, short-term investments consist of U.S. Government
investments with an original maturity of approximately four months and a
certificate of deposit with an original maturity in excess of three months.
These short-term investments are classified as available-for-sale and are
recorded at their fair value. If

                                      F-7
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

material, any unrealized gains or losses would be classified as Other
Comprehensive Income in the accompanying statement of stockholders' equity. As
of June 30, 1999, the cost and fair value of the short-term investments were
not materially different.

 Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash investments and trade receivables. The
Company has cash investment policies that limit its investments to short-term,
low-risk investments. With respect to trade receivables, the Company's
customers are concentrated in the personal computer industry and modem board
manufacturer industry segment and in certain geographic locations. The Company
actively markets and sells products in Asia. The Company performs ongoing
evaluations of its customers' financial conditions and generally requires no
collateral. As of December 31, 1997, approximately 55% of gross accounts
receivable was concentrated with three customers. As of December 31, 1998,
approximately 54% of gross accounts receivable was concentrated with three
customers. As of June 30, 1999, approximately 48% of gross accounts receivable
was concentrated with three customers.

 Inventories

   Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories at December 31, 1997 and 1998 and June
30, 1999 were composed of finished goods only. Inventories included certain
finished goods that were in excess of the Company's expected requirements and
the excess amounts were fully reserved as of December 31, 1997, 1998 and June
30, 1999. Due to competitive pressures and technological innovation, it is
possible these estimates could change in the near term.

 Property and Equipment

   Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets. Assets acquired under capital leases are recorded at the present
value of the related lease obligations and are depreciated on a straight-line
basis over the shorter of the estimated useful life or lease term. Included in
property and equipment are assets acquired under capital lease obligations with
an original cost of approximately $74,000. Accumulated amortization on the
leased assets was approximately $6,000 and $22,000 as of December 31, 1997 and
1998, respectively. Leasehold improvements are amortized over the corresponding
lease term.

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

<TABLE>
<CAPTION>
                                                  December 31,
                                                  -------------
                                                  1997    1998   June 30, 1999
                                                  -----  ------  -------------
                                                                  (unaudited)
   <S>                                            <C>    <C>     <C>
   Computer and office equipment................. $ 868  $1,296     $1,962
   Furniture and fixtures........................   119     264        271
   Leasehold improvements........................     6      55         72
                                                  -----  ------     ------
       Total property and equipment..............   993   1,615      2,305
   Less: Accumulated depreciation and
    amortization.................................  (280)   (573)      (830)
                                                  -----  ------     ------
       Property and equipment, net............... $ 713  $1,042     $1,475
                                                  =====  ======     ======
</TABLE>

                                      F-8
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Accounting for Impairment of Long-Lived Assets

   The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an on-
going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including costs in excess of net assets of
businesses acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although
the assumptions may vary from transaction to transaction, they generally
include revenue growth, operating results, cash flows and other indicators of
value. Management then determines whether there has been a permanent impairment
of the value of long-lived assets by comparing future estimated undiscounted
cash flows to the asset's carrying value. If the estimated future undiscounted
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value. To date, the Company has
not needed to record any impairment losses on long-lived assets.

 Software Development Costs

   The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company's products include a software component. The Company has expensed all
software development costs to date, and substantially all development costs
have been incurred prior to the Company's products attaining technological
feasibility.

 Revenue Recognition

   Revenues consist primarily of sales of products to original equipment
manufactures ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company provides for estimated sales returns and
allowances related to sales to OEMs at the time of shipment. Revenues from
sales to distributors are made under agreements allowing price protection and
rights of return on unsold products. In the fourth quarter of 1998, the Company
began to record revenue relating to sales to distributors upon sell-through
from the distributor to the end customer. Prior to this change, the Company
recognized revenues upon shipment to distributors, net of reserves for
estimated returns and price protection arrangements. This change did not have a
material effect on the Company's financial statements.

   The Company has also generated revenues from engineering contracts. Revenues
from engineering contracts are recognized as contract milestones are achieved.
Royalty revenue is recognized when confirmation of royalties due to the Company
is received from licensees.

 Stock-Based Compensation

   The Company accounts for stock based compensation in accordance with SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 permits the use
of either a fair value based method or the method defined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25"), to account for stock-based compensation arrangements. Companies
that elect to employ the valuation method provided in APB No. 25 are required
to disclose the pro forma net income (loss) that would have resulted from the
use of the fair value based method. The Company has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB No. 25 and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 8.

 Earnings Per Share

   The Company computes 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

                                      F-9
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

diluted, and present per share data for all periods in which a statement of
operations is presented. Basic earnings per share is computed by dividing net
income per share by the weighted average number of shares of common stock
outstanding.

   Diluted earnings per share is computed using the weighted average number of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents consist of preferred stock using the "if converted" method
and stock options and warrants using the treasury stock method. Preferred
stock, common stock options and warrants are excluded from the computation of
diluted earnings per share if their effect is anti-dilutive.

   Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock issued or granted for
nominal consideration prior to the anticipated effective date of the proposed
initial public offering must be included in the calculation of basic and
diluted net income per common share as if they had been outstanding for all
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.

   The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three years ended December 31, 1998 and for the six months ended June 30, 1998
and June 30, 1999, respectively (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                  Six Months
                                                                     Ended
                                        Year Ended December 31,    June 30,
                                        ----------------------- ---------------
                                         1996    1997    1998    1998    1999
                                        ------- ------- ------- ------- -------
                                                                  (unaudited)
<S>                                     <C>     <C>     <C>     <C>     <C>
Net income............................. $ 3,004 $ 2,301 $   495 $   683 $ 2,704
                                        ======= ======= ======= ======= =======
Basic earnings per share:
  Weighted average common shares
   outstanding.........................     627   2,032   2,355   2,320   2,461
                                        ------- ------- ------- ------- -------

Basic earnings per share............... $  4.79 $  1.13 $  0.21 $  0.29 $  1.10
                                        ======= ======= ======= ======= =======
Diluted earnings per share:
  Weighted average common shares
   outstanding.........................     627   2,032   2,355   2,320   2,461
  common stock option grants and
   outstanding warrants................   1,848   1,727   1,518   1,687   1,666
  Weighted average preferred stock
   outstanding.........................   7,805   7,886   8,452   8,393   8,511
                                        ------- ------- ------- ------- -------
  Total weighted average common shares
   and common stock equivalents........  10,280  11,645  12,325  12,400  12,638
                                        ------- ------- ------- ------- -------
Diluted earnings per share............. $  0.29 $  0.20 $  0.04 $  0.06 $  0.21
                                        ======= ======= ======= ======= =======
</TABLE>


 Comprehensive Income

   Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." Comprehensive income is to include amounts which have
been previously excluded from net income and reflected instead in stockholders'
equity. For all periods presented, comprehensive income is the same as reported
net income.

 The Cost of Computer Software Developed or Obtained for Internal Use

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,"

                                      F-10
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

which the Company adopted in fiscal 1999. SOP No. 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
has been met. The adoption did not have a material impact on the Company's
financial position or results of operations.

 Costs of Start-Up Activities

   In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which the Company
adopted in fiscal 1999. SOP No. 98-5 requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-up costs
that were previously capitalized must be written off when SOP No. 98-5 is
adopted. The adoption did not have a material impact on the Company's financial
position or results of operations.

 Proposed Initial Public Offering

   The Board of Directors has approved a plan to file a registration statement
with the Securities and Exchange Commission to register shares of its common
stock in connection with a proposed initial public offering ("IPO"). Costs
incurred by the Company related to the IPO have been recorded within the
consolidated statements of stockholders' equity. If the Company is not able to
complete the IPO, these capitalized costs would be expensed in the consolidated
statements of operations.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. The Company becomes subject to SFAS No. 133
for the first quarter beginning after January 1, 2001. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the adoption of SFAS No. 133 is not expected to have a material
impact on the financial position or results of operations of the Company.

3. RISKS AND UNCERTAINTIES:

   For the year ended December 31, 1998, the Company's purchases of integrated
circuits were primarily concentrated with a limited number of vendors. If these
vendors were unable to provide integrated circuits in a timely manner and the
Company was unable to find alternative vendors, the Company's business,
operating results and financial condition could be adversely affected.

   The majority of the Company's revenues are derived from a limited number of
products utilizing host signal processing technology. The market for these
products is characterized by frequent transitions in which products rapidly
incorporate new features and performance standards. A failure to develop
products with required feature sets or performance standards or a delay in
bringing a new product to market could adversely affect the Company's operating
results.

4. ACQUISITIONS:

 Communications Systems Division

   On December 22, 1998, the Company acquired substantially all of the assets
and certain of the liabilities of Communications Systems Division ("CSD"), a
division of General DataComm, Inc., for a total purchase

                                      F-11
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

price of approximately $17 million. The acquisition, which was accounted for as
a purchase, was paid for in cash and financed primarily with notes payable. In
conjunction with the acquisition, the Company and one of its wholly owned
subsidiaries entered into Notes Payable arrangements for approximately $16.3
million (Note 5). The consolidated statement of operations for the year ended
December 31, 1998, includes the results of operations of CSD from the date of
acquisition. The excess purchase price over the net tangible assets acquired
was $16.8 million of which $6.1 million was allocated to in-process research
and development and $10.7 million was allocated to other intangible assets.
Amounts allocated to other intangible assets (classified as Goodwill and Other
Intangible Assets, net in the accompanying consolidated balance sheets) include
patents and intellectual property of $8.7 million, work force of $1.3 million
and goodwill of $671,000, all of which are being amortized over their useful
lives which was five years on a weighted average basis. The allocation of
purchase price is a preliminary estimate by management and is subject to
further adjustment.

   Upon completion of the CSD acquisition, the Company immediately expensed
$6.1 million representing purchased in-process technology that had not yet
reached technological feasibility and had no alternative future use. The value
assigned to purchased in-process technology, based on a percentage of
completion discounted cash flow method, was determined by identifying research
projects in areas for which technological feasibility has not been established.
The value was determined by estimating the costs to develop the purchased in-
process technology into commercially viable products, estimating the resulting
net cash flows from such projects and discounting the net cash flows back to
their present value. The discount rate includes a risk adjusted discount rate
to take into account the uncertainty surrounding the successful development of
the purchased in-process technology. The valuation includes cash inflows from
in-process technology through 2002 with revenues commencing in 1999 and
increasing significantly in 2000 before declining in 2002. A royalty payment of
3% was assumed from in-process technology to existing technology, based on
management's estimate of a patent license rate. The High Density Remote Access
System and industrial modem projects were approximately 56% complete at the
time of the valuation and the expected timeframe for achieving these product
releases was assumed to be in the second half of 1999. The DSL project was
approximately 56% complete at the time of the valuation and the expected time
frame for achieving this product release is assumed to be in early 2000. The
percentage complete calculations for all projects were estimated based on
research and development expenses incurred to date and management estimates of
remaining development costs. Significant remaining development efforts must be
completed in the next 6 to 18 months in order for CSD's projects to become
implemented in a commercially viable timeframe. If these projects are not
successfully developed, the Company's future revenue and profitability may be
adversely affected. Additionally, the value of other intangible assets acquired
may become impaired.

   The unaudited pro forma financial information for the years ended December
31, 1997 and 1998 is presented below as if CSD had been acquired on January 1,
1997.

<TABLE>
<CAPTION>
                                                                  Year Ended
                                                                 December 31,
                                                                ---------------
                                                                 1997    1998
                                                                ------- -------
     <S>                                                        <C>     <C>
     Revenues.................................................. $28,573 $35,632
     Net income................................................ $ 2,272 $ 2,978
     Diluted net income per share.............................. $  0.20 $  0.24
</TABLE>

5. NOTES PAYABLE:

   On December 22, 1998, the Company and one of its wholly owned subsidiaries,
each entered into a note payable arrangement ("the Notes Payable") with a bank.
The Notes Payable are for a total amount of $16.3 million. The Notes Payable
bear interest at the bank's prime interest rate plus 0.5% (8.25% at
December 31, 1998) and are subject to certain financial and non-financial
covenants. In addition, the bank

                                      F-12
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

received a primary security interest in all assets, including intellectual
property, of the Company. The Notes Payable are to be repaid in 59 equal
monthly installments of approximately $258,000 and a final payment of
approximately $5.9 million in January 2004. The Company will be required to pay
a 3% penalty if the Notes Payable are paid prior to maturity. No payments on
the Notes Payable were required to be made by December 31, 1998.

   As of December 31, 1998, the aggregate principal maturities of the Notes
Payable are as follows (in thousands):

<TABLE>
       <S>                                                                <C>
       1999.............................................................. $1,614
       2000..............................................................  1,936
       2001..............................................................  2,111
       2002..............................................................  2,291
       2003..............................................................  2,489
       2004..............................................................  5,882
</TABLE>

   In connection with the Notes Payable, the Company issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be approximately $1.4 million using the Black-Scholes
option pricing model. The Company has recorded the fair value of the warrants
as a deferred charge which will be amortized over the term of the Notes
Payable.

6. COMMITMENTS AND CONTINGENCIES:

   The Company leases its facilities under operating leases which expire
through September 2001. In addition, the Company leases certain of its
equipment under capital leases. As of December 31, 1998, the future minimum
lease commitments under all leases were as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Capital Operating
                                                               Leases   Leases
                                                               ------- ---------
     <S>                                                       <C>     <C>
     1999.....................................................   $29    $  647
     2000.....................................................     4       517
     2001.....................................................     4        62
     2002.....................................................     3        --
                                                                 ---    ------
     Total minimum lease payments.............................    40    $1,226
                                                                        ======
     Less: Amounts representing interest......................    (4)
                                                                 ---
     Present value of minimum lease payments..................   $36
                                                                 ===
</TABLE>

   Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was approximately $139,000, $248,000 and $364,000, respectively.

   As of December 31, 1997 and 1998, the Company has accrued royalties of
approximately $6.5 million and $5.1 million, respectively. The Company has
entered into royalty agreements in fiscal 1998 and continues to negotiate
royalty agreements with several other third parties. Accordingly, the Company
has accrued its best estimate of the amount of royalties payable based on
royalty agreements already signed or in negotiation, as well as advice from
patent counsel. Should the final agreements result in royalty rates
significantly different from these assumptions, the Company's business,
operating results and financial condition could be materially and adversely
affected.

   During 1998, Motorola, Inc. ("Motorola") filed an action for patent
infringement against the Company (and one other defendant) of seven Motorola
patents. In its complaint, Motorola seeks damages for the

                                      F-13
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's alleged infringement, including treble damages for the Company's
alleged willful infringement and an injunction against the Company. Motorola is
also seeking attorney's fees and costs.

   The Company filed an answer to Motorola's complaint denying infringement of
the seven asserted Motorola patents and asserted that each patent is invalid or
unenforceable. In addition, the Company asserted counterclaims and declaratory
relief for invalidity and/or unenforceability and noninfringements of each of
the seven asserted Motorola patents. By its counterclaims, the Company seeks
compensatory and punitive damages, an injunction against Motorola, and an award
of treble damages for Motorola's violation of the Federal and state antitrust
laws, and for violation of Massachusetts General Law. The Company also seeks
its costs and attorney's fees in this action. An initial conference with the
Court under Delaware local rule was held in April 1999 and discovery started in
June 1999.

   Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, management cannot ascertain the availability of
injunctive relief or other equitable remedies or estimate the total expenses,
possible damages or settlement value, if any, that may ultimately be incurred
in connection with Motorola's suit. However, management believes, based on the
advice of legal counsel, that the Company has meritorious defenses to the
allegations contained in Motorola's complaint. This litigation could be time
consuming and costly, and the Company will not necessarily prevail given the
inherent uncertainties of litigation. In the event that the Company does not
prevail in litigation, the Company could be prevented from selling soft modem
products or be required to enter into royalty or licensing agreements or pay
monetary damages. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the event of a
successful claim against the Company, the Company's financial position and
results of operations could be materially adversely affected.

7. PREFERRED STOCK:

   Series A convertible preferred stock ("Series A"), Series B convertible
preferred stock ("Series B") and Series C convertible preferred stock ("Series
C") consist of the following, net of issuance costs (dollars in thousands):
<TABLE>
<CAPTION>
                                                    December 31,
                                                    --------------
                                                                     June 30,
                                                     1997    1998      1999
                                                    ------  ------  -----------
                                                                    (unaudited)
<S>                                                 <C>     <C>     <C>
Series A:
  $0.001 par value; Authorized--4,635,548
  Outstanding--4,635,548 shares; liquidation pref-
   erence of $1,113................................ $    5  $    5      $ 5
Series B:
  $0.001 par value; Authorized--3,250,000
  Outstanding--3,250,000 shares; liquidation pref-
   erence of $3,900................................      3       3        3
Series C:
  $0.001 par value; Authorized--1,500,000
   Outstanding or subscribed--625,200 shares;
   liquidation preference of $5,002................      1       1        1
                                                    ------  ------      ---
                                                    $    9  $    9      $ 9
                                                    ======  ======      ===
</TABLE>

   The Series C preferred stock was subscribed as of December 31, 1997 and was
subsequently issued, and payment was received, in February 1998. Accordingly, a
subscription receivable of approximately $5.0 million was recorded as a current
asset at December 31, 1997 in the accompanying consolidated balance sheets.

                                      F-14
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The rights, restrictions and preferences of the Series A, Series B and
Series C (collectively "convertible preferred stock") are as follows:

  . In the event of any liquidation, dissolution or winding up of the
    Company, either voluntary or involuntary, the holders of Series C shares
    shall be entitled to receive $8.00 per share, prior and in preference to
    any distribution of the assets or surplus funds to the holders of Series
    A, Series B and common stock, plus all declared but unpaid dividends on
    each share of Series C. After payment of the full amount due to the
    holders of Series C, the holders of Series A and Series B shall be
    entitled to receive, prior to any distribution of the Company's assets or
    property to the holders of common stock, the amount of $0.24 and $1.20
    per share, respectively, plus all declared but unpaid dividends on each
    share of Series A and Series B. The Series A and Series B shall rank on
    parity as to the receipt of any respective preferential amount for Series
    A and Series B shares. After payment of the full amount to Series A,
    Series B and Series C shareholders, the holders of common stock shall be
    entitled to receive an amount per share equal to $82,000 divided by the
    number of common shares outstanding at the time of distribution
    (excluding shares of common then issuable upon conversion of the
    convertible preferred stock). Any remaining assets shall be distributed
    ratably to the holders of convertible preferred stock and common stock,
    each share of preferred being treated as the number of shares of common
    into which it could then be converted.

  . Each share of convertible preferred stock is convertible, at the option
    of the shareholder, into one share of common stock, subject to
    adjustments to prevent dilution as provided in the respective stock
    agreements.

  . The holders of convertible preferred stock are entitled to the number of
    votes equal to the number of shares of common stock into which each share
    of convertible preferred stock could be converted.

  . Each share of convertible preferred stock will automatically convert into
    common stock in the event of the closing of an underwritten public
    offering of the Company's common stock from which the Company receives
    gross proceeds in excess of $15,000,000 and for which the offering price
    is not less than $16.00 per share.

  . Each convertible preferred stock shareholder is entitled to receive
    annual dividends at a rate of $0.019 per Series A share, $0.096 per
    Series B share and $0.64 per Series C share when, and if, declared by the
    Board of Directors. No dividends shall be paid on shares of Series A or
    Series B or common stock until total dividends have been paid, declared
    or set apart for Series C shareholders. Series A, Series B and Series C
    shareholders shall receive dividends prior to payment of dividends on
    common stock. Dividends are non-cumulative. No dividends have been
    declared to date.

8. COMMON STOCK:

   As of June 30, 1999, the Company had reserved shares of its common stock for
future issuance as follows (unaudited):

<TABLE>
   <S>                                                                <C>
   Conversion of Series A preferred stock............................  4,635,548
   Conversion of Series B preferred stock............................  3,250,000
   Conversion of Series C preferred stock............................    625,200
   Conversion of Series C and common stock warrants..................    202,417
   1995 and 1997 Stock Option Plans..................................  4,208,670
   Director Option Plan and Employee Stock Purchase Plan.............  1,000,000
                                                                      ----------
                                                                      13,921,835
                                                                      ==========
</TABLE>


                                      F-15
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Unaudited Pro Forma Stockholders' Equity

   The Board of Directors have authorized the filing of a registration
statement with the Securities and Exchange commission to register shares of its
common stock in connection with a proposed initial public offering ("IPO"). If
the IPO is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will be converted into 8,510,748 shares
of common stock upon the closing of the IPO. The effect of the conversion has
been reflected as unaudited pro forma stockholders' equity in the accompanying
balance sheet as of June 30, 1999.

Stock Option Plans

   The Company has two stock option plans, the 1995 Stock Option Plan ("1995
Plan") and the 1997 Stock Option Plan ("1997 Plan"). Under the 1995 Plan and
the 1997 Plan, the Board of Directors may grant to employees and consultants
options and/or purchase rights to purchase the Company's common stock at terms
and prices determined by the Board of Directors. The number of authorized
shares available for issuance under the 1995 Plan was 3,200,000. As of December
31, 1998, the number of shares that remain available to be granted under the
1995 Plan is 152,673. The number of authorized shares available for issuance
under the 1997 Plan is 3,500,000. As of December 31, 1998, the number of shares
that remain available to be granted under the 1997 Plan is 1,049,772.

   In May 1998, the Board of Directors approved an increase in the number of
authorized shares available for issuance under the 1997 Plan to 4,500,000
shares of common stock. In August 1999, the Board of Directors approved the
amendment and restatement of the 1997 Plan and approved an additional increase
in the number of authorized shares available for issuance under the 1997 Plan
to 5,500,000 shares of common stock. The increase to 5,500,000 authorized
shares requires stockholder approval. The number of authorized shares under the
1997 Plan will increase annually 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 and
vesting of all grants are to be determined by the Board of Directors. Options
granted under the 1997 Plan expire 10 years from the date of grant. The 1997
Plan will terminate in 2007.

 1998 Director Option Plan ("Directors Plan")

   The Directors Plan will not become effective until the effectiveness of the
proposed initial public offering. A total of 200,000 shares of common stock
have been reserved for issuance under the Directors Plan. The 1998 Director's
Plan provides for the automatic grant of 15,000 shares of common stock to each
new non-employee director upon election to the Board of Directors. 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 option is granted
to the non-employee director, he or she shall automatically be granted an
option to purchase 7,500 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
7,500 share options shall vest completely on the anniversary of their date of
grant, provided that the optionee continues to serve as a director on such
dates. All of the options granted under the 1998 Director's Plan shall have a
term of 10 years. 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.

 Employee Stock Purchase Plan ("Purchase Plan")

   In May 1998, a total of 800,000 shares of common stock were reserved for
future issuance under the 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. The Purchase Plan
will enable eligible employees to purchase common stock at the lower of 85% of
the fair market value of the Company's

                                      F-16
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

common stock on the first or last day of each six-month offering period. The
first offering period will begin upon the closing date of the proposed initial
public offering. The Purchase Plan will terminate in 2008.

   Nonqualified options granted under the 1995 Plan and 1997 Plan must be
issued at a price equal to at least 85% of the fair market value of the
Company's common stock at the date of grant. The options 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 stock
option agreement, and vest over a vesting schedule determined by the Board of
Directors.

Deferred Compensation

   In connection with the grant of certain stock options to employees during
fiscal 1998 and the six months ended June 30, 1999, the Company recorded
deferred compensation of $257,000 and $2.1 million, respectively, representing
the difference between the estimated fair value of the common stock for
accounting purposes and the option exercise price of such options at the date
of grant. Such amount is presented as a reduction of stockholders' equity and
is amortized ratably over the vesting period of the applicable options. During
1996, the Company granted options to purchase shares of common stock at an
exercise price below the fair value of the Company's common stock at the date
of grant. Compensation expense of $41,000 was recognized in relation to those
grants in the year ended December 31, 1996. The amortization expense relates to
options awarded to employees in all operating expense categories. The
amortization of deferred compensation has not been separately allocated to
these categories. The amount of deferred compensation expense to be recorded in
future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

Valuation of Stock Options

   Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS No. 123.
The fair value for the stock options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions for
fiscal years 1996, 1997 and 1998: risk-free interest rates in the range of 5.2%
to 6.5%; dividend yields of zero; an estimated volatility factor of the market
price of the Company's common stock in the range of 40% to 55%; and an expected
life of the option of six months after vest date. The weighted-average
estimated fair value of options granted during fiscal 1996, 1997 and 1998 was
$0.37, $2.32 and $3.43 per share, respectively.

   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 the Company's 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, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.


                                      F-17
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. The Company's
pro forma net income (loss) would have been approximately $3.0 million, $2.0
million and $(984,000) for fiscal years 1996, 1997 and 1998, respectively. Pro
forma diluted net income (loss) per share would have been $0.29, $0.17 and
($0.42) for fiscal years 1996, 1997 and 1998, respectively.

   The following table summarizes stock option activity under the 1995 Plan and
1997 Plan:

<TABLE>
<CAPTION>
                                                      Options Outstanding
                                                  ----------------------------
                                       Options                Weighted Average
                                      Available     Shares     Exercise Price
                                      ----------  ----------  ----------------
   <S>                                <C>         <C>         <C>
   Balance, December 31, 1995........    437,003   2,762,997       $0.02
     Granted.........................   (674,670)    674,670       $0.26
     Exercised.......................         --  (1,454,999)      $0.02
     Forfeited.......................    237,667    (237,667)      $0.05
                                      ----------  ----------       -----
   Balance, December 31, 1996........         --   1,745,001       $0.12
     Authorized......................  1,500,000          --
     Granted......................... (1,172,830)  1,172,830       $2.32
     Exercised.......................         --    (753,991)      $0.03
     Forfeited.......................     95,590     (95,590)      $0.91
                                      ----------  ----------       -----
   Balance, December 31, 1997........    422,760   2,068,250       $1.36
     Authorized......................  2,000,000          --         --
     Granted......................... (1,393,900)  1,393,900       $8.13
     Exercised.......................         --    (203,257)      $0.17
     Forfeited.......................    173,585    (173,585)      $2.52
                                      ----------  ----------       -----
   Balance, December 31, 1998........  1,202,445   3,085,308       $4.43
     Granted (unaudited).............   (893,193)    893,193       $9.83
     Exercised (unaudited)...........         --     (79,083)      $0.12
     Forfeited (unaudited)...........     83,708     (83,708)      $7.18
                                      ----------  ----------       -----
   Balance, June 30, 1999
    (unaudited)......................    392,960   3,815,710       $5.72
                                      ==========  ==========       =====
</TABLE>

<TABLE>
<CAPTION>
                                           Options Outstanding                Options Exercisable
                                ----------------------------------------- ---------------------------
                     Number            Weighted-                             Number
                 Outstanding at         Average             Weighted-     Exercisable    Weighted-
   Range of       December 31,         Remaining         Average Exercise December 31,    Average
Exercise Prices       1998      Contractual Life (Years)      Price           1998     Exercise Price
---------------  -------------- ------------------------ ---------------- ------------ --------------
<S>              <C>            <C>                      <C>              <C>          <C>
  $0.02-$0.12        389,583              7.09                $0.07         307,832        $0.05
  $0.48-$0.48        528,000              8.00                $0.48         283,190        $0.48
  $1.25-$2.00        423,200              8.10                $1.40         197,721        $1.39
  $2.35-$3.50        244,000              8.33                $3.01          99,968        $3.00
  $4.50-$4.85         87,500              9.12                $4.76           8,438        $4.50
  $7.45-$9.25      1,413,025              9.32                $8.24          30,355        $7.45
                   ---------                                                -------
                   3,085,308                                  $4.43         927,504
                   =========                                                =======
</TABLE>

Warrants

   In connection with the issuance of the Series C preferred stock, the Company
issued warrants to a Company advisor to acquire 31,260 shares of common stock
at $6.96 per share. The warrants expired unexercised in February 1999. The fair
value of this warrant at the date of issuance was $50,000 and this

                                      F-18
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

amount has been included as an issuance cost of the Series C preferred stock.
The Company also issued warrants to acquire 2,417 shares of common stock at
$8.00 in February 1998. The warrants expire in February 2001 and the fair value
at the date of issuance was not material. See Note 5 for warrants to purchase
200,000 shares of Series C preferred stock issued in conjunction with the
Company's Notes Payable arrangements.

9. INCOME TAXES:

   The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires that deferred taxes be
calculated using an asset and liability approach under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.

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

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
   <S>                                              <C>       <C>      <C>
   Domestic........................................ $  4,009  $ 2,438   ($1,390)
   Foreign.........................................       --      818     2,097
                                                    --------  -------  --------
                                                    $  4,009  $ 3,256  $    707
                                                    ========  =======  ========

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


<CAPTION>
                                                     Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
   <S>                                              <C>       <C>      <C>
   Current:
     Federal....................................... $  2,848  $   827  $  1,188
     State.........................................      646      237       482
     Foreign.......................................       --       82        67
                                                    --------  -------  --------
                                                       3,494    1,146     1,737
                                                    --------  -------  --------
   Deferred:
     Federal.......................................   (2,152)    (240)     (942)
     State.........................................     (337)      49      (583)
                                                    --------  -------  --------
                                                      (2,489)    (191)   (1,525)
                                                    --------  -------  --------
                                                    $  1,005  $   955  $    212
                                                    ========  =======  ========

   The provision for income taxes differs from the amount computed by applying
the Federal statutory income tax rate as follows (in thousands):

<CAPTION>
                                                     Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
   <S>                                              <C>       <C>      <C>
   Provision at Federal statutory rate............. $  1,403  $ 1,140  $    247
   State income tax, net of Federal benefit........      241       95        25
   Change in valuation allowance...................     (577)      --        --
   Foreign taxes in excess of statutory rate.......       --       82        67
   R & D credit....................................       --     (224)     (310)
   Other...........................................      (62)    (138)      183
                                                    --------  -------  --------
                                                    $  1,005  $   955  $    212
                                                    ========  =======  ========
</TABLE>

                                      F-19
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The net deferred tax asset consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Accrued royalties............................................. $2,070 $1,152
   Inventory reserve.............................................     58    262
   Deferred amortization of purchased assets.....................     --  2,302
   California income tax payable.................................     82     --
   Other cumulative temporary differences........................    470    489
                                                                  ------ ------
                                                                  $2,680 $4,205
                                                                  ====== ======
</TABLE>

   Other cumulative temporary differences consist of items currently deductible
for financial reporting purposes, but not for tax purposes. These items are
primarily estimated reserves and accruals. The realization of the deferred tax
asset is dependent on generating sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely than
not that the deferred tax asset will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during future years is reduced.

10. RELATED PARTY TRANSACTIONS:

   The President of a significant customer of the Company was a member of the
Company's Board of Directors from inception to November 1, 1997. For the years
ended December 31, 1996 and 1997, revenues generated from sales to this related
party customer were approximately $1.7 million and $2.2 million, respectively.

11. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION:

   Effective January 1, 1998, the Company adopted SFAS No. 131, ("SFAS 131")
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for business segments of a company and related
disclosures. The Company is organized based upon the nature of the products it
offers. Under this organizational structure, the Company operates in one
segment, that segment being software-based modems using host signal processing
technology. The Company markets its products worldwide through its sales
personnel, independent sales representatives and distributors.

   The Company's sales to customers outside of the United States, as a percent
of total revenues, are as follows:

<TABLE>
<CAPTION>
                                                           Six Months Ended
                             Year Ended December 31,           June 30,
                             ---------------------------   -------------------
                              1996      1997      1998       1998       1999
                             -------   -------   -------   --------   --------
                                                              (unaudited)
   <S>                       <C>       <C>       <C>       <C>        <C>
   Taiwan...................      37%       46%       48%        62%        21%
   China (Hong Kong)........      15%       20%       --         --         47%
   Singapore................      19%        9%       --         --          2%
   Rest of Asia.............       3%        2%       28%        15%        29%
   Other....................       9%        2%        1%         3%        --
                             -------   -------   -------   --------   --------
                                  83%       79%       77%        80%        99%
                             =======   =======   =======   ========   ========
</TABLE>

                                      F-20
<PAGE>

                                  PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                             Six Months
                             Year Ended December 31,       Ended June 30,
                             ---------------------------   -----------------
   Customer                   1996      1997      1998      1998      1999
   --------                  -------   -------   -------   -------   -------
                                                             (unaudited)
   <S>                       <C>       <C>       <C>       <C>       <C>
   A, related party (See
    Note 10)................      10%        9%       13%        5%       --
   B........................      16%        4%       12%       21%        6%
   C........................       5%        6%       15%       11%       10%
   D........................      22%       20%        4%       15%        1%
   E........................      13%       --        --        --        --
   F........................      --        18%       12%       12%        3%
   G........................      --        --         8%       --        20%
   H........................      --        --         3%       --        42%
</TABLE>

   As of December 31, 1997, the Company's long-lived assets were primarily
located in the United States. The Company's long-lived assets, comprising
primarily intangible assets, by geographic region as of December 31, 1998 and
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
                                                        December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (unaudited)
   <S>                                                  <C>          <C>
   United States.......................................    $5,357      $5,314
   Cayman Islands......................................    $8,178      $7,399
</TABLE>


                                      F-21
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Management of
General DataComm, Inc.:

   In our opinion, the accompanying balance sheets and the related statements
of income and divisional equity and of cash flows present fairly, in all
material respects, the financial position of the Communications Systems
Division, a division of General DataComm, Inc., at September 30, 1998 and 1997,
and the results of its operations and its cash flows for each of the years then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

                                          PricewaterhouseCoopers LLP

Stamford, Connecticut
December 15, 1998

                                      F-22
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  September 30,
                                                                  -------------
                                                                   1998   1997
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
<S>                                                               <C>    <C>
                             ASSETS
Assets:
  Fixed assets, net.............................................. $  119 $  117
  Capitalized software...........................................  1,993  1,359
  Security deposit and accrued interest..........................      8     --
  Patents........................................................     --     --
                                                                  ------ ------
    Total assets................................................. $2,120 $1,476
                                                                  ====== ======
                           LIABILITIES
Liabilities:
  Income taxes payable........................................... $  568 $  940
  Deferred income tax liabilities................................    251    535
                                                                  ------ ------
    Total liabilities............................................    819  1,475
                                                                  ------ ------
Divisional Equity................................................  1,301      1
                                                                  ------ ------
    Total liabilities and divisional equity...................... $2,120 $1,476
                                                                  ====== ======
</TABLE>


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

                                      F-23
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                   STATEMENTS OF INCOME AND DIVISIONAL EQUITY

<TABLE>
<CAPTION>
                                                                  For the years
                                                                      ended
                                                                  September 30,
                                                                  -------------
                                                                   1998   1997
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
<S>                                                               <C>    <C>
Licensing revenues............................................... $3,531 $4,564
Operating Expenses:
  General and Administrative.....................................    135     83
  Selling and Marketing..........................................    174    146
  Research and Development.......................................  1,209    685
                                                                  ------ ------
                                                                   1,518    914
Net income before income taxes...................................  2,013  3,650
Income tax provision.............................................    819  1,475
                                                                  ------ ------
  Net income..................................................... $1,194 $2,175
Divisional equity at beginning of year........................... $    1 $  133
Cash transfer from (to) parent...................................    106 (2,307)
                                                                  ------ ------
  Divisional equity at end of year............................... $1,301 $    1
                                                                  ====== ======
</TABLE>


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

                                      F-24
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                For the years
                                                                    ended
                                                                September 30,
                                                                --------------
                                                                 1998    1997
                                                                ------  ------
                                                                     (in
                                                                 thousands)
<S>                                                             <C>     <C>
Cash flows from operating activities:
  Net income................................................... $1,194  $2,175
  Adjustments to reconcile net income to net cash provided by
   operating activities
    Depreciation expense.......................................     78      62
    Increase in security deposit...............................     (8)     --
    (Decrease) increase in income taxes payable................   (372)    940
    (Decrease) increase in deferred income taxes...............   (284)    526
                                                                ------  ------
      Net cash provided by operating activities................    608   3,703
                                                                ------  ------
Cash flows from investing activities:
  Acquisition of property, plant and equipment.................    (80)    (37)
  Capitalized software development costs.......................   (634) (1,359)
                                                                ------  ------
      Net cash used in investing activities....................   (714) (1,396)
  Net cash borrowed from (transferred to) GDC..................    106  (2,307)
                                                                ------  ------
      Net increase in cash and cash equivalents................     --      --
Cash and cash equivalents at beginning of year.................     --      --
                                                                ------  ------
Cash and cash equivalents at end of year....................... $   --  $   --
                                                                ======  ======
</TABLE>


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

                                      F-25
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                         NOTES TO FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies

 Description of Business

   Communications Systems Division (the "Company") is a division of General
DataComm, Inc., which is a subsidiary of General DataComm Industries, Inc.
("GDC"). The Company, which is principally comprised of scientists and
engineers, develops, patents and licenses advanced modem and access
technologies.

 Basis of Presentation

   The Company's balance sheets and statements of operations include assets,
liabilities, revenues and expenses that are specifically identifiable to the
Company. In addition, GDC provides certain services, as discussed in Note 6,
which are allocated to the Company.

 Cash

   All cash balances are transferred to GDC as they arise.

 Property, Plant and Equipment

   Property, plant and equipment are stated at cost and depreciated or
amortized using the straight-line method over their estimated useful lives.

 Capitalized Software Development Costs

   Software development costs are capitalized for those products that have met
the requirements of technological feasibility. When the products under
development begin to be sold, such capitalized costs will be amortized on a
product-by-product basis over the estimated economic life of the product. No
amortization was recorded in either fiscal 1998 or fiscal 1997 as the products
in development had reached the technological feasibility stage but had not
reached the marketability stage. Unamortized costs are reviewed for
recoverability and, if necessary, are adjusted so as not to exceed estimated
net realizable value.

 Patents

   The Company holds various technology patents. The third party cost of these
patents has been fully amortized. Registration costs are expensed as incurred.

 Revenue Recognition

   The Company has entered into numerous technology licensing agreements
whereby licensees pay the Company fees for the use or sale of specific patented
technology. Technology licensing fee revenue is recognized in the period
received, or alternatively, may be accrued when readily determinable.

 Income Taxes

   Income taxes are calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement requires that deferred income taxes reflect the impact of temporary
differences in bases of assets and liabilities recognized for financial
reporting purposes and amounts recognized for tax purposes. As a division, the
Company is included in the consolidated income tax returns of GDC, however, the
Company's provision for income taxes has been calculated on a separate return
basis.


                                      F-26
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Employee Benefits and Incentive Plans

   The Company's employees participate in plans for post-retirement benefits,
post-employment benefits, stock option plans, and retirement savings and
deferred profit sharing plans, which are sponsored by GDC. No assets,
liabilities or expenses have been reflected in the balance sheets and
statements of operations related to the post-retirement and post-employment
plans, as it is not practical to segregate these amounts.

 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
reporting periods presented. Actual results could differ from those estimates.
For example, the markets the Company is involved in are characterized by
intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company's
capitalized software.

2. Property, Plant and Equipment

   Property, plant and equipment consists of:

<TABLE>
<CAPTION>
                                                       September
                                                          30,
                                                       ---------   Estimated
                                                       1998 1997  Useful Life
                                                       ---- ---- -------------
   <S>                                                 <C>  <C>  <C>
   Test equipment and fixtures, office equipment...... $651 $578 2 to 10 years
     Less: accumulated depreciation...................  532  461
                                                       ---- ----
                                                       $119 $117
                                                       ==== ====
</TABLE>

   Depreciation expense amounted to $78 and $62 in fiscal 1998 and 1997,
respectively.

3. Income Taxes

   For purposes of the financial statements, income taxes are provided on a
stand-alone basis as if the Company is a separate entity.

   The provision for income taxes consists of the following amounts:

<TABLE>
<CAPTION>
                                                                      September
                                                                         30,
                                                                     -----------
                                                                     1998  1997
                                                                     ---- ------
   <S>                                                               <C>  <C>
   Current:
     State.......................................................... $146 $  246
     Federal........................................................  422    694
                                                                     ---- ------
                                                                      568    940
   Deferred:
     State.......................................................... $ 66 $  144
     Federal........................................................  185    391
                                                                     ---- ------
                                                                      251    535
                                                                     ---- ------
       Total provision.............................................. $819 $1,475
                                                                     ==== ======
</TABLE>


                                      F-27
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

   The tax effects of temporary differences which give rise to deferred income
tax assets and liabilities consisted of the following:

<TABLE>
<CAPTION>
                                                                   September
                                                                      30,
                                                                  ------------
                                                                  1998   1997
                                                                  -----  -----
   <S>                                                            <C>    <C>
   Deferred income tax assets:
     Property, plant and equipment............................... $   3  $   8
   Deferred income tax liabilities:
     Capitalized software........................................  (254)  (543)
                                                                  -----  -----
       Net deferred income tax liabilities....................... $(251) $(535)
                                                                  =====  =====
</TABLE>

4. Operating Leases

   GDC entered into an operating lease on June 1, 1998 to provide separate
facilities for the operation of the Company. Such lease expires in May 2001.
The lease contains renewal options and provisions for payment by the lessee of
executory costs (taxes, maintenance and insurance).

   The following is a schedule of the future minimum payments under the lease
as of September 30, 1998:

<TABLE>
<CAPTION>
     Year                                                               Amount
     ----                                                               ------
     <S>                                                                <C>
     1999                                                                $50
     2000                                                                 50
     2001                                                                 33
</TABLE>

   Rent expense under the lease was $17 for the year ended September 30, 1998.
Prior to June 1, 1998, the operations of the Company were conducted in
facilities shared with other GDC operations. The amounts allocated by GDC,
which are included in the statements of income, were $74 and $100 for
September 30, 1998 and 1997, respectively.

5. Employment Incentive Plans

 Stock Option Plans

   Officers and key employees of GDC may be granted incentive stock options at
an exercisable price equal to or greater than the market price on the date of
grant and non-incentive stock options at an exercisable price equal to or less
than the market price on the date of grant. While individual options can be
issued under various provisions, most options, once granted, generally vest in
increments of 25% per year over a four-year period and expire within ten
years.

                                     F-28
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   The following summarizes activity related to the Company in fiscal 1997 and
1998 under these stock option plans:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                  Average
                                                      Shares   Exercise Price
                                                      -------  --------------
   <S>                                                <C>      <C>
   Options outstanding, September 30, 1996 (10,497
    exercisable).....................................  79,747      $6.49
   Options granted...................................  86,530       7.44
   Options exercised.................................      --         --
   Options cancelled or expired...................... (53,890)      6.50
                                                      -------      -----
   Options outstanding, September 30, 1997 (20,097
    exercisable)..................................... 112,387       6.60
   Options granted...................................  85,750       4.32
   Options exercised.................................      --         --
   Options cancelled or expired...................... (11,450)      7.14
                                                      -------      -----
   Options outstanding, September 30, 1998 (30,632
    exercisable)..................................... 186,687      $6.96
                                                      =======      =====
</TABLE>

   The following summarizes additional information related to the Company
regarding options outstanding and exercisable options as of September 30, 1998:

<TABLE>
<CAPTION>
   Options Outstanding at September                   Options Exercisable at
               30, 1998                                 September 30, 1998
   -----------------------------------   Weighted     ------------------------
                             Weighted     Average                  Weighted
                   Number    Average    Contractual                 Average
     Exercise        of      Exercise      Life        Number     Contractual
      Prices       Shares     Price       (Years)     of Shares      Price
     --------      -------   --------   -----------   ---------   -----------
   <S>             <C>       <C>        <C>           <C>         <C>
   $ 3.38-$ 4.81    65,947    $ 3.81       9.47           197       $ 4.81
   $ 5.25-$ 6.75    89,540      6.34       7.98        19,035         5.63
   $ 7.31-$ 9.63    25,700      8.95       7.46         9,900         6.83
   $10.00-$15.50     5,500     10.92       7.69         1,500        11.83
                   -------    ------       ----        ------       ------
                   186,687    $ 6.96       8.43        30,632       $ 6.96
</TABLE>

   The weighted average option price of exercisable options was $6.96 and $6.60
at September 30, 1998 and 1997, respectively. All options granted during the
two fiscal years ended September 30, 1998 were granted at an option price equal
to fair market value at date of grant.

 Employee Retirement Savings and Deferred Profit Sharing Plan

   Under the retirement savings provisions of GDC's retirement plan established
under Section 401(k) of the Internal Revenue Code, employees are generally
eligible to contribute to the plan after three months of continuous service, in
amounts determined by the plan. GDC contributes an additional 50 percent of the
employee contribution up to certain limits (not to exceed 2 percent of total
eligible compensation). Employees become fully vested in GDC's contributions
after three years of continuous service, death, disability or upon reaching age
65. The amounts contributed related to the Company's employees for the years
ended September 30, 1998 and 1997 were $28 and $33, respectively.

   The deferred profit sharing provisions of the plan include retirement and
other related benefits for substantially all of GDC's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of GDC. There were no such
contributions for fiscal 1998 or 1997.

                                      F-29
<PAGE>

                        COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


6. Related Party Transactions and Net Equity

   The Company is comprised of intellectual property and property, plant and
equipment and certain employees that GDC has contributed to the business. All
of the Company's cash transactions are managed by GDC. All intercompany
accounts which represent all contributed property and the net amounts funded by
GDC to date are included in divisional equity.

   In addition, in fiscal 1998 and fiscal 1997, the Company performed product
development work on behalf of GDC. The cost of such work, estimated to be $434
and $480, respectively in fiscal 1998 and fiscal 1997, has been excluded from
the operating costs included in the Company's statements of income, as these
costs have been fully reimbursed by GDC.

   GDC provides accounting, treasury, tax and audit, legal, medical and risk
insurance services and various other services to the Company. An allocation
related to these costs has been made and is included in the statements of
income.

                                      F-30
<PAGE>

                PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

              PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                  (unaudited)

   In December 1998, PC-Tel, Inc. (the "Company" or "PC-Tel") completed the
acquisition of substantially all the assets and certain liabilities of
Communications Systems Division, a division of General DataComm, Inc., a
Delaware corporation ("CSD"). CSD develops patents and licenses advanced modem
and access technologies. The acquisition of CSD has been accounted for as a
purchase.

   The accompanying pro forma condensed combined statement of operations for
PC-Tel's fiscal year ended December 31, 1998 assumes that the acquisition took
place as of January 1, 1998, and combines PC-Tel's statement of operations for
the year ended December 31, 1998 and CSD's statement of operations for its
fiscal year ended September 30, 1998. No pro forma condensed balance sheet is
required as the acquisition of CSD took place in December 1998 and is already
reflected in PC-Tel's consolidated balance sheet as of December 31, 1998,
included elsewhere in this Prospectus. The pro forma condensed combined
statement of operations for the year ended December 31, 1998 does not include
the effect of any nonrecurring charges directly attributable to the
acquisition.

   The purchase price allocation reflected in the accompanying pro forma
condensed combined statement of operations has been prepared on an estimated
basis. The effects resulting from any differences in the final allocation of
the purchase price are not expected to have a material effect on the Company's
financial statements.

   The accompanying pro forma condensed combined statement of operations should
be read in conjunction with the historical financial statements and related
notes thereto for both PC-Tel and CSD, which are included in this Prospectus.

                                      P-1
<PAGE>

                PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

              PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                         Year Ended December 31, 1998
                                  ---------------------------------------------
                                  Historical Historical  Pro Forma    Pro Forma
                                    PC-Tel     CSD(a)   Adjustments   Combined
                                  ---------- ---------- -----------   ---------
                                                             (unaudited)
<S>                               <C>        <C>        <C>           <C>
REVENUES                           $33,004     $3,531     $  (903)(b)   35,632
COST OF REVENUES................    13,878         --      (2,162)(c)   16,040
                                   -------     ------                  -------
GROSS PROFIT....................    19,126      3,531                   19,592
                                   -------     ------                  -------
OPERATING EXPENSES:
  Research and development......     4,932      1,209                    6,141
  Sales and marketing...........     5,624        174                    5,798
  General and administrative....     2,169        135                    2,304
  Acquired in-process research
   and development..............     6,130         --      (6,130)(d)       --
  Amortization of deferred
   compensation.................        43         --                       43
                                   -------     ------                  -------
    Total operating expenses....    18,898      1,518                   14,286
                                   -------     ------                  -------
INCOME FROM OPERATIONS..........       228      2,013                    5,306
                                   -------     ------                  -------
OTHER INCOME (EXPENSE), net:
  Interest income...............       504         --                      504
  Interest expense..............       (25)        --      (1,530)(e)   (1,555)
                                   -------     ------                  -------
    Total other income
     (expense), net.............       479         --                   (1,051)
                                   -------     ------                  -------
INCOME BEFORE PROVISION FOR
 INCOME TAXES...................       707      2,013                    4,255
PROVISION FOR INCOME TAXES......       212        819         246 (f)    1,277
                                   -------     ------                  -------
NET INCOME......................   $   495     $1,194                  $ 2,978
                                   =======     ======                  =======
BASIC NET INCOME PER SHARE......   $  0.21                             $  1.26
                                   =======                             =======
DILUTED NET INCOME PER SHARE....   $  0.04                             $  0.24
                                   =======                             =======
SHARES USED IN COMPUTING BASIC
 EARNINGS PER SHARE.............     2,355                               2,355
SHARES USED IN COMPUTING DILUTED
 EARNINGS PER SHARE.............    12,325                              12,325
</TABLE>

                                      P-2
<PAGE>

               PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

         NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                  (unaudited)

Note 1. Pro Forma Adjustments

   Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined statement of operations as described below:

     (a) Includes CSD's historical condensed statement of operations for the
  year ended September 30, 1998.

     (b) Reflects the elimination of revenues from licensing arrangements
  between the Company and CSD.

     (c) Reflects the amortization of goodwill and other intangibles acquired
  of $10.8 million for CSD which will be amortized on a straight line basis
  over their estimated weighted average useful lives of five years.

     (d) Eliminates the acquired in-process research and development expense
  of approximately $6.1 million associated with the acquisition of CSD.

     (e) Reflects the interest expense and amortization of deferred finance
  charges on the debt incurred for the CSD acquisition.

     (f) Reflects adjustment to record a provision for income taxes in
  accordance with PC-Tel's effective tax rate for fiscal 1998.

                                      P-3
<PAGE>

Inside back cover

Background of space shot of planet earth. Text captions "PCtel Technology for
connectivity," "Broadband," "Wireless," "Remote Access," "Analog," and
"solutions"
<PAGE>

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

                                4,600,000 Shares

                          [ PCtel Logo appears here ]




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

                                   Prospectus

                                        , 1999

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

                         Banc of America Securities LLC

                            Warburg Dillon Read LLC

                            Needham & Company, Inc.

   Until        , 1999, all dealers that buy, sell or trade the common stock
may be required to deliver a prospectus, regardless of whether they are
participating in this offering. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by PC-Tel in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.

<TABLE>
<S>                                                                  <C>
SEC registration fee................................................ $   23,530
NASD filing fee.....................................................      9,000
Nasdaq National Market listing fee..................................     90,000
Printing and engraving costs........................................    150,000
Legal fees and expenses.............................................    790,000
Accounting fees and expenses........................................    300,000
Blue sky fees and expenses..........................................     15,000
Transfer agent and registrar fees...................................     17,000
Directors and officers insurance....................................    300,000
Miscellaneous expenses..............................................    105,470
                                                                     ----------
  Total............................................................. $1,800,000
                                                                     ==========
</TABLE>

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors, officers and controller provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

   Article Ninth of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest
extent permissible under Delaware law.

   Article VI of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of PC-Tel if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to our
best interest, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.

   We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intended to enter into indemnification agreements with any new directors
and executive officers in the future. The indemnification agreements may
require us, among other things, to indemnify our directors and officers against
certain liability that may arise by reason of their status or service as
directors and officers (other than liabilities arising from willful misconduct
of culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors and officers' insurance, if available on reasonable terms.

   Reference is also made to Section 8 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of PC-Tel against
certain liabilities.

Item 15. Recent Sales of Unregistered Securities

   Since inception, we have issued unregistered securities to a limited number
of persons, as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. The

                                      II-1
<PAGE>

recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us.

     1. On or about February 10, 1994 we issued 2,800,000 shares of our
  common stock at a per share price of $0.10 for an aggregate purchase price
  of $420,000 to our founders and certain individuals with whom we had a pre-
  existing business or personal relationship.

     2. On or about November 4, 1994 we issued 1,613,333 shares of our common
  stock at a per share price of $0.25 for an aggregate purchase price of
  $605,000 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     3. On May 9, 1995 we effected a recapitalization of our outstanding
  stock with our then current stockholders by which each share of our common
  stock was converted into one (1) share of Series A preferred stock and
  through which we received no consideration.

     4. On June 29, 1995 we sold 222,222 shares of our Series A preferred
  stock at a per share price of $0.30 for an aggregate purchase price of
  $100,000 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     5. Between October 18, 1995 and on or about January 10th of 1996 we sold
  3,250,000 shares of our Series B preferred stock at a per share price of
  $l.20 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     6. On October 4, 1995, we effected, by amendment to our articles of
  incorporation, a 3 for 2 reverse stock split of our then outstanding
  capital stock.

     7. On February 4, 1998 we sold 625,200 shares of our Series C preferred
  stock at a per share price of $8.00 for an aggregate purchase price of
  $5,00l,600 to certain accredited investors, as that term is defined under
  Rule 50l of the Securities Act. State Street Securities, Needham & Company,
  Inc. and Beckman White & Reed acted as placement agents for us and, as
  partial consideration for services performed, Beckman White & Reed received
  a one-year warrant to purchase 31,260 shares of our common stock at an
  exercise price of $6.96 per share and State Street Securities, Edward
  Gibstein, Mitchell Segal, and Irving Minnaker each received three-year
  warrants to purchase an aggregate of 2,417 shares of our common stock at an
  exercise price of $8.00.

     8. On December 31, 1998 we issued ten (10) year warrants to purchase an
  aggregate of 200,000 shares of our Series C preferred stock at an exercise
  price of $8.00 to Pentech Financial Services, Inc. and PFF Bank & Trust,
  Inc. in connection with the Technology Alliance Group acquisition from
  General DataCom, Inc.

     9. From inception to December 3l, 1998, we issued and sold an aggregate
  of 2,412,247 shares of our common stock to employees, consultants, and
  directors for an aggregate consideration of $83,421 pursuant to exercise of
  options granted under our 1995 stock plan, 1997 stock plan, and our 1997
  stock plan as amended August 3, 1999.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

  *1.1  Form of Underwriting Agreement.

   3.1  Amended and Restated Certificate of Incorporation of the Registrant,
        as currently in effect.

  *3.2  Form of Amended and Restated Certificate of Incorporation of the
        Registrant to be filed after the closing of the offering made under
        this Registration Statement.

   3.3  Amended and Restated Bylaws of the Registrant.

                                      II-2
<PAGE>

   *4.1 Specimen common stock certificate.

    4.2 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to Pentech Financial Services, Inc.

    4.3 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to PFF Bank and Trust, Inc.

    4.4 Warrant to purchase shares of common stock of the Registrant issued
        to Edward Gibstein.

    4.5 Warrant to purchase shares of common stock of the Registrant issued
        to Irving Minnaker.

    4.6 Warrant to purchase shares of common stock of the Registrant issued
        to Mitchell Segal.

    4.7 Warrant to purchase shares of common stock of the Registrant issued
        to State Street Securities, Inc.

    4.8 Amended and Restated Rights Agreement dated December 31, 1997.

    4.9 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.

   4.10 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and Pentech Financial Services, Inc. dated February 1,
        1999.

   *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation.

   10.1 Form of Indemnification Agreement between PC-Tel and each of its
        directors and officers.

   10.2 1995 Stock Option Plan and form of agreements thereunder.

   10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
        form of agreements thereunder.

   10.4  1998 director option plan and form of agreements thereunder.

   10.5 1998 employee stock purchase plan and form of agreements thereunder.

   10.6 Employment offer letter between Derek S. Obata and the Registrant
        dated March 31, 1998.

   10.7 Employment offer letter between William F. Roach and the Registrant
        dated July 19, 1999.

   10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
        September 24, 1998.

   10.9 Commercial Security Agreement by and between the Registrant and PPF
        Bank and Trust and related documents.

  10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
        Technologies, Ltd. And General Datacomm, Inc. dated as of December
        22, 1998.

  10.11 Escrow Agreement by and between the Registrant and General DataComm,
        Inc. dated December 22, 1998.

  10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
        General DataComm, Inc. dated December 22, 1998.

  10.13 Form of Acquisition Bonus Agreement by and between the Registrant and
        General DataComm, Inc. dated on December 22, 1998.

  10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
        Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.

  10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
        Laboratories, Inc. and the Registrant.

   21.1 List of Subsidiaries of the Registrant.

   23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.

   23.2 Consent of PricewaterhouseCoopers, Independent Accountants.

  *23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
        (included in Exhibit 5.1).

   24.1 Power of Attorney (see Pages II-5 and II-6).

   27.1 Financial Data Schedule.

      * To be filed by amendment.

                                      II-3
<PAGE>

   (b) Financial Statement Schedules

   Schedule II Valuation and Qualifying Accounts and Reserves (included on
pages S-1 and S-2 of this registration statement).

   Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.

   Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by director,
officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

   We hereby undertake that:

     (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of Prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 6th day of August, 1999.

                                          PC-Tel, Inc.

                                                      /s/ Peter Chen
                                          By: _________________________________
                                            Peter Chen, Chief Executive
                                            Officer and Chairman

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter Chen and Andrew D. Wahl and each of them,
his attorneys-in-fact, each with the power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all 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 and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:


<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
            /s/ Peter Chen             Chief Executive Officer      August 6, 1999
______________________________________  and Chairman of the Board
             (Peter Chen)               (Principal Executive
                                        Officer)

         /s/ William F. Roach          President and Chief          August 6, 1999
______________________________________  Operating Officer
          (William F. Roach)

          /s/ Andrew D. Wahl           Vice President, Finance      August 6, 1999
______________________________________  and Chief Financial
           (Andrew D. Wahl)             Officer (Principal
                                        Financial Officer)

      /s/ William Wen-Liang Hsu        Vice President,              August 6, 1999
______________________________________  Engineering Director
       (William Wen-Liang Hsu)
</TABLE>


                                      II-5
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
             /s/ Han Yeh               Vice President, Technology   August 6, 1999
______________________________________  Director
              (Han Yeh)

       /s/ Richard C. Alberding        Director                     August 6, 1999
______________________________________
        (Richard C. Alberding)

         /s/ Martin H. Singer          Director                     August 6, 1999
______________________________________
          (Martin H. Singer)

            /s/ Wen C. Ko              Director                     August 6, 1999
______________________________________
             (Wen C. Ko)

       /s/ Michael Min-Chu Chen        Director                     August 6, 1999
______________________________________
        (Michael Min-Chu Chen)

          /s/ Giacomo Marini           Director                     August 6, 1999
______________________________________
</TABLE>   (Giacomo Marini)

                                      II-6
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To PC-Tel, Inc.:

   We have audited, in accordance with generally accepted auditing standards,
the financial statements of  PC-Tel, Inc. (a Delaware corporation) included in
this Registration Statement and have issued our report thereon dated March 4,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose 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 audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth herein in relation to the basic financial statements
taken as a whole.

                                          Arthur Andersen LLP

San Jose, California
March 4, 1999

                                      S-1
<PAGE>

                                  PC-TEL, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                Balance at  Charged to
                               Beginning of Costs and              Balance at
         Description              Period     Expenses  Deductions End of Period
         -----------           ------------ ---------- ---------- -------------
<S>                            <C>          <C>        <C>        <C>
Year Ended December 31, 1996:
  Allowance for doubtful
   accounts...................     $ --       $   70    $    --      $   70

Year Ended December 31, 1997:
  Allowance for doubtful
   accounts...................     $ 70       $  534    $    --      $  604

Year Ended December 31, 1998:
  Allowance for doubtful
   accounts...................     $604       $3,356    $(2,271)     $1,689
</TABLE>


                                      S-2
<PAGE>

                                 EXHIBIT INDEX

 Number  Description
 ------  -----------

   *1.1 Form of Underwriting Agreement.

    3.1 Amended and Restated Certificate of Incorporation of the Registrant,
        as currently in effect.

   *3.2 Form of Amended and Restated Certificate of Incorporation of the
        Registrant to be filed after the closing of the offering made under
        this Registration Statement.

    3.3 Amended and Restated Bylaws of the Registrant.

   *4.1 Specimen common stock certificate.

    4.2 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to Pentech Financial Services, Inc.

    4.3 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to PFF Bank and Trust, Inc.

    4.4 Warrant to purchase shares of common stock of the Registrant issued
        to Edward Gibstein.

    4.5 Warrant to purchase shares of common stock of the Registrant issued
        to Irving Minnaker.

    4.6 Warrant to purchase shares of common stock of the Registrant issued
        to Mitchell Segal.

    4.7 Warrant to purchase shares of common stock of the Registrant issued
        to State Street Securities, Inc.

    4.8 Amended and Restated Rights Agreement dated December 31, 1997.

    4.9 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.

   4.10 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and Pentech Financial Services, Inc. dated February 1,
        1999.

   *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation.

   10.1 Form of Indemnification Agreement between PC-Tel and each of its
        directors and officers.

   10.2 1995 Stock Option Plan and form of agreements thereunder.

   10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
        form of agreements thereunder.

   10.4 1998 director option plan and form of agreements thereunder.

   10.5 1998 employee stock purchase plan and form of agreements thereunder.

   10.6 Employment offer letter between Derek S. Obata and the Registrant
        dated March 31, 1998.

   10.7 Employment offer letter between William F. Roach and the Registrant
        dated July 19, 1999.

   10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
        September 24, 1998.

   10.9 Commercial Security Agreement by and between the Registrant and PPF
        Bank and Trust and related documents.

  10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
        Technologies, Ltd. And General Datacomm, Inc. dated as of December
        22, 1998.

  10.11 Escrow Agreement by and between the Registrant and General DataComm,
        Inc. dated December 22, 1998.

  10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
        General DataComm, Inc. dated December 22, 1998.

  10.13 Form of Acquisition Bonus Agreement by and between the Registrant and
        General DataComm, Inc. dated on December 22, 1998.
<PAGE>

                                 EXHIBIT INDEX

  Number Description
  ------ -----------

  10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
        Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.

  10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
        Laboratories, Inc. and the Registrant.

   21.1 The subsidiaries of the Registrant.

   23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.

   23.2 Consent of PricewaterhouseCoopers, Independent Accountants.

  *23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
        (included in Exhibit 5.1).

   24.1 Power of Attorney (see Pages II-5 and II-6).

   27.1 Financial Data Schedule.

      * To be filed by amendment
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 422916}]
{"company-data": {"conformed-name": "PC TEL INC", "cik": "0001057083", "assigned-sic": "", "irs-number": "770364943", "state-of-incorporation": "DE"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-84707", "film-number": "99679959"}, "business-address": {"street1": "70 RIO ROBLES", "city": "SAN JOSE", "state": "CA", "zip": "95134", "phone": "4089652100"}, "mail-address": {"street1": "70 RIO ROBLES", "city": "SAN JOSE", "state": "CA", "zip": "95134"}}
As filed with the Securities and Exchange Commission on August 6, 1999

                                                      Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ---------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                                ---------------
                                  PC-Tel, Inc.
             (Exact Name of Registrant as Specified in Its Charter)

                                ---------------
         Delaware                      3661                    77-0364943
     (State or other            (Primary Standard           (I.R.S. Employer
     jurisdiction of        Industrial Classification        Identification
     incorporation or              Code Number)                 Number)
      organization)

                                 70 Rio Robles
                           San Jose, California 95134
                                 (408) 965-2100
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                                   PETER CHEN
                            Chief Executive Officer
                                  PC-Tel, Inc.
                                 70 Rio Robles
                           San Jose, California 95134
                                 (408) 965-2100
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                   Copies to:
          DOUGLAS H. COLLOM, ESQ.                  SCOTT D. LESTER, ESQ.
           ROGER E. GEORGE, ESQ.                   MICHAEL S. DORF, ESQ.
          DEBORAH M. CHANG, ESQ.                    TORREY MILLER, ESQ.
           SHELDON J. QUAN, ESQ.              Brobeck Phleger & Harrison, LLP
     Wilson Sonsini Goodrich & Rosati               Spear Street Tower
         Professional Corporation                       One Market
            650 Page Mill Road                San Francisco, California 94105
        Palo Alto, California 94304                   (415) 442-0900
              (650) 493-9300
                                ---------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement
                                ---------------
   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                                ---------------
                        CALCULATION OF REGISTRATION FEE

-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Proposed       Proposed
 Title of Each Class of        Amount         Maximum        Maximum      Amount of
    Securities to be           to be       Offering Price   Aggregate    Registration
       Registered            Registered      Per Share    Offering Price    Fee(1)
-------------------------------------------------------------------------------------
Common Stock, $0.001 par
 value.................   5,290,000 shares     $16.00      $84,640,000     $23,530
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(a) promulgated under the Securities
    Act of 1933, as amended.
                                ---------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed without +
+notice. PC-Tel, Inc. may not sell these securities until the registration     +
+statement filed with the Securities and Exchange Commission is effective.     +
+This prospectus is not an offer to sell these securities, and PC-Tel, Inc. is +
+not soliciting offers to buy these securities, in any jurisdiction where the  +
+offer or sale of these securities is not permitted.                           +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Not Complete)
Issued      , 1999

                                4,600,000 Shares

                           [PCtel LOGO APPEARS HERE}

                                  PC-Tel, Inc.

                                  Common Stock

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

  PC-Tel, Inc. is offering shares of its common stock in an initial public
offering. We estimate that the initial public offering price for our shares
will be between $15.00 and $17.00.

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

  We will apply to have our common stock quoted on the Nasdaq National Market
under the symbol "PCTI."

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

  Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8.

                                 ------------
Per Share Total
                                                                 --------- -----
Public Offering Price...........................................   $       $
Discounts and Commissions to Underwriters.......................   $       $
Proceeds to PC-Tel, Inc.........................................   $       $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

  PC-Tel, Inc. has granted the underwriters the right to purchase up to an
additional 690,000 shares of common stock to cover any over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. Banc of America Securities LLC expects to deliver the shares of
common stock to investors on      , 1999.

Banc of America Securities LLC

                            Warburg Dillon Read LLC

                                                         Needham & Company, Inc.

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

                   The date of this prospectus is      , 1999
Inside front cover

Background of space shot photograph of planet earth and graphic images of
telephone, laptop computer, desktop computer, wireless modem, personal digital
assistant and set-top box. Text caption "High-Speed Personal Connecting
Communications Solutions."
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

                               TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   4
Risk Factors.............................................................   8
Special Note Regarding Forward Looking Statements........................  20
Use of Proceeds..........................................................  21
Dividend Policy..........................................................  21
Capitalization...........................................................  22
Dilution.................................................................  23
Selected Consolidated Financial Data.....................................  24
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  25
Business.................................................................  37
Management...............................................................  50
Certain Transactions.....................................................  60
Principal Stockholders...................................................  62
Description of Capital Stock.............................................  64
Shares Eligible for Future Sale..........................................  66
Underwriting.............................................................  68
Legal Matters............................................................  70
Experts..................................................................  70
Where You Can Find Additional Information................................  70
Index to Financial Statements............................................ F-1
----------------

   PC-Tel, the PC-Tel logo, HSP Modem, MicroModem, HIDRA and LiteSpeed are
trademarks of PC-Tel. Other service marks, trademarks and trade names referred
to in this prospectus are the property of their respective owners.

                                       3
PROSPECTUS SUMMARY

   This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully before making an investment
decision.

   This prospectus contains forward-looking statements, which involve risks and
uncertainties. PC-Tel's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described under "Risk Factors" and elsewhere in this prospectus.

                                     PC-Tel

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions. Our solutions enable Internet access and other
communications applications through existing analog and emerging broadband
networks. We have developed a proprietary software architecture that
substantially reduces the hardware, space and power requirements of
conventional hardware-based connectivity devices. Our software architecture is
easily upgradeable, minimizing the risk of technological obsolescence. Our
communications products are designed to enable widespread Internet access and
other communication applications through desktop PCs, notebook computers,
Internet appliances such as set-top boxes and webphones, video game consoles
and remote monitoring devices.

   We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective software-based
digital signal processing solutions. Host signal processing technology utilizes
the computational and processing resources of a host central processing unit
rather than requiring additional special-purpose hardware. The reduction of
hardware components in our architecture reduces space requirements by 50% and
power requirements by 70% compared to conventional solutions. The first
implementation of our host signal processing technology was in a software
modem, or soft modem, in 1995. Through June 1999, we have shipped 11.3 million
soft modems. Based on our 1998 unit shipments, we believe we are the largest
worldwide producer of soft modems, representing 68% of all soft modems sold
that year, as estimated by Vision Quest 2000. We also believe that in 1998 we
sold 6% of all analog modems, estimated by Dataquest to have been 59.1 million
units. Various OEMs, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.

   In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high-speed remote access.
The accelerated growth of content-rich applications, which demand high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now an ordinary requirement for business, government, academic
and home environments. These market trends have resulted in a significant
increase in the demand for connectivity devices. International Data Corporation
estimates that by 2003, the number of Internet connectivity devices in use will
grow to over 722 million.

   Our host signal processing architecture allows us to quickly and cost-
effectively capitalize on this rapid growth in demand for connectivity devices.
We believe that we can use our intellectual property portfolio to readily adapt
to the speed and design requirements of additional emerging connectivity
technologies. For example, we have developed LiteSpeed, a host signal
processing architecture solution, in response to growing market acceptance of
G.Lite, a digital subscriber line, or DSL, technology that enables downstream
data transmission speeds of up to 1.5 Mbps and upstream data transmission
speeds of 512 Kbps over existing copper telephone lines. Our G.Lite technology
is completely compatible with analog transmission networks, offering the user
complete flexibility in choosing access technology and transmission speed. By
providing connectivity solutions that can be easily adapted to new standards
and protocols, we reduce interoperability obstacles, which simplifies
purchasing decisions and accelerates deployment times for OEMs.

                                       4
To extend our position as the leading provider of cost-effective software-
based connectivity solutions, our strategy includes the following key elements:

  . identify emerging high-growth communications technologies and develop
    innovative software-based connectivity solutions to capitalize on these
    new market opportunities as they gain acceptance,

  . enhance the scope of our host signal processing technology to further
    reduce the number of hardware components in our software-based solutions,

  . develop innovative products based on our host signal processing
    architecture that enable migration to emerging broadband communications
    technologies for next generation devices,

  . extend our intellectual property leadership position and establish
    industry standards through rapid internal product development, strategic
    acquisitions and licensing of innovative communications technology, and

  . license our proprietary digital signal processing communications
    applications in non-PC devices to provide enhanced performance and cost
    savings.

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

   Our principal executive offices are located at 70 Rio Robles, San Jose,
California 95134. Our telephone number is (408) 965-2100.

                                       5
The Offering

Common stock offered by PC-Tel.......
                                         4,600,000 shares

Common stock to be outstanding after    15,602,078 shares
 this offering.......................

Use of proceeds......................   $15.7 million of the proceeds from this
                                        offering will be used to repay bank
                                        debt. The remaining proceeds will be
                                        used for general corporate purposes,
                                        including working capital, and for
                                        potential investments in and
                                        acquisitions of complementary products,
                                        technologies or businesses.

Proposed Nasdaq National Market         PCTI
 symbol..............................

   In addition to the shares of common stock to be outstanding after this
offering, we are obligated to issue shares of our common stock upon exercise of
outstanding options and warrants. As of June 30, 1999 these additional shares
included:

  . a total of 3,815,710 shares of common stock issuable upon exercise of
    outstanding stock options under our 1995 stock plan and 1997 stock plan
    at a weighted average exercise price per share of $5.72, and

  . a total of 202,417 shares of common stock issuable upon exercise of
    outstanding warrants at an exercise price of $8.00 per share.

   In addition, during the period between July 1 and August 3, 1999, we granted
additional stock options under our 1997 stock plan for the purchase of 565,390
shares. This includes options to purchase 400,000 shares of common stock
granted to William F. Roach, our President and Chief Operating Officer, who
began employment with PC-Tel in August 1999.

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

   Please also note that, except where otherwise indicated:

  . the information in this prospectus relating to our outstanding shares of
    common stock or options or warrants to purchase our common stock is based
    upon information as of June 30, 1999,

  . the information in this prospectus reflects the conversion of all of our
    outstanding shares of preferred stock into 8,510,748 shares of common
    stock upon the closing of this offering,

  . the information in this prospectus assumes no exercise of the
    underwriters' over-allotment option, and

  . in this prospectus, "PC-Tel," "we," "us" and "our" refer to PC-Tel, Inc.
    and its subsidiaries.

  . all shares referred to in this prospectus reflect a 3 for 2 reverse stock
    split that we effected on October 4, 1995.

                                       6
Summary Consolidated Financial Information

   You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto
included elsewhere in this prospectus. The adjusted balance sheet data as of
June 30, 1999 reflects the application of the net proceeds from the sale of the
4,600,000 shares of common stock offered by PC-Tel at an assumed offering price
of $16.00 per share, after deducting estimated offering expenses and
underwriting discounts and commissions. Had this offering closed on June 30,
1999, $16.0 million of the proceeds would have been used to repay bank debt.
The adjusted balance sheet data as of June 30, 1999 also reflects the write-off
of deferred debt issuance costs and the expense of the prepayment penalty
related to the bank debt.
Period From
                           February 10,
                               1994                                      Six Months Ended
                          (inception) to    Year Ended December 31,          June 30,
                           December 31,  ------------------------------- -----------------
                               1994       1995    1996    1997    1998     1998     1999
                          -------------- ------  ------- ------- ------- -------- --------
                                       (in thousands, except per share data)
Statement of Operations
 Data:
Revenues................      $ --       $  191  $16,573 $24,009 $33,004 $ 12,343 $ 33,046
Gross profit............        --           85    7,391  11,085  19,126    6,395   16,049
Income (loss) from
 operations.............       (283)     (1,127)   3,882   2,957     228      732    4,454
Net income (loss).......       (280)     (1,093)   3,004   2,301     495      683    2,704
Basic earnings per
 share..................      $ --       $  --   $  4.79 $  1.13 $  0.21 $   0.29 $   1.10
Diluted earnings per
 share..................      $ --       $  --   $  0.29 $  0.20 $  0.04 $   0.06 $   0.21
Shares used in computing
 basic earnings per
 share..................        --          --       627   2,032   2,355    2,320    2,461
Shares used in computing
 diluted earnings per
 share..................        --          --    10,280  11,645  12,325   12,400   12,638
June 30, 1999
                                                            --------------------
                                                                    Adjusted for
                                                            Actual  the offering
                                                            ------- ------------
                                                               (in thousands)
Balance Sheet Data:
Cash and short-term investments............................ $23,534   $74,182
Total assets...............................................  50,483    99,661
Long-term debt, net of current portion.....................  13,630        --
Total stockholders' equity.................................  17,861    83,113
----------------

   See Note 2 of Notes to the Consolidated Financial Statements for an
explanation of the shares used in computing basic earnings per share and shares
used in computing diluted earnings per share in the above table.

                                       7
RISK FACTORS

   Before you invest in our common stock, you should carefully consider the
various risks, including those described below, together with all of the other
information included in this prospectus. Additional risks and uncertainties not
presently known to us or that we currently consider to be immaterial may also
impair our business operations. If any of these risks actually occur, our
business, financial condition or operating results could be adversely affected.
In that case, the trading price of our common stock could decline and you could
lose all or part of your investment.

                         Risks Related to Our Business

Our sales are concentrated among a limited number of customers and the loss of
one or more of these customers could negatively affect our operating results.

   Our sales are concentrated among a limited number of customers. If we were
to lose one or more of these customers, or if one or more of these customers
were to delay or reduce purchases of our products, our financial performance
could be adversely affected. For the six months ended June 30, 1999,
approximately 81% of our revenues were generated by five of our customers, and
revenues derived from sales to Talent Trade Asia, TriGem and Silicon
Application Corporation accounted for 42%, 20% and 10%, respectively, of our
product sales. For the year ended December 31, 1998, approximately 60% of our
revenues were generated by five of our customers, and revenues derived from
sales to Silicon Application Corporation, BTC, Askey Computer and Zoltrix
accounted for 15%, 13%, 12% and 12%, respectively, of our product sales. These
customers may in the future decide not to purchase our products at all,
purchase fewer products than they did in the past or alter their purchasing
patterns, because:

  . we do not have any long term purchase arrangements or contracts with
    these or any of our other customers,

  . our product sales to date have been made primarily on a purchase order
    basis, which permit our customers to cancel, change or delay product
    purchase commitments with little or no notice and without penalty, and

  . many of our customers also have pre-existing relationships with current
    or potential competitors which may affect our customers' purchasing
    decisions.

   We expect that a small number of customers will continue to account for a
substantial portion of our revenues for the foreseeable future and that a
significant portion of our sales will continue to be made on the basis of
purchase orders.

We have been sued by Motorola for patent infringement. If this litigation
resolves unfavorably to us, our business is likely to be harmed.

   In September 1998, Motorola, Inc. filed a patent infringement lawsuit
against PC-Tel and another modem manufacturer in the U.S. District Court for
the District of Massachusetts. Motorola's complaint alleges that we are, and
have been, infringing seven Motorola patents by making, using, offering to
sell, selling and/or importing products that embody or use the inventions
claimed in its patents. In addition to alleging direct infringement, Motorola's
complaint includes allegations of inducing infringement and contributory
infringement. Motorola's complaint seeks damages and also asks the court to
award a preliminary and permanent injunction to prevent us from continuing acts
of direct infringement, inducing infringement and contributory infringement.
Motorola's complaint contains a demand for Motorola's costs, expenses and
reasonable attorney's fees and treble damages for willful infringement. Six of
the seven patents asserted by Motorola relate to communications standards
accepted by the International Telecommunications Union, or ITU. Any patents
incorporating communications standards accepted by the ITU are required to be
made available for licensing by the holder of the patent on terms that are
fair, reasonable and non-discriminatory. The seventh

                                       8
Motorola patent, entitled "Processor Modem," allegedly relates to software
modem technology. Motorola subsequently dismissed its Massachusetts lawsuit
without prejudice and re-filed its complaint in the U.S. District Court for the
District of Delaware.

   We answered Motorola's complaint denying infringement of Motorola's seven
patents and alleging the patents are invalid and unenforceable. We also
asserted counter-claims asserting tort and breach of contract claims and
violations of the antitrust and unfair competition laws. Our counter-claims and
defenses are based in part on Motorola's refusal to license its ITU-related
patents to us at fair, reasonable and non-discriminatory rates, as required by
the ITU. Our counter-claims also allege that Motorola intentionally interfered
with our actual and potential customer relationships.

   In response to Motorola's lawsuit, we filed a patent infringement suit
against Motorola in the U.S. District Court for the District of Delaware. We
have since amended our first complaint against Motorola to include allegations
that Motorola is, and has been, infringing, inducing infringement and
contributorily infringing ten of our patents. In our complaint, we have asked
the court to award similar relief to that requested by Motorola in its lawsuit,
including a preliminary and permanent injunction, damages, costs, expenses,
reasonable attorneys' fees and treble damages for willful infringement. Our ten
patents asserted against Motorola include patents related to ITU standards,
software and other modem technology.

   Discovery is underway and trial is set for early 2001 in both Motorola's
lawsuit against us and our lawsuit against Motorola.

   Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, we cannot ascertain the outcome of the lawsuit,
the availability of injunctive relief or other equitable remedies, or estimate
the total expenses, possible damages or settlement value, if any, that we may
ultimately incur in connection with our litigation with Motorola. However, we
believe, based on our knowledge of the industry, our review of Motorola's six
ITU-related patents and our products, our involvement in the ITU standards
setting process and our awareness of Motorola's participation in that process,
and the advice of our patent counsel, Knobbe, Martens, Olson & Bear, LLP, that
Motorola's six ITU-related patents asserted in its lawsuit are not enforceable
against us. We also believe, based on our knowledge of the industry, our review
of Motorola's patent related to software modem technology and our products, and
the advice of our patent counsel, Knobbe, Martens, Olson & Bear, LLP, that
Motorola's patent allegedly related to software modem technology asserted by
Motorola in its patent lawsuit against us is not infringed by us and is
invalid. We are vigorously contesting, and intend to continue to vigorously
contest, all of Motorola's claims. Nonetheless, this litigation could be time
consuming and costly, and we will not necessarily prevail given the inherent
uncertainties of litigation.

   Substantially all of our revenues to date are attributable to products which
Motorola claims as the basis for its infringement suit against us. Further, we
anticipate that a substantial proportion of our revenues for the foreseeable
future is expected to be dependent upon sales of these and future products
incorporating technology that Motorola has alleged infringes its patents. 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. We could also be required to pay substantial monetary damages to
Motorola, which are subject to trebling in the event of a finding by the court
of willful infringement. The grant of a preliminary or permanent injunction
could have an adverse effect on our business, including a substantial reduction
in our revenues and income, losses for an extended period of time and a
substantial depletion of our financial resources. In the event of an
injunction, we could attempt to obtain a license from Motorola to enable us to
continue to sell products incorporating the technology. However, we may not be
able to enter into any royalty or licensing agreements on terms acceptable to
us or at all. We could also attempt to develop a different technology and
modify the design of our products in an effort to avoid infringement of
Motorola's patents. However, we are not currently engaged in any development
efforts in this regard, and we cannot be sure that any efforts would be
successful. Even if successful, these efforts would require a substantial
period of time to complete and we cannot be sure that these efforts would
result in competitive products.

                                       9
In connection with the Motorola litigation, we have incurred and expect to
continue to incur substantial legal and other expenses. In addition, the
Motorola litigation has diverted and is expected to continue to divert the
efforts and attention of our management and technical personnel. Accordingly,
whether or not we are ultimately successful on the merits, the expenses and
diversion of resources associated with the Motorola litigation could have a
material adverse effect on our business and operating results. If the Motorola
lawsuit were to be resolved by a settlement, we might be required to make
substantial payments to Motorola or to grant a cross-license to Motorola to
utilize our technology, which could also hurt our business and operating
results.

Our business is exposed to additional risks because we have significant
international sales and operations.

   Our sales to customers located in Asia accounted for 74%, 77% and 76% of our
total revenues in the years ended December 31, 1996, 1997 and 1998,
respectively, and 77% and 99% of total revenues in the six months ended June
30, 1998 and 1999, respectively. The predominance of our sales are in Asia,
mostly in Taiwan and China, because our customers are primarily motherboard or
modem manufacturers that are located there. In many cases, our indirect OEM
customers specify that our products be included on the modem boards or
motherboards that they purchase from board manufacturers, and we sell our
products directly to the board manufacturers for resale to our indirect OEM
customers. Industry statistics indicate that approximately two thirds of modems
manufactured in Asia are sold back to OEMs located in the United States. Due to
the industry-wide concentration of modem manufacturers in Asia, we believe that
a high percentage of our future sales will continue to be concentrated with
Asian customers. As a result, our future operating results could be uniquely
affected by a variety of factors outside of our control, including:

  . political and economic instability,

  . changes in tariffs, quotas, import restrictions and other trade barriers,

  . difficulty in meeting export license requirements,

  . delays in collecting accounts receivable,

  . adverse tax consequences,

  . changes in legislative or regulatory requirements, and

  . fluctuations in the value of Asian currencies relative to the U.S.
    dollar.

   To successfully expand our international sales, we must strengthen foreign
operations, hire additional personnel and recruit additional international
distributors and resellers. This will require significant management attention
and financial resources. To the extent that we are unable to effect these
additions in a timely manner, we may not be able to maintain or increase
international market demand for our products, and our operating results could
be adversely affected.

Continuing decreases in the average selling prices of our products could
materially adversely affect our operating results.

   Product sales in the connectivity industry have been characterized by
continuing erosion of average selling prices. Price erosion experienced by any
company can cause revenues and gross margins to decline, and negatively affect
operating results. The average selling price of our products has decreased by
approximately 40% from October 1995 to June 30, 1999. We expect this trend to
continue. This erosion is due to a number of factors, including:

  . competitive pricing pressures from other sellers of connectivity
    solutions,

  . rapid technological change resulting in rapid introductions of new
    products,

  . continuing price performance enhancements by our competitors, and

  . customers of PC-Tel who negotiate price reductions in exchange for longer
    term purchase commitments.

   In addition, we believe that the widespread adoption of industry standards
in the soft modem industry is likely to further erode average selling prices,
particularly for analog modems. Decreasing average selling prices

                                       10
in our products could result in decreased revenue even if the number of units
that we sell increases. Therefore, we must continue to develop and introduce
next-generation products with enhanced functionalities that can be sold at
higher gross margins. Our failure to do this could cause our revenues and gross
margin to decline.

Our gross margins may vary based on the mix of sales of our products and
services, and these variations will directly affect our quarterly operating
results.

   We derive a significant portion of our sales from our software-based
connectivity products. We expect 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 margins from both
existing and future products to decrease over time. In addition, licensing
revenues from our products historically have provided higher margins than of
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 will cause our quarterly results to vary and could adversely affect
our operating results.

Our quarterly operating results may fluctuate significantly, and these
fluctuations may cause our stock price to fall.

   Our quarterly and annual operating results have varied in the past and are
expected to vary in the future depending upon a number of factors. As a result,
we believe that quarter-to-quarter comparisons of our financial results are not
necessarily meaningful, and you should not rely on them as an indication of
future performance. The operating results of companies in our industry have in
the past experienced significant quarter-to-quarter fluctuations. If our
revenues for a quarter fall below our expectations and we are not able to
quickly reduce our operating expenses in response, our operating results for
that quarter would be negatively affected. In addition, it is likely that in
some future quarter our operating results may be below the expectations of
public market analysts and investors and, as a result, our stock price may
fall.

Seasonal trends in sales of our software-based connectivity products may affect
our quarterly operating results.

   We have experienced and expect to continue to experience seasonality in
sales of our connectivity products. These seasonal trends materially affect our
quarter-to-quarter operating results. Our revenues are higher during the back-
to-school and holiday seasons which fall in the third and fourth calendar
quarters. Revenue and operating results in our third and fourth quarters are
typically higher relative to other quarters because many purchasers of PCs make
purchase decisions based on their calendar year-end budgeting requirements. As
a result, we generally expect revenue levels and operating results for the
first quarter to be less than those for the preceding quarter.

   We are currently expanding our sales in international markets, particularly
in Asia, Europe and South America. We expect our third quarter to reflect the
effects of summer slowing of international business activity and spending
activity generally associated with that time of year, particularly in Europe.
To the extent that our revenue in Asia, Europe 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 expect that our operating expenses will increase substantially in the future
and these increased expenses may adversely affect our ability to remain
profitable.

   Although we have been profitable in recent years, we may not remain
profitable on a quarterly or annual basis in the future. We anticipate that our
expenses will increase substantially in the foreseeable future as we:

  . further develop and introduce new applications and functionality for our
    host signal processing technology,

  . explore emerging product opportunities in digital technologies and
    wireless and cable communications,

                                       11
. expand our distribution channels, both domestically and in our
    international markets, and

  . pursue strategic relationships and acquisitions.

   In order to maintain profitability we will be required to increase our
revenue to meet these additional expenses. Any failure to significantly
increase our revenue as we implement our product, service, distribution and
strategic relationship strategies would have a negative effect on our operating
results.

We must accurately forecast our customer demand for our modem products. If
there is an unexpected fluctuation in demand for our products, we may incur
excessive operating costs or lose product revenues.

   We must forecast and place purchase orders for specialized semiconductor
chips, the ASIC, CODEC and discrete access array, or DAA, components of our
modem products, several months before we receive purchase orders from our own
customers. This forecasting and order lead time requirement limits our ability
to react to unexpected fluctuations in demand for our products. These
fluctuations can be unexpected and may cause us to have excess inventory, or a
shortage, of a particular product. In the event that our forecasts are
inaccurate, we may need to write down excess inventory. For example, we were
required to write down inventory in the second quarter of 1996 in connection
with a product transition within our 14.4 Kbps product family. Similarly, if we
fail to purchase sufficient supplies on a timely basis, we may incur additional
rush charges or we may lose product revenues if we are not able to meet a
purchase order. These failures could also adversely affect our customer
relations. Significant write-downs of excess inventory or declines in inventory
value in the future could adversely affect our financial results.

Any delays in our normally lengthy sales cycles could result in significant
fluctuations in our quarterly operating results.

   Sales cycles for our products with major customers are lengthy, often
lasting six months or longer. In addition, it can take an additional six 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:

  . our OEM customers usually complete a lengthy technical evaluation of our
    products, over which we have no control, before placing a purchase order,

  . the commercial integration of our products by an OEM is typically limited
    during the initial release to evaluate product performance, and

  . 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 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. If this were to occur, our operating results for the
quarter would be adversely affected.

Other third parties may also assert that our products infringe their
intellectual property rights.

   In addition to our ongoing patent litigation with Motorola, we have
received, and may receive in the future, communications from third parties
asserting that our products infringe on their intellectual property rights.
These claims could affect our relationships with existing customers and may
prevent potential future customers from purchasing our products or licensing
our technology. Because we depend upon a limited number of products, any claims
of this kind, whether they are with or without merit, could be time consuming,
result in costly litigation, 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

                                       12
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.

   We have received communications from third parties, including Motorola,
Lucent and Dr. Brent Townshend, claiming to own patent rights in technologies
that are part of communications standards adopted by the ITU, such as v.90,
v.34, v.42bis and v.32bis, and other common communications standards. These
third parties claim that our products utilize such patented technologies and
have requested that we enter into license agreements with them. At various
times we have engaged in negotiations with, and are continuing to negotiate
with, Lucent to obtain licenses under its patents. Motorola has refused to
conduct further negotiations with us to license its patents and we are in
litigation with Motorola in connection with its patent infringement claims. To
date, we have not obtained any licenses from Lucent, Motorola or Dr. Townshend,
because we believe that Lucent, Motorola and Dr. Townshend have requested
license fees or cross licenses of our portfolio of intellectual property on
terms that are not fair, reasonable and nondiscriminatory as required by the
ITU. Should we cross license our intellectual property in order to obtain
licenses, we may no longer be able to offer a unique product.

   In addition, new patent applications may be currently pending or filed in
the future by third parties covering technology that we use currently or may
use in the future. Pending U.S. patent applications are confidential until
patents are issued, and thus it is impossible to ascertain all possible patent
infringement claims against us. We believe that several of our competitors,
including Motorola, Lucent and ESS Technology, may have a strategy of
protecting their market share by filing intellectual property claims against
their competitors and may assert claims against us in the future. The legal and
other expenses and diversion of resources associated with any such litigation
could materially and adversely affect our business, financial condition and
results of operations.

   In addition, some of our customer agreements include an indemnity clause
that obligates us to defend and pay all damages and costs finally awarded by a
court should third parties assert patent and/or copyright claims against our
customers. As a result, we may be held responsible for infringement claims
asserted against our customers.

   We have established and recorded on a monthly basis a financial per-unit
reserve for payment of future license fees based upon our estimate as to the
likely amount of the licensing fees that we may be required to pay in the event
that licenses are obtained. We believe that it is typical for participants in
the modem industry to obtain licenses in exchange for grants of cross licenses
rather than for payment of fees and we have based our estimates on our
understanding of the license fee practices of other segments of our industry.
Our reserves may not be adequate because of factors outside of our control and
because these license fee practices in the modern industry may not be
applicable to our experience.

If we cannot retain our executive officers and our key personnel our business
may be adversely affected.

   Our past performance has been and our future performance is substantially
dependent on the performance of our current executive officers and certain key
engineering, managerial, sales, marketing, financial, technical and customer
support personnel. If we lost the services of one or more of our executives or
key employees, a replacement could be difficult to recruit and our business
could be adversely affected.

   In August 1999, we hired William F. Roach as our new President and Chief
Operating Officer. If for any reason Mr. Roach is not successful, our business
may be adversely affected.

   We maintain "key person" life insurance policies on Peter Chen, our Chairman
and Chief Executive Officer, William Wen-Liang Hsu, our Vice President,
Engineering, and Han-Chung Yeh, our Vice President, Technology, in the face
amount of $1 million for each individual. However, these insurance policies may
not adequately compensate for the loss of services of any of these individuals.

                                       13
Our success depends on our ability to attract and retain qualified technical,
sales, support and other administrative personnel.

   We intend to hire a significant number of additional engineering, sales,
support, marketing and finance personnel in the future. Competition for
personnel, especially engineers and marketing and sales personnel in Silicon
Valley, is intense. We expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining personnel. If we do
not attract qualified personnel, this could adversely affect our business.

   We are particularly dependent on our ability to identify, attract, motivate
and retain qualified engineers with the requisite education, backgrounds and
industry experience. As of June 30, 1999, we employed a total of 58 people in
our engineering department, over half of whom have advanced degrees. In the
past we have experienced difficulty in recruiting qualified engineering
personnel, especially developers, on a timely basis. If we are not able to hire
at the levels that we plan, our ability to continue to develop products and
technologies responsive to our markets will be impaired.

   Technical and customer support is also critical to our future success
because our products and the related technologies are rapidly evolving and many
customers require technical support in implementing our products. If we are
unable to provide comprehensive technical support services satisfactory to our
existing and prospective customers, our ability to establish and expand our
presence in the connectivity markets may be adversely affected.

   As we continue to develop new products for the emerging broadband and
Internet markets, our expanded business focus has also placed greater emphasis
on our need for additional sales and marketing personnel. Hiring additional
personnel in this area will be important for us to effectively achieve customer
acceptance in our targeted markets.

We have experienced significant growth in our business in recent periods and
failure to manage our growth could strain our management and other resources.

   Our ability to successfully sell our products and implement our business
plan in rapidly evolving markets requires an effective management planning
process. Future expansion efforts could be expensive and put a strain on our
management and resources. We have increased, and plan to continue to increase,
the scope of our operations at a rapid rate. Our headcount has grown and will
continue to grow substantially. At December 31, 1998, we had a total of 95
employees and at June 30, 1999, we had a total of 125 employees. In addition,
we expect to continue to hire a significant number of new employees. To
effectively manage our growth, we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations.

If we are unable to expand our customer base, our ability to sustain our
revenue growth rates may be adversely affected.

   To date, we have principally relied upon our direct sales organization for
product sales to smaller accounts. Our direct sales efforts have focused
principally on board manufacturers and smaller PC OEMs. To increase penetration
of our target customer base, including large, tier-one, OEMs, we must
significantly increase the size of our direct sales force and organize and
deploy sales teams targeted at specific domestic tier-one OEM accounts. If we
are unable to expand our sales to additional OEMs, our revenue growth rates may
be adversely affected.

We are subject to additional risks because we 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 do not have our own manufacturing, assembling or testing operations.
Instead, we rely on independent companies to manufacture, assemble and test the
semiconductor chips which are integral components of our

                                       14
products. Most of these companies are located outside of the United States.
There are many risks associated with our relationships with these independent
companies, including reduced control over:

  . delivery schedules,

  . quality assurance,

  . manufacturing costs,

  . capacity during periods of excess demand, and

  . availability of access to process technologies.

   In addition, the location of these independent parties outside of the United
States creates additional risks resulting from the foreign regulatory,
political and economic environments in which each of these companies exists.
While to date we have not experienced any material problems, failures or delays
by our manufacturers to provide the semiconductor chips that we require for our
products, or any material change in the financial arrangements we have with
these companies, could have an adverse impact on our ability to meet our
customer product requirements.

   We are a fabless company and the majority of our products and related
components are manufactured by five principal companies: Taiwan Semiconductor
Manufacturing Corporation, ST Microelectronics, Kawasaki/LSI, Silicon Labs and
Delta Integration. We expect to continue to rely upon these third parties for
these services. Currently, the DAA chips used in our soft modem products are
provided by a sole source, Silicon Labs, on a purchase order basis, and we have
only a limited guaranteed supply arrangement under a contract with our
supplier. We are currently in the process of qualifying a second source for our
DAA chips. Although we believe that we would be able to qualify an alternative
manufacturing source for DAA chips within a relatively short period of time,
such a transition, if necessary, could result in loss of purchase orders or
customer relationships, which could adversely affect our operating results.

We rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. If we cannot protect these rights,
this could adversely affect our business.

   Our success is heavily dependent upon our proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These means of protecting our proprietary rights may not be
adequate. We hold a total of 32 patents, a number of which cover technology
that is considered essential for ITU standard communications solutions, and
also have 26 additional patent applications pending or filed. These patents may
never be issued. These patents, both issued and pending, may not provide
sufficiently broad protection against third party infringement lawsuits or they
may not prove enforceable in actions against alleged infringers.

   Despite precautions that we take, it may be possible for unauthorized third
parties to copy aspects of our current or future products or to obtain and use
information that we regard as proprietary. We may provide our licensees with
access to our data model and other proprietary information underlying our
licensed applications. Additionally, our competitors may independently develop
similar or superior technology. Finally, policing unauthorized use of software
is difficult and some foreign laws, including those of various countries in
Asia, do not protect our proprietary rights to the same extent as United States
laws. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Litigation could result in
substantial costs and diversion of resources and could have a negative effect
on our financial results.

Undetected software errors or failures found in new products may result in loss
of customers or 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. 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.

                                       15
Potential Year 2000 issues could adversely affect our business or operating
results.

   The Year 2000 issue refers to computer programs which use two digits rather
than four to define a given year and which might read a date using "00" as the
year 1900 rather than the Year 2000. As a result, many companies' systems and
software may need to be upgraded or replaced in order to function correctly
after December 31, 1999.

   Our Software. In the ordinary course of our business, we test and evaluate
our software modems. We believe that our current products are Year 2000
compliant, meaning that the use or occurrence of dates on or after January 1,
2000 will not materially affect the performance of our software products or the
ability of our products to transmit data involving dates. However, our
connectivity products are incorporated into computer products of our customers
which may not be Year 2000 compliant, or which may be perceived by their
markets as not meeting Year 2000 compliance requirements. As a result, it is
likely that any failure of the computer products into which our products may be
incorporated to be Year 2000 compliant, or any slowdown in the connectivity
markets as a result of Year 2000 compliance concerns, will hurt our product
sales. In addition, we believe that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase our products. To the extent Year 2000 issues cause a significant
delay in, or cancellation of, decisions to purchase our products or services,
our business would suffer.

   Third Party Equipment And Software. We use third party equipment and
software that may not be Year 2000 compliant. This equipment and software
includes our key internal systems such as for our internal accounting systems
or controls. If this equipment or software does not operate properly with
regard to the Year 2000, we may incur unexpected expenses to remedy any
problems. These costs may materially adversely affect our business. In
addition, if our key internal systems fail as a result of Year 2000 problems,
we could incur substantial costs and disruption of our business.

   Compliance. To date, we have not incurred any material costs directly
associated with Year 2000 compliance efforts, except for compensation expense
associated with salaried employees who have devoted some of their time to Year
2000 assessment and remediation efforts. We do not expect the total cost of
Year 2000 problems to be material to our business, financial condition or
operating results. However, during the months prior to the century change, we
will continue to evaluate new versions of our products, new software and
information systems provided by third parties and any new infrastructure
systems that we acquire, to determine whether they are Year 2000 compliant.
Despite our current assessment, we may not identify and correct all significant
Year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could harm our business,
financial condition and operating results. We currently do not have any
estimate of potential costs related to potential Year 2000 problems. We
currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems.

                         Risks Related to Our Industry

If the market for applications using our host signal processing technology does
not grow as we anticipate, or if our products are not accepted in this market,
our business will be adversely affected.

   Our success depends on the growth of the market for applications using our
host signal processing technology. This market has only recently begun to
develop and may not develop at the growth rates that have been suggested by
industry estimates. Market demand for host signal processing technology depends
primarily upon the cost and performance benefits relative to other competing
solutions. For example, soft modems have only recently begun to gain acceptance
in the modem market. Although we have shipped a significant number of soft
modems since we began commercial sales of these products in October 1995, the
current level of demand for soft modems may not be sustained or may not grow.
If customers do not accept soft modems or the market for soft modems does not
grow, our business will be adversely affected.

                                       16
Further, we are in the process of developing next generation products and
applications which improve and extend upon our host signal processing
technology, such as a G.Lite modem solution, an external modem product and a
remote access solution. If these products are not accepted in our markets when
they are introduced, our revenues and profitability will be adversely affected.

Our business, operating results and financial condition will be adversely
impacted if we fail to compete successfully in our connectivity product market,
which is highly competitive.

   The connectivity device market is intensely competitive. We may not be able
to compete successfully against current or potential competitors, and our
failure to do so will adversely affect our business, operating results and
financial condition. Our current competitors include 3Com, Conexant, ESS
Technology, Lucent Technologies and Motorola. Motorola introduced soft modems
in the third quarter of 1998 and Conexant introduced soft modems in the fourth
quarter of 1998. We expect competition to increase in the future as current
competitors enhance their product offerings, new suppliers enter the
connectivity device market, new communication technologies are introduced and
additional networks are deployed.

   We may in the future also face competition from other suppliers of products
based on host signal processing technology or on new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Alcatel,
Analog Devices, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.

   Compared to us, many of our competitors, including some of those described
above, have:

  . longer operating histories than we do with more experience in designing
    and selling connectivity products and services,

  . greater presence in our connectivity product markets, which can provide
    an immediate advantage in connection with new product introductions,

  . greater name recognition, which can facilitate customer acceptance of new
    products and technologies,

  . access to larger customer bases,

  . significantly greater financial resources, which could enable a
    competitor to significantly reduce the price of new products below
    prevailing market rates to capture market share,

  . significantly greater research and development and other technical
    resources, which may enable a competitor to respond more quickly than we
    can to new or emerging technologies and changes in customer requirements,
    or to introduce new products that are superior to our products or bundle
    modem solutions with its other products, and

  . significantly greater sales and marketing resources to devote to the
    promotion, sale and support of competitive products.

   We believe that the principal competitive factors required by users and
customers in the connectivity product market include compatibility with
industry standards, price, functionality, ease of use and customer service and
support. Although we believe that our products currently compete favorably with
respect to these factors, we may not be able to maintain our competitive
position against current and potential competitors.

Our industry is characterized by rapidly changing technologies and our future
success will depend on our ability to adapt to these technologies.

   The connectivity product market is characterized by rapidly changing
technologies, limited product life cycles and frequent new product
introductions. To remain competitive in this market, we have been required to
introduce many products over a limited period of time. For example, we
introduced a 14.4 Kbps product in 1995, a 28.8 Kbps product in 1996, a 33.6
Kbps product in late 1996, a non-ITU standard 56 Kbps modem in the second half
of 1997 and a v.90 ITU standard 56 Kbps modem in early 1998. The market for
high speed

                                       17
data transmission is also characterized by several competing technologies that
offer alternative broadband solutions which allow for higher modem speeds and
faster Internet access. These competing broadband technologies include xDSL,
wireless and cable. However, substantially all of our current product revenue
is derived from sales of analog modems, which use a more conventional
technology. We must continue to develop and introduce technologically advanced
products that support one or more of these competing broadband technologies. If
we are not successful in our response, we will not be able to compete
effectively and our financial results will be adversely affected.

If we are unable to adapt our products to evolving industry standards, we will
not be able to meet the requirements of our customers.

   The emergence of new industry standards may render our products unmarketable
or obsolete and may require us to incur substantial unanticipated costs to
develop products that comply with new standards. The emphasis on communications
standards in the connectivity product market may cause OEMs and end users to
delay purchasing activities on a market-wide basis until vendors redesign and
redevelop connectivity products to suit new industry communications standards.
For example, we believe that the commercial introduction in 1997 of 56 Kbps
modems based on incompatible standards created uncertainty in the modem
industry generally, which adversely affected our operating results in the first
two quarters of 1998. Because we intend to introduce products and applications
to support broadband communications, our financial performance will depend on
the announcement and acceptance of industry standards as they relate to
different broadband technologies such as G.Lite and ADSL, and our ability to
design and develop products based on those standards. If we do not meet or
anticipate these standards, we will not be able to compete effectively and our
financial results will be adversely affected.

The success of our future products designed for the emerging broadband and
Internet markets will depend on the supporting infrastructure for these
markets. If this infrastructure fails to keep pace, our products will not be
accepted by customers.

   The success of our future products for the broadband and Internet markets
will depend on the commercial availability and cost of other products and
systems, including switches, routers, multimedia and Internet servers,
code/decode equipment within telephony networks, and customer premises
equipment for the telephone company customers. If this infrastructure of
products and systems is not fully integrated into our markets, the
functionality and utility of our products, such as our G.Lite product designed
to increase the speed of Internet access and other interactive services, will
be impaired and will not be accepted by our markets. Many of the products and
systems necessary to support our connectivity products are still in the
implementation and testing stages of their development. We cannot assure you
that the suppliers of these products and systems will complete this development
and market these complementary products and components effectively. In
addition, we cannot predict that these products and systems, when combined with
our broadband products, will be a cost-effective means of delivering high speed
data transmission, for Internet and other interactive services.

Our products and those of our customers are subject to government regulations.
Changes in laws or regulations that negatively impact our products and
technologies could harm our business.

   The jurisdiction of the Federal Communications Commission 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, 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,
international regulatory bodies are beginning to adopt standards for the
communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our operating results and financial condition.

                                       18
Risks Related to this Offering

Shares eligible for sale in the near future may adversely affect the market
price for our common stock.

   Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price for our
common stock. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
agreements that our stockholders have entered into with the underwriters. Those
agreements restrict our stockholders from selling, pledging or otherwise
disposing of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Banc of America Securities LLC.
Banc of America Securities LLC may, however, in its sole discretion, release
all or any portion of the common stock from the restrictions of the lockup
agreements, although they have no current plans to do so. Upon completion of
this offering we will have outstanding 15,602,078 shares of common stock,
assuming no exercise of the underwriters' over allotment option and no exercise
of outstanding options or warrants. Of these shares, the 4,600,000 shares sold
in this offering are freely tradeable. The remaining 11,002,078 shares are
eligible for sale in the public market as follows:
Approximate
                          Shares Eligible
     Relevant Dates       for Future Sale                       Comment
------------------------  --------------- ---------------------------------------------------
On effective date(1)....                  Shares sold in this offering and eligible for
                                          sale under Rule 144(k)
90 days after effective                   Additional shares eligible for sale under
 date(2)................                  Rules 144 and 701
180 days after effective                  All shares subject to lock-up released; additional
 date(2)................                  shares eligible for sale under Rules 144 and 701

More than 181 days after                  Additional shares becoming eligible for sale under
 effective date(2)......                  Rule 144 more than 180 days from the effective date
--------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Assumes an effective date of September 30, 1999.

   In addition, as of June 30, 1999, there were outstanding options and
warrants to purchase 4,018,127 shares of common stock. All such options and
warrants are subject to lock-up agreements. Banc of America Securities LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.

Our current officers and directors own a significant portion of our stock and
accordingly, no corporate actions requiring stockholder approval can be
consummated without approval of this group.

   Upon completion of this offering, our officers, directors and persons or
entities directly related to these individuals will together beneficially own
approximately 37% of the outstanding shares. In particular, WK Technology Funds
owns approximately 17.2% and Peter Chen owns 11.7% of the shares. As a result,
WK Technology Funds and our officers and directors, in general, will be able to
control most matters requiring stockholder approval. These matters would
include the election of our directors and approval of potential mergers,
consolidations or sales of all or substantially all of our assets.

Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which are beyond our control.

   Stock prices and trading volumes for many communications companies fluctuate
widely for a number of reasons, including some reasons that may be unrelated to
their businesses or operating results, such as changes in analysts' estimates,
the presence or absence of short-selling of common stock and events affecting
other companies that the market deems to be comparable. This market volatility,
as well as general domestic or international economic, market and political
conditions, could negatively affect the market price of our common stock
without regard to our operating performance.

                                       19
Provisions in our charter documents may inhibit a change of control or a change
of management which may adversely affect the market price for our common stock.

   Provisions of our charter documents specify procedures for nominating and
electing directors and submitting proposals for consideration at stockholder
meetings. Some of these provisions could discourage potential acquisition
proposals, delay or prevent a change in control transaction and have the effect
of discouraging others from making tender offers for our shares. As a result,
these provisions may prevent the market price of our common stock from
reflecting the effects of actual or rumored takeover attempts. These same
provisions may also inhibit changes in our management.

   Upon the closing of the offering, our board of directors will have 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 subject to, 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 the our stockholders. As a result, the market price
of the our common stock may be adversely affected.

Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.

   The trading market price of our common stock may decline below the initial
public offering price. In addition, an active public market for our common
stock may not develop or be sustained after this offering. Before this
offering, there has not been a public market for our common stock. The initial
public offering price will be determined by negotiations between PC-Tel and the
representatives of the underwriters.

               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

   This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These
risks and other factors include among other things, those listed under "Risk
Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.

                                       20
USE OF PROCEEDS

   We estimate that we will receive net proceeds of $66,648,000 from the sale
of 4,600,000 shares of common stock based on an assumed initial offering price
of $16.00 per share (or $76,915,000 assuming the underwriters' over-allotment
option of $690,000 shares is exercised in full) after deducting estimated
offering expenses and underwriting discounts and commissions.

   The principal purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate our future access to
public securities markets.

   We currently expect to use $15.7 million of the proceeds of this offering to
repay bank debt. Had this offering closed on June 30, 1999, the amount used to
repay bank debt would have equaled $16.0 million. This debt bears interest at
the bank's prime interest rate plus 0.5%. Absent such prepayment, this debt is
to be repaid in 60 monthly payments ending in January 2004. The prepayment of
this debt will result in a 3% penalty. We entered into this debt to fund our
acquisition in December 1998 of Communications Systems Division from General
DataComm Inc.

   We will use the remaining proceeds from this offering for general corporate
purposes, including working capital. We also may use a portion of the net
proceeds to acquire complementary products, technologies or businesses.
However, we currently have no commitments or agreements and are not involved in
any negotiations with respect to any transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in short-term,
interest-bearing securities.

                                DIVIDEND POLICY

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

                                       21
CAPITALIZATION

   The following table sets forth our capitalization as of June 30, 1999 (i) on
an actual basis, and (ii) on a pro forma basis adjusted to give effect to the
receipt by us of the estimated net proceeds from the sale of 4,600,000 shares
of common stock in this offering at an assumed initial public offering price of
$16.00 per share and the repayment of outstanding bank debt for $16.0 million
as of June 30, 1999. The adjusted balance sheet data as of June 30, 1999 also
reflects the write-off of deferred debt issuance costs and the expense of the
prepayment penalty related to the bank debt.

   The outstanding share information in the table excludes, as of June 30,
1999, 3,815,710 shares of common stock subject to outstanding stock options
under our 1995 and 1997 stock plans, and 202,417 shares of common stock
issuable upon exercise of outstanding warrants. The outstanding share
information in the table also does not reflect option grants under our 1997
stock plan made during the period between July 1 and August 3, 1999 for the
purchase of 565,390 shares, including an option grant to purchase 400,000
shares of common stock to Mr. William F. Roach, who became our President and
Chief Operating Officer in August 1999.
June 30, 1999
                                                 ------------------------------
                                                                  Pro Forma
                                                                  After the
                                                    Actual         Offering
                                                 -------------  ---------------
                                                 (in thousands, except share
                                                     and per share data)
Current portion of long-term debt............... $       1,847   $          --
                                                 -------------   -------------
Long-term debt, net of current portion..........        13,630              --
                                                 -------------   -------------
Stockholders' equity:
  Preferred stock: par value $0.001 per share,
  aggregate liquidation preference of $10,015,
  9,385,548 shares authorized, 8,510,748 issued
  and outstanding, actual; zero shares issued
  and outstanding pro forma after the offering..             9              --
  Common stock: par value $0.001 per share,
  50,000,000 shares authorized, 2,491,330 issued
  and outstanding, actual; 15,602,078 shares
  issued and outstanding, pro forma after the
  offering......................................             2              16
Additional paid-in-capital......................        12,881          79,524
Deferred compensation...........................        (2,162)         (2,162)
Retained earnings...............................         7,131           5,735
                                                 -------------   -------------
Total stockholders' equity......................        17,861          83,113
                                                 -------------   -------------
Total capitalization............................ $      33,338   $      83,113
                                                 =============   =============
22
DILUTION

   Net tangible book value per share of common stock represents the amount of
our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the pro forma as adjusted net
tangible book value per share immediately after the completion of this
offering.

   Our pro forma net tangible book value as of June 30, 1999 was approximately
$6.7 million, or $0.61 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of outstanding shares of common stock. Our pro forma net
tangible book value per share stated here gives effect to the conversion of all
outstanding shares of preferred stock into 8,510,748 shares of common stock
effective immediately upon the closing of this offering. After giving effect to
the sale of the 4,600,000 shares of common stock offered by us at an assumed
initial public offering price of $16.00 per share and after deducting
underwriting discounts and estimated offering expenses, the pro forma as
adjusted net tangible book value at June 30, 1999 would have been approximately
$73.4 million, or approximately $4.70 per share of common stock. This
represents an immediate increase in net tangible book value of $4.09 per share
to existing stockholders and an immediate dilution in net tangible book value
of $11.30 per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share...............        $16.00
                                                                         ------
   Pro forma net tangible book value per share at June 30, 1999..  $0.61
                                                                   -----
   Increase per share attributable to this offering..............   4.09
                                                                   -----
   Pro forma as adjusted net tangible book value per share after
    this offering................................................          4.70
                                                                         ------
   Dilution per share to new investors...........................        $11.30
                                                                         ======
--------
   The table above excludes, as of June 30, 1999, 3,815,710 shares of common
stock subject to outstanding options under our 1995 and 1997 stock plans, and
202,417 shares of common stock issuable upon exercise of outstanding warrants.
To the extent options or warrants are exercised, there will be further dilution
to new investors.

   The following table sets forth, on a pro forma basis adjusted for the
offering as of June 30, 1999, the differences between the number of shares of
common stock purchased from us, the total consideration paid and the average
price per share paid by existing stockholders and by new investors, before
deducting underwriting discounts and commissions and estimated offering
expenses, at an assumed initial public offering price of $16.00 per share.
Shares Purchased  Total Consideration  Average
                                ------------------ -------------------   Price
                                  Number   Percent   Amount    Percent Per Share
                                ---------- ------- ----------- ------- ---------
Existing stockholders.......... 11,002,078   70.5% $10,156,798   12.1%  $ 0.92
New investors..................  4,600,000   29.5%  73,600,000   87.9%   16.00
                                ----------  -----  -----------  -----
  Total........................ 15,602,078  100.0% $83,756,798  100.0%
                                ==========  =====  ===========  =====
--------
   If the underwriters' over-allotment option is exercised in full, the
percentage of shares of common stock held by existing stockholders after this
offering would be reduced to approximately 67.5% and the number of shares of
common stock held by new investors would increase to 5,290,000 or approximately
32.5% of the total number of shares of common stock outstanding after this
offering.

                                       23
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 prospectus.
The statement of operations data for the years ended December 31, 1996, 1997
and 1998 and the balance sheet data as of December 31, 1997 and 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from inception to
December 31, 1994 and year ended December 31, 1995 and the balance sheet data
as of December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this prospectus. The balance sheet data as of June
30, 1999 and the statement of operations data for the six months ended June 30,
1998 and 1999 are unaudited, have been prepared on the same basis as the
audited statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
representation of PC-Tel's operating results for such periods and financial
condition at such date. The operating results for the six-month period ended
June 30, 1999 are not necessarily indicative of the results to be expected for
any other interim period or any future fiscal year.
Period From                                                 Six Months
                          February 10, 1994         Year Ended December 31,            Ended June 30,
                           (inception) to   ----------------------------------------  -----------------
                          December 31, 1994   1995       1996      1997      1998      1998      1999
                          ----------------- ---------  --------- --------- ---------  -------  --------
                                             (in thousands, except per share data)
Statement of Operations
 Data:
Revenues................        $  --       $     191  $  16,573 $  24,009 $  33,004  $12,343  $33,046
Cost of revenues........           --             106      9,182    12,924    13,878    5,948   16,997
                                -----       ---------  --------- --------- ---------  -------  -------
Gross profit............           --              85      7,391    11,085    19,126    6,395   16,049
                                -----       ---------  --------- --------- ---------  -------  -------
Operating expenses:
 Research and
  development...........          198             822      2,152     3,348     4,932    2,455    4,423
 Sales and marketing....           42             275        839     3,168     5,624    2,407    4,945
 General and
  administrative........           43             115        477     1,612     2,169      791    2,063
 Acquired in-process
  research and
  development...........           --              --         --        --     6,130       --       --
 Amortization of
  deferred compensation
  expense...............           --              --         41        --        43       10      164
                                -----       ---------  --------- --------- ---------  -------  -------
   Total operating
    expenses............          283           1,212      3,509     8,128    18,898    5,663   11,595
                                -----       ---------  --------- --------- ---------  -------  -------
Income (loss) from
 operations.............         (283)         (1,127)     3,882     2,957       228      732    4,454
                                -----       ---------  --------- --------- ---------  -------  -------
Other income (expense),
 net:
 Interest income........            4              35        127       299       504      254      303
 Interest expense.......           --              --         --        --       (25)     (11)    (895)
                                -----       ---------  --------- --------- ---------  -------  -------
   Total other income
    (expense), net......            4              35        127       299       479      243     (592)
                                -----       ---------  --------- --------- ---------  -------  -------
Income (loss) before
 provision for income
 taxes..................         (279)         (1,092)     4,009     3,256       707      975    3,862
Provision for income
 taxes..................            1               1      1,005       955       212      292    1,158
                                -----       ---------  --------- --------- ---------  -------  -------
Net income (loss).......        $(280)      $  (1,093) $   3,004 $   2,301 $     495  $   683  $ 2,704
                                =====       =========  ========= ========= =========  =======  =======
Basic earnings per
 share..................        $  --       $      --  $    4.79 $    1.13 $    0.21  $  0.29  $  1.10
                                =====       =========  ========= ========= =========  =======  =======
Diluted earnings per
 share..................        $  --       $      --  $    0.29 $    0.20 $    0.04  $  0.06  $  0.21
                                =====       =========  ========= ========= =========  =======  =======
Shares used in computing
 basic earnings per
 share..................           --              --        627     2,032     2,355    2,320    2,461
Shares used in computing
 diluted earnings per
 share..................           --              --     10,280    11,645    12,325   12,400   12,638
As of December 31,
                          ----------------------------------------------------------           June 30,
                                1994          1995       1996      1997      1998                1999
                          ----------------- ---------  --------- --------- ---------           --------
                                               (in thousands)
Balance Sheet Data:
Cash and short-term
 investments............        $ 594       $   1,676  $   5,585 $   6,685 $  12,988           $23,534
Working capital.........          702           3,068      6,236    12,840    16,313            18,778
Total assets............          747           3,980     14,110    23,148    45,996            50,483
Long term debt, net of
 current portion........           --               3          5        38    14,709            13,630
Total stockholders'
 equity.................          746           3,228      6,689    13,610    15,139            17,861
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   You should read the following discussion in conjunction with our
Consolidated Financial Statements and related notes appearing elsewhere in this
prospectus. Except for historical information, the following discussion
contains forward-looking statements that involve risks and uncertainties,
including, among other things, statements regarding our anticipated revenues,
profits, costs and expenses, revenue mix and plans for addressing Year 2000
issues. Such forward-looking statements include, among others, those statements
including the words, "may", "will", "plans", "seeks", "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results may differ
significantly from those discussed in the forward-looking statements. Factors
that might cause future results to differ materially from those discussed in
the forward-looking statements include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.

Overview

   We provide cost-effective software-based connectivity solutions that address
Internet access and other communications requirements for existing analog and
emerging broadband networks. Our communications products enable Internet access
through desktop PCs, notebook computers and non-PC devices. From our inception
in February 1994 through the end of 1995, we were a development stage company
primarily engaged in product development, product testing and the establishment
of strategic relationships with customers and suppliers. From 1996 to 1999, our
total headcount increased to support corporate growth from 18 at the end of
1995 to 125 at June 30, 1999. We first recognized revenue on product sales in
the fourth quarter of 1995, and became profitable in 1996, our first full year
of product shipments. Revenues increased from $16.6 million in 1996 to $24.0
million in 1997 to $33.0 million in 1998. Revenues for the six months ended
June 30, 1999 were $33.0 million.

   We sell soft modems to manufacturers and distributors principally in Asia
through our sales personnel, independent sales representatives and
distributors. Our sales to manufacturers and distributors in Asia were 74.4%,
77.1% and 75.9% of our total sales for the years ended 1996, 1997 and 1998,
respectively, and 76.9% and 98.6% for the six months ended June 30, 1998 and
1999, respectively. The predominance of our sales are in Asia because our
customers are primarily motherboard and modem manufacturers, and the majority
of these manufacturers are located in Asia. In many cases, our indirect OEM
customers specify that our products be included on the modem boards or
motherboards that they purchase from the board manufacturers, and we sell our
products directly to the board manufacturers for resale to our indirect OEM
customers. Industry statistics indicate that approximately two-thirds of modems
manufactured in Asia are sold back to OEMs located in the United States.

   We recognize revenues from product sales to customers upon shipment. We
provide for estimated sales returns, allowances and discounts related to such
sales at the time of shipment. We recognize revenues from product sales to
distributors upon a "sell through" basis from the distributor to the end user.
We recognize revenues from non-recurring engineering contracts as contract
milestones are achieved.

   In the fourth quarter of 1998, we acquired substantially all of the assets
and selected liabilities of Communications Systems Division of General
DataComm, Inc., for a total purchase price of $17.0 million. We began to
recognize revenues in the three months ended June 30, 1999 from licensing the
patent portfolio that we acquired in this acquisition. These revenues are
recognized based on confirmation from licensees of the royalty payments due to
us.

                                       25
Results of Operations

   The following table sets forth the results of our operations expressed as a
percentage of total revenues.
Six Months Ended
                                 Year Ended December 31,        June 30,
                                 -------------------------  ------------------
                                  1996     1997     1998      1998      1999
                                 -------  -------  -------  --------  --------
Revenues........................   100.0%   100.0%   100.0%    100.0%    100.0%
Cost of revenues................    55.4     53.8     42.0      48.2      51.4
                                 -------  -------  -------  --------  --------
  Gross profit..................    44.6     46.2     58.0      51.8      48.6
                                 -------  -------  -------  --------  --------
Operating expenses:
  Research and development......    13.0     13.9     14.9      19.9      13.4
  Sales and marketing...........     5.1     13.2     17.0      19.5      15.0
  General and administrative....     2.9      6.7      6.6       6.4       6.2
  Acquired in-process research
   and development..............      --       --     18.6        --        --
  Amortization of deferred
   compensation expense.........     0.2       --      0.1       0.1       0.5
                                 -------  -------  -------  --------  --------
    Total operating expenses....    21.2     33.8     57.2      45.9      35.1
                                 -------  -------  -------  --------  --------
Operating income................    23.4     12.4      0.8       5.9      13.5
                                 -------  -------  -------  --------  --------
Other income (expense), net:
  Interest income...............     0.8      1.2      1.5       2.1       0.9
  Interest expense..............      --       --     (0.1)     (0.1)     (2.7)
                                 -------  -------  -------  --------  --------
    Total other income
     (expense), net.............     0.8      1.2      1.4       2.0      (1.8)
Income before provision for
 income taxes...................    24.2     13.6      2.2       7.9      11.7
Provision for income taxes......     6.1      4.0      0.6       2.4       3.5
                                 -------  -------  -------  --------  --------
Net income......................    18.1%     9.6%     1.6%      5.5%      8.2%
                                 =======  =======  =======  ========  ========
Six Months Ended June 30, 1998 and 1999

 (All amounts in tables, other than percentages, are in thousands)

 Revenues
--------------------------------------------------------------------------------
Six Months
                                                                     Ended
                                                                   June 30,
                                                                ---------------
                                                                 1998    1999
                                                                ------- -------
Revenues....................................................... $12,343 $33,046
% change from prior period.....................................     N/A   167.7%
--------------------------------------------------------------------------------

   Our historical revenues primarily consisted of product sales of soft modems
to board manufacturers and distributors in Asia.

   The 167.7% increase in revenues for the six months ended June 30, 1999 over
the same period in the previous year was attributable to an increase in unit
sales in 1999. We believe that this unit increase was due principally to the
general acceptance of our products in the low cost, or sub-$1,000, PC
marketplace, the increase of market share of our MicroModem product and the
certification by Microsoft of its Windows 98 logo for our products. The
benefit of increase of sales volume was partly offset by downward pressure on
average selling prices and sales discounts to customers.

                                      26
Gross Profit
--------------------------------------------------------------------------------
Six Months Ended
                                                                  June 30,
                                                              -----------------
                                                               1998      1999
                                                              -------- --------
Gross profit................................................. $ 6,395  $ 16,049
Percentage of revenue........................................    51.8%     48.6%
% change from prior period...................................     N/A     151.0%
--------------------------------------------------------------------------------

   Cost of revenues consists primarily of chipsets which we purchase from third
party manufacturers and also includes amortization of intangibles related to
our acquisition of the Communications Systems Division in December 1998,
accrued intellectual property royalties, cost of operations, reserves for
inventory obsolescence and distribution costs. The royalties accrued are our
best estimate based on royalty agreements already signed, or in negotiation, as
well as advice from patent counsel. Upon consummation of the Communications
Systems Division acquisition, we reduced our royalty reserves because we
believe that we can obtain necessary licenses of the patent portfolio in
exchange for grants of cross licenses rather than the payment of fees.

   Gross profit increased $9.7 million, or 151.0%, to $16.0 million for the six
months ended June 30, 1999 from $6.4 million for the same period the previous
year. The increase in gross profit was the direct result of increased revenues.
However, as a percentage of revenues, gross profit decreased from 51.8% for the
six months ended June 30, 1998 to 48.6% for the same period in 1999. Average
selling prices decreased faster than the rate of cost reduction, which
adversely effected our gross profit margins. We believe that decreases in the
average selling price of our products through volume discounts have resulted in
our attaining greater market share.

 Research and Development
--------------------------------------------------------------------------------
Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
Research and development.................................... $  2,455  $  4,423
Percentage of revenue.......................................     19.9%     13.4%
% change from prior period..................................      N/A      80.2%
--------------------------------------------------------------------------------

   Research and development expenses include compensation 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 increased for the six months ended June
30, 1999 due to the addition of personnel for new product development in the
G.Lite, modem riser card and HIDRA projects and engineering work related to
v.90 modems. As a percentage of revenues, research and development decreased
for the six months ended June 30, 1999 because revenue increased proportionally
greater than research and development expenses. Approximately 70% of all
research and development expenses are payroll related. The headcount in this
area increased approximately 87% from the same period in the prior year, which
included 18 additional staff members from the Communications Systems Division
acquisition in December 1998. We expect that our research and development
expenses will increase in absolute dollars due to the anticipated additional
headcount and continued efforts in broadband product development.

 Sales and Marketing
--------------------------------------------------------------------------------
Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
Sales and marketing......................................... $  2,407  $  4,945
Percentage of revenue.......................................     19.5%     15.0%
% change from prior period..................................      N/A     105.4%
--------------------------------------------------------------------------------

                                       27
Sales and marketing expenses consist primarily of personnel costs, sales
commissions and marketing costs. Marketing costs include promotional goods,
trade shows, press tours and advertisements in trade magazines.

   Sales and marketing expenses increased $2.5 million for the six months ended
June 30, 1999, but decreased as a percentage of total revenues, compared to the
same period in the prior year. The dollar increase reflects the addition of
sales and marketing personnel to develop new accounts, support customers, and
drive new product developments and product launches. We also expanded our sales
regions geographically to include Japan and Korea. The increase in sales and
marketing expenses is also due to increased governmental telephony
certification of our products in Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom, the production of sales materials, travel
costs, trade shows and press tours.

 General and Administrative
--------------------------------------------------------------------------------
Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                              1998      1999
                                                             -------- ---------
General and administrative.................................. $   791  $   2,063
Percentage of revenue.......................................     6.4%       6.2%
% change from prior period..................................     N/A      160.8%
--------------------------------------------------------------------------------

   General and administrative expenses include costs associated with our
general management, human resources 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.

   These general and administrative expenses increased $1.3 million for the six
months ended June 30, 1999, over the same period in the prior year but
decreased as a percentage of total revenues, compared to the same period in the
prior year. This increase reflected additional legal costs related to contract
negotiations, patent submissions, additional tax planning, as well as
litigation expenses related to the Motorola lawsuit. We also incurred
additional expenses related to the increase in staff.

 Amortization of Deferred Compensation Expense
--------------------------------------------------------------------------------
Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                              1998      1999
                                                             -------- ---------
Amortization of deferred compensation expense............... $    10  $     164
Percentage of revenue.......................................     0.1%       0.5%
% change from prior period..................................     N/A      1,540%
--------------------------------------------------------------------------------

   In connection with the grant of stock options to employees, we amortized
$164,000 in deferred compensation for the six months ended June 30, 1999. The
deferred compensation expense related to the grant of stock options to
employees for the six months ended June 30, 1998 was $10,000. We expect that
the deferred compensation expense will increase to approximately $340,000 per
quarter through the third quarter of 2003, based on option grant activity
through August 3, 1999.

 Other Income (Expense), Net
--------------------------------------------------------------------------------
Six Months Ended
                                                                June 30,
                                                            ------------------
                                                             1998      1999
                                                            -------- ---------
Other income (expense), net................................ $   243  $    (592)
Percentage of revenue......................................     2.0%      (1.8)%
% change from prior period.................................     N/A     (343.6)%
--------------------------------------------------------------------------------

                                       28
Other income (expense), net, consists of interest income, net of interest
expense. Interest income is expected to fluctuate over time. Interest expense
will continue to consist primarily of interest on capital leases and the $16.3
million loan issued to acquire Communications Systems Division. Other income
(expense), net, decreased $835,000 for the six months ended June 30, 1999 over
the same period for the prior year. The decrease was due primarily to the
interest expense related to the bank loan issued to acquire the Communications
Systems Division. We intend to repay the bank loan following completion of the
offering.

 Provision for Income Taxes
--------------------------------------------------------------------------------
Six Months Ended
                                                                 June 30,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
Provision for income taxes.................................. $    292  $  1,158
Effective tax rate..........................................     30.0%     30.0%
% change from prior period..................................      N/A     296.6%
--------------------------------------------------------------------------------

   Provision for income taxes increased for the six months ended June 30, 1999
over the same period for the prior year due to higher taxable income, while the
effective tax rate remained constant at 30%.

Year Ended December 31, 1996, 1997 and 1998

 Revenues
--------------------------------------------------------------------------------
1996     1997     1998
                                                      -------  -------  -------
Revenues............................................. $16,573  $24,009  $33,004
% change from prior period...........................     N/A     44.9%    37.5%
--------------------------------------------------------------------------------

   Revenues increased 37.5% for 1998 due to an increase in unit sales over
1997. This unit increase was due principally to acceptance of our products in
the marketplace following the certification by Microsoft of its Windows 95 and
98 logos for our products and the launch of our v.90 soft modem products early
in 1998. The benefit of increased sales volume was partly offset by downward
pressure on prices throughout the industry.

   Revenues for 1997 increased 44.9% reflecting a doubling in unit sales over
the same period in 1996. This revenue growth was fueled by the introduction of
our K56Flex soft modem in late 1997. The benefit of increased sales volume was
partly offset by downward pressure on prices throughout the industry.

 Gross Profit
--------------------------------------------------------------------------------
1996     1997     1998
                                                      -------  -------  -------
Gross profit......................................... $ 7,391  $11,085  $19,126
Percentage of revenue................................    44.6%    46.2%    58.0%
% change from prior period...........................     N/A     50.0%    72.5%
--------------------------------------------------------------------------------

   Gross profit increased $8.0 million, or 72.5%, for 1998 and increased as a
percentage of revenues to 58.0% from 46.2% in 1997. The increase was due to the
increase in revenues and lower unit costs obtained through volume discounts
from our semiconductor vendors, which were partly offset by declining selling
prices throughout the industry. The increase was also due in part to a $3.0
million reversal in royalty reserves in the fourth quarter of 1998. Upon
consummation of the Communications Systems Division acquisition in December
1998, we reduced our royalty reserves because we believe that in some instances
we can obtain necessary licenses of third party technologies in exchange for
grants of cross licenses of our patent portfolio rather than the payment of
license fees or royalties. Without considering the $3.0 million reversal in
royalty reserves, gross profit as a percentage of revenues would have been
48.9% in 1998.

                                       29
The increase in gross profit as a percentage of revenues from 1996 to 1997
reflects the change in the mixture of sales toward higher margin modems,
economies of scale and lower reserves required for product obsolescence. The
addition of personnel in the operations area enabled us to focus on better
managing product cost, improving product transition strategies and reducing
inventory levels.

 Research and Development
--------------------------------------------------------------------------------
1996    1997    1998
                                                         ------  ------  ------
Research and development................................ $2,152  $3,348  $4,932
Percentage of revenue...................................   13.0%   13.9%   14.9%
% change from prior period..............................    N/A    55.6%   47.3%
--------------------------------------------------------------------------------

   Research and development expenses increased $1.6 million, or 47.3%, for
1998. The increase was due to the addition of research and development
personnel to facilitate new product development for our v.90, G.Lite and Modem
Riser products.

   Research and development expenses increased $1.2 million in 1997, reflecting
the growth in our software development team to facilitate new product
development for our K56Flex and v.90 products.

 Sales and Marketing
--------------------------------------------------------------------------------
1996    1997    1998
                                                         ------  ------  ------
Sales and marketing..................................... $  839  $3,168  $5,624
Percentage of revenue...................................    5.1%   13.2%   17.0%
% change from prior period..............................    N/A   277.6%   77.5%
--------------------------------------------------------------------------------

   Sales and marketing expenses increased $2.5 million for 1998. We continued
to develop our sales organization in 1998 to expand into different distribution
channels, particularly the OEM channel. Consequently, sales and marketing
personnel grew by approximately 63% to develop new accounts, support customers
and drive new product developments and product launches. Sales and marketing
expenses in 1998 also reflected higher sales commissions and increased
promotional activity including increased spending in trade shows and press
tours.

   Sales and marketing expenses increased $2.3 million for 1997, reflecting the
addition of sales and marketing personnel to support customers, develop new
accounts and expand our business geographically. Higher sales and marketing
expenses in 1997 also included increased commission expenses due to higher
revenues, increased promotional activity, the production of sales material and
the costs of trade shows and press tours.

 General and Administrative
--------------------------------------------------------------------------------
1996    1997    1998
                                                         ------  ------  ------
General and administrative.............................. $  477  $1,612  $2,169
Percentage of revenue...................................    2.9%    6.7%    6.6%
% change from prior period..............................    N/A   237.9%   34.6%
--------------------------------------------------------------------------------

   General and administrative expenses increased $557,000 for 1998. This
increase reflected additional legal costs related to the negotiation and review
of an increased number of contracts, an increase in patent submissions, tax
planning and litigation expenses related to the Motorola lawsuit.

   General and administrative expenses increased $1.1 million for 1997,
reflecting higher costs associated with the expansion of our infrastructure,
including increased personnel required to implement and sustain a financial
reporting structure and increased expenses resulting from the move to a larger
facility.

                                       30
Acquired In-Process Research & Development
--------------------------------------------------------------------------------
1996 1997  1998
                                                               ---- ---- ------
Acquired in-process research & development....................  --   --  $6,130
Percentage of revenue.........................................  --   --    18.6%
% change from prior period.................................... N/A   --      --
--------------------------------------------------------------------------------

   Upon completion of our acquisition of the Communications Systems Division in
December 1998, we immediately expensed $6.1 million, representing purchased in-
process technology that had not yet reached technological feasibility and had
no alternative future use. The value assigned to purchased in-process
technology, based on a percentage of completion discounted cash flow method,
was determined by identifying research projects in areas for which
technological feasibility has not been established. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate includes a risk-adjusted discount rate to take into account the
uncertainty surrounding the successful development of the in-process
technology. The valuation includes cash inflows from in-process technology
through 2002 with revenues commencing in 1999 and increasing significantly in
2000 before declining in 2002. A royalty payment of 3% was assumed from in-
process technology to existing technology, based on management's estimate of a
patent license rate. The HIDRA and industrial modem projects were approximately
56% complete at the time of the valuation and the expected timeframe for
achieving these product releases was assumed to be in the second half of 1999.
The DSL project was approximately 56% complete at the time of the valuation and
the expected timeframe for achieving this product release is assumed to be in
early 2000. Significant remaining development efforts must be completed in the
next six to 18 months in order for the projects of the Communications Systems
Division to become implemented in a commercially viable timeframe.

 Amortization of Deferred Compensation Expense
--------------------------------------------------------------------------------
1996   1997    1998
                                                         ------  -----   -----
Amortization of deferred compensation expense........... $   41  $  --   $  43
Percentage of revenue...................................    0.2%    --     0.1%
% change from prior period..............................    N/A     --      --
--------------------------------------------------------------------------------

   In connection with the grant of stock options to employees, we amortized
$43,000 in deferred compensation for the year ended December 31, 1998. There
was no deferred compensation expense for the year ended December 31, 1997. The
deferred compensation expense related to the grant of stock options to
employees for the year ended December 31, 1996 was $41,000.

 Other Income (Expense), Net
--------------------------------------------------------------------------------
1996   1997    1998
                                                         ------  -----   -----
Other income (expense), net............................. $  127  $ 299   $ 479
Percentage of revenue...................................    0.8%   1.2%    1.4%
% change from prior period..............................    N/A  135.4%   60.2%
--------------------------------------------------------------------------------

   Other income (expense), net, increased $180,000 for 1998. The increase was
due to higher average cash balances.

 Provision for Income Taxes
--------------------------------------------------------------------------------
1996   1997    1998
                                                         ------  -----   -----
Provision for income taxes.............................. $1,005  $ 955   $ 212
Effective tax rate......................................   25.1%  29.3 %  30.0 %
% change from prior period..............................    N/A   (5.0)% (77.8)%
--------------------------------------------------------------------------------

                                       31
Provision for income taxes decreased $743,000, or 77.8%, for 1998 due to
lower gross profits, while the effective tax rate for 1998 remained at 30.0%.

   Income taxes remained relatively constant for 1997 and 1996. The lower
effective tax rate for 1996 was due to the benefit realized from net operating
losses carried forward from our inception.

   We have deferred tax assets on our balance sheet as of December 31, 1998
amounting to $4.2 million. We believe that our expected effective tax rate will
be below the statutory tax rate due to our research and development tax credits
and the increase in international sales through our wholly owned subsidiaries.

                                       32
Quarterly Results of Operations

   The following table presents our operating results for each of the six
quarters up to and including the period ended June 30, 1999. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited financial statements appearing elsewhere in this prospectus. In
the opinion of management, all necessary adjustments consisting only of normal
recurring adjustments, have been included to present fairly the unaudited
quarterly results when read in conjunction with our audited Consolidated
Financial Statements and the related notes appearing elsewhere in this
prospectus. These operating results are not necessarily indicative of the
results of any future period.
Quarter Ended
                          ---------------------------------------------------------
                          Mar. 31, June 30, Sept. 30, Dec. 31,   Mar. 31,  June 30,
                            1998     1998     1998      1998       1999      1999
                          -------- -------- --------- --------   --------  --------
Revenues................   $5,515   $6,828   $9,063   $11,598    $15,156   $17,890
Cost of revenues........    2,533    3,415    4,902     3,028      7,926     9,071
                           ------   ------   ------   -------    -------   -------
 Gross profit...........    2,982    3,413    4,161     8,570      7,230     8,819
                           ------   ------   ------   -------    -------   -------
Operating expenses:
 Research and
  development...........    1,129    1,326    1,283     1,194      2,043     2,380
 Sales and marketing....    1,068    1,339    1,713     1,504      2,298     2,647
 General and
  administrative........      384      407      423       955        815     1,248
 Acquired in-process
  research and
  development...........       --       --       --     6,130         --        --
 Amortization of
  deferred compensation
  expense...............       --       10       17        16         16       148
                           ------   ------   ------   -------    -------   -------
  Total operating
   expenses.............    2,581    3,082    3,436     9,799      5,172     6,423
                           ------   ------   ------   -------    -------   -------
Operating income
 (loss).................      401      331      725    (1,229)     2,058     2,396
                           ------   ------   ------   -------    -------   -------
Other income (expense),
 net:
 Interest income........      106      148      140       110        116       187
 Interest expense.......       (5)      (6)      (6)       (8)      (453)     (442)
                           ------   ------   ------   -------    -------   -------
  Total other income
   (expense), net.......      101      142      134       102       (337)     (255)
                           ------   ------   ------   -------    -------   -------
Income (loss) before
 provision for income
 taxes..................      502      473      859    (1,127)     1,721     2,141
Provision (benefit) for
 income taxes...........      151      141      258      (338)       516       642
                           ------   ------   ------   -------    -------   -------
Net income (loss).......   $  351   $  332   $  601   $  (789)   $ 1,205   $ 1,499
                           ======   ======   ======   =======    =======   =======
Quarter Ended
                          ---------------------------------------------------------
                          Mar. 31, June 30, Sept. 30, Dec. 31,   Mar. 31,  June 30,
                            1998     1998     1998      1998       1999      1999
                          -------- -------- --------- --------   --------  --------
Revenues................    100.0%   100.0%   100.0%    100.0%     100.0%    100.0%
Cost of revenues........     45.9     50.0     54.1      26.1       52.3      50.7
                           ------   ------   ------   -------    -------   -------
 Gross profit...........     54.1     50.0     45.9      73.9       47.7      49.3
                           ------   ------   ------   -------    -------   -------
Operating expenses:
 Research and
  development...........     20.5     19.4     14.2      10.3       13.5      13.3
 Sales and marketing....     19.4     19.6     18.9      13.0       15.1      14.8
 General and
  administrative........      7.0      6.0      4.7       8.2        5.4       7.0
 Acquired in-process
  research and
  development...........      0.0      0.0      0.0      52.9        0.0       0.0
 Amortization of
  deferred compensation
  expense...............       --      0.1      0.1       0.1        0.1       0.8
                           ------   ------   ------   -------    -------   -------
  Total operating
   expenses.............     46.9     45.1     37.9      84.5       34.1      35.9
                           ------   ------   ------   -------    -------   -------
Operating income
 (loss).................      7.2      4.9      8.0     (10.6)      13.6      13.4
                           ------   ------   ------   -------    -------   -------
Other income (expense),
 net:
 Interest income........      1.9      2.2      1.5       1.0        0.8       1.1
 Interest expense.......     (0.1)    (0.1)      --      (0.1)      (3.0)     (2.5)
                           ------   ------   ------   -------    -------   -------
  Total other income
   (expense), net.......      1.8      2.1      1.5       0.9       (2.2)     (1.4)
                           ------   ------   ------   -------    -------   -------
Income (loss) before
 provision for income
 taxes..................      9.0      7.0      9.5      (9.7)      11.4      12.0
Provision (benefit) for
 income taxes...........      2.7      2.1      2.8      (2.9)       3.4       3.6
                           ------   ------   ------   -------    -------   -------
Net income (loss).......      6.3%     4.9%     6.7%     (6.8)%      8.0%      8.4%
                           ======   ======   ======   =======    =======   =======
33
Our quarterly operating results have varied significantly in the past and
may vary significantly in the future depending on a number of factors, many of
which are beyond our control. Our revenues have been negatively affected by
market-wide delays in purchasing activities associated with the anticipated
announcement by the ITU of the v.90 standard whereas our revenues have been
positively affected by the market acceptance of our soft modems. We have also
experienced seasonality in our quarterly operating results. A detailed
discussion of these and other factors are described under Risk Factors
elsewhere in this prospectus. Our gross profit for the fourth quarter ended
December 31, 1998 was favorably impacted by the reversal of $3.0 million in
royalty reserves. Without considering the reversal, gross profit as a
percentage of revenues would have been 48.0% in the fourth quarter of 1998.

Liquidity and Capital Resources

Six Months Ended June 30, 1998 and 1999
--------------------------------------------------------------------------------
1998     1999
                                                               -------  -------
Net cash provided by operating activities..................... $ 1,080  $12,262
Net cash used in investing activities.........................    (149)  (6,980)
Net cash provided by (used in) financing activities...........   4,756   (1,018)
Cash and short-term investments at end of period..............  12,988   23,534
Working capital...............................................     N/A   18,778
--------------------------------------------------------------------------------
The increase in net cash provided by operating activities for the six months
ended June 30, 1999 compared to 1998 was primarily due to better collection in
accounts receivable due to the use of letters of credit and a higher net income
in 1999. Net cash used in investing activities for the six months ended June
30, 1999 reflected the purchases of short-term investments, property and
equipment, while net cash used in financing activities for the six months ended
June 30, 1999 reflected the repayment of principal of the notes payable
arrangements associated with the Communications Systems Division acquisition.

   As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $18.8 million. As of June 30,
1999, we had outstanding debt of $15.5 million under notes payable arrangements
which we will repay for $15.7 million, including a prepayment penalty,
following the closing of this offering.

Year Ended December 31, 1996, 1997 and 1998
--------------------------------------------------------------------------------
1996     1997      1998
                                                   -------  -------  --------
Net cash provided by operating activities......... $ 4,753  $   917  $  2,719
Net cash provided by (used in) investing
 activities.......................................  (1,258)     576   (17,344)
Net cash provided by (used in) financing
 activities.......................................     414     (393)   20,928
Cash and equivalents at end of period.............   5,585    6,685    12,988
Working capital...................................   6,236   12,840    16,313
------------------------------------------------------------------------------
Since our inception through December 31, 1998, we have funded our operations
primarily through the sale of convertible preferred stock and cash generated
from operations. We received $388,000 and $5.0 million from the sale of
convertible preferred stock in 1996 and 1998, respectively. Net cash provided
by operating activities for 1996, 1997 and 1998 were $4.8 million, $917,000 and
$2.7 million, respectively. The decrease in net cash provided by operating
activities for 1997 compared to 1996 was primarily due to increased working
capital requirements associated with higher revenues as well as lower net
income in 1997. The increase in net cash provided by operating activities for
1998 compared to 1997 was primarily due to higher net income before considering
the write-off of acquired in-process research and development and also
increased accruals.

                                       34
Net cash provided by (used for) investing activities was $(1.3) million,
$576,000 and $(17.3) million for 1996, 1997 and 1998, respectively. Net cash
provided by investing activities for 1997 reflected proceeds from the sale of
short-term investments, net of purchases of property and equipment, while net
cash used in investing activities for 1998 represented the Communications
Systems Division acquisition, and purchases of property, plant and equipment.
The timing and amount of future capital expenditures will depend primarily on
our growth. Our principal commitments consist of leases for our office
facilities as well as other general obligations under our capital leases. We
anticipate that we will relocate to larger office facilities within the next
six months and we expect to incur additional capital expenditures of
approximately $500,000 per year. We currently have no other material
commitments for capital expenditures.

   As of June 30, 1999, we had $23.5 million in cash and cash equivalents and
short-term investments and working capital of $18.8 million. In December 1998,
we became obligated under notes payable in the aggregate principal amount of
$16.3 million in connection with the acquisition of Communications Systems
Division. We intend to repay these notes following the closing of this
offering. In connection with these notes payable, we issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be $1.4 million. We recorded the fair value of the
warrants as a deferred charge which will be amortized over the term of the
notes.

   We believe that the net proceeds from the offering, together with existing
sources of liquidity, will be sufficient to meet our working capital and
anticipated capital expenditure requirements for at least the next 12 months.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes, and may seek, even before such time, to
raise additional funds through public or private equity or debt financing or
from other sources. Additional financing may not be available at all, and if it
is available, such financing may not be obtainable on terms acceptable to us or
that are not dilutive to our stockholders.

Recent Accounting Pronouncements

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which we adopted in fiscal 1999. SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria has been met. The adoption did not have a
material impact on our financial position or results of operations.

   In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we adopted
in fiscal 1999. SOP No. 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were previously capitalized must be written off when SOP No. 98-5 is adopted.
The adoption did not have a material impact on our financial position or
results of operations.

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. We are subject to SFAS No. 133 for the
first quarter beginning January 1, 2001. Because we do not currently hold any
derivative instruments and do not engage in hedging activities, we do not
believe that the adoption of SFAS No. 133 will have a material impact on our
financial position or results of operations.

Qualitative and Quantitative Disclosures About Market and Interest Rate Risk

   We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, which is comprised solely of highly-rated, short-term investments.
We do not hold or issue derivative, derivative commodity instruments or other
financial

                                       35
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.

   We may be exposed to interest rate risks, as we may use additional financing
to fund additional acquisitions and fund other capital expenditures. The
interest rate that we may be able to obtain on financings will depend on market
conditions at that time and may differ from the rates we have secured in the
past.

Year 2000 Compliance

   We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of
our products are Year 2000 compliant. However, our products operate in complex
network environments and directly or indirectly interact with a number of other
hardware and software systems that we cannot adequately evaluate for Year 2000
compliance.

   We may face claims based on Year 2000 problems in other companies' products,
or issues arising from the integration of multiple products within an overall
system. We have not been a party to any litigation or arbitration proceeding
involving our products or services related to Year 2000 compliance issues. We
may in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.

   We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with significant suppliers to determine their Year 2000 readiness.
Based on our vendors' representations, we believe that the third-party hardware
and software we use is Year 2000 compliant.

   To date, we have not incurred any material costs directly associated with
Year 2000 compliance efforts, except for compensation expense associated with
salaried employees who have devoted some of their time to Year 2000 assessment
and remediation efforts. We do not expect the total cost of Year 2000 problems
to be material to our business, financial condition or operating results.
However, during the months prior to the century change, we will continue to
evaluate new versions of our products, new software and information systems
provided by third parties and any new infrastructure systems that we acquire,
to determine whether they are Year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant Year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could harm our business, financial
condition and operating results. We currently do not have any estimate of
potential costs related to potential Year 2000 problems. We currently have no
contingency plans to address the risks associated with unremediated Year 2000
problems.

                                       36
BUSINESS

Overview

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions. Our solutions enable Internet access and other
communications applications through existing analog and emerging broadband
networks. We have developed a proprietary software architecture that
substantially reduces the hardware, space and power requirements of
conventional hardware-based connectivity devices. Our software architecture is
also easily upgradeable, minimizing the risk of technological obsolescence. Our
communications products are designed to enable widespread Internet access and
other communication applications through, desktop PCs, notebook computers and
non-PC devices.

   We are a pioneer in developing host signal processing technology, a
proprietary set of algorithms that enables cost-effective software-based
digital signal processing solutions. Host signal processing technology utilizes
the computational and processing resources of a host central processing unit
rather than requiring additional special-purpose hardware. The reduction of
hardware components in our architecture reduces space requirements by 50% and
power requirements by 70% compared to conventional solutions. The first
implementation of our host signal processing technology was in a software
modem, or soft modem, in 1995. Through June 1999, we have shipped 11.3 million
soft modems. Based on our unit shipments in 1998, we believe we are the largest
worldwide producer of soft modems, representing 68% of all soft modems sold
that year, as estimated by Vision Quest 2000. We also believe that in 1998 we
sold 6% of all analog modems estimated by Dataquest to have been 59.1 million
units. Various OEMs, including Acer, Dell, emachines, Fujitsu and Sharp, have
integrated our soft modems into their products.

   We continue to innovate and expand upon our successful host signal
processing architecture so that we can provide high speed connectivity
solutions for broadband communications, including xDSL, cable and wireless
communications. These emerging opportunities include connectivity solutions for
client-side applications, enterprise servers, service providers and industrial
markets. We have extended our host signal processing architecture and have
developed a G.Lite solution, LiteSpeed, that enables downstream broadband data
transmission speeds of up to 1.5 Mbps and upstream broadband data transmission
speeds of 512 Kbps over existing copper telephone lines. We expect to begin
shipments of this product in the first half of 2000.

   We also have developed an embedded solution for non-PC devices that either
do not use a central processing unit or lack the excess processing capacity
necessary to support our host signal processing solution. These devices include
Internet appliances, such as set-top boxes and webphones, video game consoles
and remote monitoring devices. By offering reductions in size, cost and power
consumption, we also believe that this solution is ideal for service providers
and server-side applications such as single and multi-port remote access
servers and concentrators.

   We enhanced our position as an intellectual property leader with the
acquisition of our Communications Systems Division from General DataComm, Inc.
in the fourth quarter of 1998. As a result of this acquisition and our own
intellectual property development efforts, we hold 32 patents, a number of
which cover technology that is considered essential for International
Telecommunication Union, or ITU, standard communications solutions. We also
have 26 additional patent applications pending or filed.

Industry Overview

   In recent years, dramatic increases in business and consumer demand for
multimedia information, entertainment and voice and data communication have
resulted in a corresponding increase in demand for high speed remote access.
The accelerated growth of content-rich applications, which require high
bandwidth, has changed the nature of information networks. High-speed
connectivity is now a requirement for business, government, academic and home
environments. Businesses, ranging from large and small corporate enterprises to
home offices, are increasingly dependent upon data networks, not only for
communication within the office, but also to exchange information among
corporate sites, remote locations, telecommuters, business partners,

                                       37
suppliers and customers. Consumers are also increasingly accessing data
networks such as the Internet to communicate, collect and publish information
and conduct retail purchases.

   These market trends have resulted in a significant increase in the demand
for connectivity devices. International Data Corporation estimates that by
2003, the number of Internet connectivity devices will grow to over 722
million.

 Analog Connectivity Solutions

   Although there has been significant publicity given to broadband
connectivity, the majority of Internet access is still through dial-up, or
analog, connections. Analog technology converts digital data into an analog
signal for transmission over telephone networks, and executes the reverse
analog-to-digital signal conversion to enable the host device to receive the
transmitted data. Analog modems, which, according to Dataquest, comprised 90%
of the modem market in 1998, are primarily utilized by PC devices. Dataquest
estimates that 59.1 million analog modems were sold in 1998, and expects this
number to reach 74.8 million units in 2001. Although the number of analog
modems is expected to grow in the near future, new technologies have emerged to
address the volume of bandwidth intensive data and demand for enhanced
multimedia capabilities.

 Broadband Connectivity Solutions

   The data transmission constraints of copper telephone wires have led the
communications industry to focus on broadband communications. In order to
address the demand for high-speed connectivity, telecommunications service
providers have developed and deployed cost-effective technologies in their
networks. However, the lack of ubiquitous low-cost, high-bandwidth connectivity
from the backbone network to the customer premises has been the underlying
issue preventing the majority of the market from taking advantage of the array
of high-bandwidth network services. Although the broadband access market is
underdeveloped, its potential size has attracted a high level of attention.
Telephone, cable and satellite companies each have different strategies and
capabilities for providing this broadband connectivity to the Internet. Each
has its advantages based on price, performance and availability.

   Digital Subscriber Line.  DSL utilizes the ubiquitous, existing public
switched telephone network, or PSTN, infrastructure, without the need for
expensive additions and upgrades. DSL technologies dramatically increase the
data transmission capacity of standard telephone lines and are expected to
enable a wide range of new services including high speed Internet access and
digital television. Most of the businesses and homes today are connected to the
PSTN by twisted-pair copper wire. It is estimated that there are nearly 700
million copper wire access lines in existence today worldwide, and that more
than 95% consist of a single twisted-pair copper wire.

   A wide array of DSL technologies known as xDSL products are rapidly
emerging. The "x" in xDSL represents the various kinds of digital subscriber
line technologies. Each type of DSL has distinguishing advantages and
disadvantages, depending on a variety of bandwidth and deployment features
suitable for different applications. DSL is either symmetric, which delivers
the same data rate both downstream and upstream, or asymmetric, which delivers
faster data rates downstream than upstream. The other distinguishing feature is
the data rate itself. DSL technologies allow for the transmission of data at
speeds ranging from 128 Kbps to 52 Mbps depending on the distance between the
central office and the subscriber. Common types of DSL technologies include:

     ADSL. Asymmetric digital subscriber line, or ADSL, allows more bandwidth
  downstream than upstream. This asymmetry, combined with "always-on" access,
  makes ADSL ideal for Internet surfing, video-on-demand and remote local
  area network access. Users of these applications typically download much
  more information than they send. In order to implement an ADSL solution, a
  splitter, which is a device that separates the voice signal from the data
  signal, must be installed both at the head-end and at the customer's
  premises. This process of installing splitters for each subscriber means a
  service truck needs to be sent to each customer site in order to initiate
  service. This process is expensive and time consuming

                                       38
and ultimately slows the overall service deployment. ADSL provides speeds
  up to 8 Mbps downstream and up to 1 Mbps upstream, depending on the line
  conditions and the length of the loop.

     G.Lite. G.Lite is a lower-speed version of ADSL that will eliminate the
  need for the service provider to install a splitter at the customer's
  premises. G.Lite allows for a downstream data transmission rate of up to
  1.5 Mbps and an upstream data transmission rate of up to 512 Kbps, and is
  expected to be as simple as the "plug-and-play" nature of traditional,
  analog dial-up modems.

     G.SHDSL. Single-pair HDSL, or G.SHDSL, requires only a single copper
  twisted-pair and has a maximum loop length of 10,000 feet from the
  telephone company's central office. G.SHDSL can offer symmetrical data
  transmission rates of up to 1.544 Mbps. Since G.SHDSL uses only one copper
  twisted-pair, the capacity of existing infrastructure is greatly increased.

     VDSL. Very-high-bit-rate digital subscriber line, or VDSL, technology is
  the fastest DSL technology, supporting a maximum downstream rate of 52 Mbps
  and an upstream rate of 10 Mbps over a single copper twisted-pair wire. The
  one limitation of VDSL is that the maximum loop length is only between
  1,000 and 4,500 feet from the telephone company's central office.

   Wireless. The main alternatives in wireless broadband access are wireless
and broadband satellite. Wireless provides advantages over wireline, the
primary benefits being speed and ease of installation. The strength of wireless
is that it can quickly provide high-speed Internet access within a 10, 20 or 35
mile radius depending on the frequency band used. In the next several years,
wireless is expected to help unlock broadband competition thereby enabling new
operators to bypass existing wireline networks and deliver local and long
distance telephone service and Internet access services.

   Cable Modems. Designed to provide broadband Internet access, cable modems
are targeted primarily at the consumer market. Cable lines pass by more than
100 million North American homes, but only 20% of those homes can now get cable
modem service. Cable lines offer downstream transmission speeds of up to 36
Mbps and upstream transmission speeds of up to 10 Mbps. In order to fully
realize the benefits of two way communications, cable operators must upgrade
their networks to improve the provisioning of existing cable services and to
support high-speed data and other new services.

 Non-PC Connectivity

   While existing Internet connectivity devices are primarily PC-based,
development of enabling technologies and the growth in consumer dependence are
spurring the deployment of non-PC devices. These devices include Internet
appliances such as set-top boxes and webphones, video game consoles and remote
monitoring devices. International Data Corporation predicts that as many as 42%
of all Internet access devices will be in the form of non-PC devices by 2001.
However, it is difficult to integrate modem functionality into these compact
devices due to the limited availability of power and space.

 Server-Side

   As the number of connectivity devices increases, service providers will be
required to increase the number of server-side access ports to ensure
reliability and quality service for their customers. Presently, communications
equipment providers are limited to using either expensive multiport chips or a
single modem port per chip. Internet service providers and other service
providers who locate their server-side equipment at the telephone companies'
central offices do not have the space or power available to accommodate the
expected growth in demand for client-side access. Service providers are
demanding connectivity solutions that increase the density of modem ports per
chip while reducing cost, space and power requirements.

 Evolution from Hardware to Software-based Connectivity Solutions

   The rapid development of emerging technologies for broadband access combined
with changing industry standards and protocols is driving manufacturers to turn
towards software-based connectivity solutions as

                                       39
opposed to conventional hardware connectivity solutions. Further, trends such
as the acceptance of alternative access devices, the significant increase in
available processing power, cost reduction pressures and space and power
constraints have permitted software-based products to emerge as viable and
cost-effective alternatives.

   One of the primary reasons that PC manufacturers have been better able to
utilize software-based solutions has been the dramatic increase in central
processing unit processing power. Prior to the introduction of Intel's 266 MHz
Pentium II processor, most PCs lacked the processing power required to
effectively utilize software-based connectivity solutions. By 1998, a majority
of the PCs shipped were equipped with CPUs equivalent to or exceeding the
processing power of Intel's 350 MHz Pentium II. This significant increase in
processing power is expected to continue into the future as demonstrated by
Intel's announcement of its intention to deliver 1.0 GHz processors by 2001.
With microprocessor performance continuing to rapidly increase, technologies
that support software algorithms running off the central processing unit,
rather than on extraneous hardware, will become increasingly valuable and
feasible.

   Another significant trend driving the growth of software-based solutions is
the increasing pressure on OEMs to reduce costs. With the market acceptance of
low-cost, or sub-$1,000, PCs and a general decline in PC selling prices, OEMs
are demanding further price reductions, from suppliers of central processing
units and motherboard manufacturers. As a result, central processing unit
suppliers and motherboard manufacturers are increasingly employing software-
based solutions as a cost-effective way to meet these demands. This response
eliminates additional, special purpose hardware and replaces it with integrated
software. As a result, Cahners In-Stat estimates analog soft-modem annual sales
will grow from five million units in 1998 to over 40 million units by 2000.

   Software-based solutions are also increasingly utilized to address the power
and space requirements of non-PC devices. The limited availability of power and
space in these devices has hindered the successful integration of hardware-
based modem functionality. Because soft modems shift processing capacity into
software and, thus, significantly reduce power and space constraints, they are
increasingly integrated as a critical part in the development of the non-PC
device market.

PC-Tel Solution

   We are a leading developer and supplier of cost-effective software-based
connectivity solutions that address Internet access and other communications
through existing analog and emerging broadband networks. These solutions are
based on our proprietary software algorithms which enable the movement of core
signal processing capabilities out of hardware and into software. Our host
signal processing architecture allows us to develop connectivity solutions that
provide significant benefits over traditional hardware-based solutions,
including:

     Extensibility and Scaleability. Our host signal processing architecture
  allows us to quickly and cost-effectively develop new products to
  capitalize on rapidly growing market segments. We believe that we can use
  our intellectual property portfolio to readily adapt to the speed and
  design requirements of additional emerging connectivity technologies. For
  example, in response to growing market acceptance, we have developed a host
  signal processing architecture solution for G.Lite, which we call
  LiteSpeed, that enables downstream data transmission speeds of up to 1.5
  Mbps and upstream data transmission speeds of up to 512 Kbps over existing
  copper telephone lines. As the broadband market develops, we believe we can
  capitalize on our proprietary technology to continue the cost-effective
  migration from hardware into software.

     Cost Effectiveness. By shifting the composition of connectivity devices
  from hardware into software, we are able to significantly reduce the
  hardware required in conventional connectivity solutions. Our proprietary
  software-based solution eliminates extraneous hardware and reduces our
  customers' manufacturing costs, while still offering superior or comparable
  performance. For example, our host signal processing technology eliminates
  as much as 40% of the hardware used in conventional connectivity solutions.

                                       40
Upgradeability, Adaptability and Flexibility. The software component of
  our architecture is upgradeable, minimizing the risk of technological
  obsolescence. By embedding core functionality in software, performance
  upgrades and the adaptation to new standards and protocols can be
  accomplished quickly and easily through software downloads rather than
  through costly replacements of existing hardware. For example, customers
  who purchased our 33.6K modems are able to easily upgrade the product to an
  ITU-compliant 56K modem through a simple software download. Ease of
  upgradeability is of considerable value in the rapidly changing
  communications marketplace and a substantial competitive advantage over
  conventional connectivity solutions. In addition, our LiteSpeed DSL
  technology will also provide a similar capability in offering an end-user
  the ability to easily upgrade to higher bandwidth services. Further, our
  G.Lite technology is completely compatible with analog transmission
  networks, offering the user complete flexibility in choosing access
  technology and transmission speed. By providing connectivity solutions that
  can be easily adapted to new standards and protocols, we reduce
  interoperability obstacles, which simplifies purchasing decisions and
  accelerates deployment times for OEMs.

     Reduced Space and Power Requirements. The reduction of hardware
  components enabled by our host signal processing architecture provides the
  dual benefits of 50% reduced space and 70% lower power requirements
  compared to conventional solutions. These benefits enable connectivity
  capabilities in non-PC devices that are difficult to implement with
  conventional hardware-based solutions. In addition, the efficiency of our
  proprietary algorithms increases the modem port density per chip in server-
  side devices, reducing power requirements and heat generation.

PC-Tel Strategy

   PC-Tel's goal is to be the leading provider of cost-effective software-based
connectivity solutions that enable Internet access and other communication
applications through existing analog and emerging broadband networks. Key
elements of our strategy include:

     Target Emerging High-Growth Communications Technologies. We identify
  emerging high-growth communications technologies and develop innovative
  software-based connectivity solutions to capitalize on these new market
  opportunities as they gain acceptance. Our software-based technology is
  extensible, allowing us to quickly and cost-effectively develop new
  applications. We have recently leveraged our core technologies to design
  and develop a fully functional software-based G.Lite solution, LiteSpeed.
  In addition, we are currently developing implementation options for
  extending HSP technology into the emerging wireless data network market,
  which includes devices that offer high speed access to Internet connections
  as well as wireless connections to computing on Internet devices within
  homes and businesses. We believe that our communications technology will
  enable us to develop significant applications in the broadband modem
  markets.

     Continue To Enhance Software-Based Solutions. We are committed to
  enhancing the scope of our host signal processing technology to further
  reduce the number of hardware components in our software-based solutions.
  We believe that our success in minimizing the hardware content of our soft
  modems will continue to enhance our ability to address emerging markets in
  non-PC devices that require smaller designs and reduced power consumption.
  This reduction of hardware content provides numerous benefits for our OEM
  customers, including:

       . reducing costs,

       . decreasing board space,

       . decreasing inventory,

       . minimizing technological obsolescence,

       . accelerating time to market, and

       . streamlining production flow.

                                       41
In addition, because of the software-based functionality of our products, we
   have developed a core expertise in ensuring the compatibility of our host
   signal processing products with multiple operating systems including Linux,
   OS/2, Windows 3.1, 95, 98, 2000, NT and CE, and VXWorks.

     Enable Migration to Emerging Communications Technologies. We aim to
  develop innovative products based on our host signal processing
  architecture that enable existing platforms to migrate to emerging
  broadband communications technologies. The current level of processing
  power available in PCs and non-PC devices does not support the amount of
  signal processing calculations required for higher speed broadband
  applications without overloading the central processing unit. For these
  applications, we have developed an accelerated host signal processing
  architecture that adds low-cost, application-specific hardware to
  efficiently handle a portion of the signal processing load. Accelerated
  host signal processing architecture enables us to deliver an ideal platform
  from which to migrate to a full host signal processing solution for next
  generation devices.

     Extend Our Intellectual Property Leadership Position and Establish
  Industry Standards. We are actively extending our intellectual property
  position through rapid internal development, strategic acquisitions and
  licensing of innovative communications technology. We hold 32 patents, with
  an additional 26 patents pending. We are actively pursuing the filing of
  additional patent applications to cover our intellectual property
  advancements. We believe that these intellectual property advancements will
  optimize the performance, efficiency and cost of our software-based
  connectivity solutions. Our intellectual property leadership position
  allows us to establish industry standards so that we can be well positioned
  to implement leading-edge second generation connectivity solutions in
  technologies in advance of our competitors.

     License Proprietary Digital Signal Processing Solutions. We are
  developing and intend to license reference designs for digital signal
  processing communications applications in non-PC devices. By using low cost
  digital signal processing chips coupled with our software-based technology,
  we are providing enhanced throughput and capacity per chip. In addition,
  because our digital signal processing algorithms are highly efficient, we
  can enable cost savings by reducing space requirements, lowering power
  consumption and port density for remote access.

Products

 Current Products

   In the fourth quarter of 1998, we began shipping our newest product, the
MicroModem. This product integrates our host signal processing technology with
a micro form-factor DAA. Our patented MicroModem features reduce power and size
requirements and replace approximately 90 discrete hardware components with two
mini DAA chips. The MicroModem has recently been certified as being compatible
with the telecommunications standards of most industrialized countries,
allowing OEMs to accomplish seamless global interoperability.

   As illustrated in Figure 1 below, in contrast to the conventional hardware
modem, our host signal processing soft architecture replaces the memory chip,
digital signal processing chip, universal asynchronous receiver and
transmitter, or UART, and controller chip with customized software that draws
upon the excess capacity of the host central processing unit. A single
proprietary Application Specific Integrated Circuit, or ASIC, acts as interface
between the analog and digital data. We have further reduced the cost, size and
design effort required for standardized worldwide PC modem use by using an
integrated Data Access Arrangement, or DAA, and a coder/decoder, or CODEC. This
integration reduces the number of components in a conventional DAA by
approximately 40%.

                                       42
FIGURE 1--CONVENTIONAL DSP vs. HSP MODEM ARCHITECTURE

 Schematic with two boxes. Caption is "Modem Evolution". First box describes a
  traditional hardware modem, second box describes PCtel's soft modem. Bottom
  text caption "CODEC--performs analog-to-digital and digital-to-analog signal
 conversions", "DAA--Data Access Arrangement interfaces and protects the modem
  with the telecommunications network.", "CONTROLLER--controls data and error
    compression function.", "DATAPUMP--performs modulation and demodulation
    calculations.", "Memory--handles the data buffering.", "UART--Universal
    Asynchronous Receive Transmit synchronizes incoming and outgoing data.",
  "INTEGRATED SILICON DAA and CODEC--Direct Access Arrangement interfaces and
protects the modem with the telecommunications network while the CODEC performs
              analog-to-digital and digital-to-analog conversion."

                                       43
Next Generation Products

   We are currently focusing our design and development efforts in the
following application areas:
Next Generation
        Technology                         Product Description
-------------------------------------------------------------------------------
G.Lite                 We have developed a G.Lite solution, LiteSpeed, to
                         address the demand for DSL connectivity. LiteSpeed
                         uses less power and space and costs less than
                         conventional solutions for G.Lite. We expect to
                         commercially release this product in the first half of
                         2000.
-------------------------------------------------------------------------------
  USB External Modem     We have developed our first external modem, which
                         connects through the Universal Serial Bus, or USB,
                         interface. The USB is an open specification developed
                         to advance the use of peripheral devices with personal
                         computers. Major PC manufacturers now ship machines
                         with USB enabled hardware predominantly to Europe due
                         to the continent's differing telephony standards. We
                         believe that our external modem will allow us to
                         capture significant revenue opportunities in the
                         peripheral device market.
-------------------------------------------------------------------------------
  Home Networking        The number of private homes with multiple PCs or
                         multiple devices, such as printers, scanners and
                         notebook computers, has reached a critical mass,
                         driving consumer demand for home networking and shared
                         Internet access. In order to capitalize on this
                         emerging market opportunity, we are working with a
                         silicon supplier to include our soft modem on a
                         processor which will deliver home networking
                         functionality.
-------------------------------------------------------------------------------
  Industrial Modem       We are developing a small hardware platform for the
                         non-PC market. This platform uses one low cost digital
                         signal processor and our software performs both the
                         controller and the digital signal processing
                         functions. The v.34 version of our industrial modem is
                         currently being tested.
-------------------------------------------------------------------------------
  Remote Access Solution We are developing a reference design to deliver the
                         functionality of six modem ports per digital signal
                         processing chip in a server-side modem solution. Our
                         innovative design would reduce power, cost and space
                         requirements to nearly one-sixth of those used today
                         by providing alternatives to expensive chips or a
                         single modem port per chip. We intend to license our
                         design to the leading companies in the growing remote
                         access solution marketplace, the first version which
                         will support three modems per DSP and is currently
                         being tested.
44
Emerging Product Opportunities

   In addition to our products currently under development, we continue to
explore emerging opportunities in the area of broadband communications.
Emerging
     Opportunities                       Product Description
-------------------------------------------------------------------------------
Wireless
-------------------------------------------------------------------------------
   Wireless Protocols Our HSP technology can be applied to various wireless
                      standards. We expect that the wireless solutions which
                      can take advantage of HSP architecture are optimal for
                      customers with capacity requirements between 19.2 Kbps
                      today, and up to 10 Mbps in the near future. We are
                      currently developing software enhancements to our
                      products in order to enable their use in wireless
                      environments with speeds of up to 384 Kbps by the end of
                      2000.
-------------------------------------------------------------------------------
  xDSL
-------------------------------------------------------------------------------
   ADSL               We expect to begin developing a G.DMT modem in 2000 which
   (G.DMT)            will provide downstream transmission speeds of up to 512
                      Kbps and upstream transmission speeds of up to 8 Mbps.
                      G.DMT is a full-rate ADSL standard and is being endorsed
                      by the ITU as a worldwide standard.
-------------------------------------------------------------------------------
   G.SHDSL            G.SHDSL modems will offer both downstream and upstream
                      transmission speeds of up to 1.5 Mbps. We have initiated
                      design and simulation studies for this product. These
                      efforts will position us to pursue the G.SHDSL
                      opportunity as it becomes widely adopted.
-------------------------------------------------------------------------------
   VDSL               We intend to develop a VDSL modem once VDSL technologies
                      become more fully deployed. We expect that this
                      technology will provide downstream transmission speeds of
                      up to 52 Mbps and upstream transmission speeds of up to
                      10 Mbps.
-------------------------------------------------------------------------------
  Server Side
-------------------------------------------------------------------------------
   VPN Controller     Our VPN Controller project is expected to enhance HIDRA
                      by integrating additional functionality to support
                      virtual private networks, or VPNs. The key to maximizing
                      the value of a VPN is the ability for companies to
                      upgrade their VPNs as their business needs change.
-------------------------------------------------------------------------------
   VOIP               The Voice Over Internet Protocol, or VOIP, project is
                      expected to enhance the HIDRA solution by integrating
                      voice capability into the HIDRA infrastructure such that
                      HIDRA will be able to provide VOIP gateway functionality.
                      HIDRA will implement voice compression and packetization
                      along with the signaling and addressing gateway functions
                      required for a complete VOIP solution.
-------------------------------------------------------------------------------
  Cable
-------------------------------------------------------------------------------
   Cable Modem        Cable modems connect PCs to the cable network and offer
                      downstream transmission speeds of up to 36 Mbps and
                      upstream transmission speeds of up to 10 Mbps. We are
                      researching cable technology to follow advancements and
                      will undertake an HSP cable modem development if and when
                      our studies show a significant advantage over existing
                      technologies.
45
Intellectual Property Licensing

   We also offer our software-based solutions through intellectual property
licensing and product royalty arrangements. Current licensees of our
intellectual property, principally ITU-standard technology, include modem and
semiconductor manufacturers, such as Conexant, Texas Instruments and U.S.
Robotics, and RISC processor manufacturers including Hitachi, Intel and NEC.

Customers

   We sell our products directly and indirectly to the following principal
distributors and customers:
Embedded
                 Modem Board    Motherboard       PC OEM    Systems     Systems
  Distributors   Manufacturers  Manufacturers     Companies Integrators Integrators
Golden Way     Amigo          Asus              Acer      CTX         Casio
  InnoMicro      Askey Computer Chaintech         Dell      Everex      Fujitsu
  Silicon
   Application   Aztech         FIC               emachines MicroCenter Intel
   Corporation   BTC            Shuttle           Fujitsu   Mitsuba     NEC
                 E-Tech         Talent Trade Asia Mitac     Tiny        Yamaha
                 Zoltrix                          Sharp
                                                  TriGem
                                                  TwinHead
-----------------------------------------------------------------------------------
For the six months ended June 30, 1999, revenues derived from sales to
customers Talent Trade Asia, TriGem and Silicon Application Corporation
accounted for approximately 42%, 20%, and 10%, respectively, of product sales.
For the year ended December 31, 1998, revenues derived from sales to customers
Silicon Application Corporation, BTC, Askey Computer and Zoltrix accounted for
15%, 13%, 12% and 12%, respectively, of our product sales. No other customers
represented more than 10% of our product sales for these periods.

Sales, Marketing and Support

   We sell our products directly to modem board and motherboard manufacturers
who assemble and distribute the end product both directly to OEMs and systems
integrators and indirectly through distributors. In the United States, we
primarily sell our products through direct sales. In Taiwan, we sell our
products through distributors such as Golden Way and Silicon Application
Corporation, and in Japan, through distributors such as InnoMicro. In many
cases, modems are manufactured by third parties on behalf of the final brand
name OEM. We focus on developing long-term customer relationships with our
direct and indirect customers. In many cases, our indirect OEM customers
specify that our products be included on the modem boards or motherboards that
they purchase from board manufacturers, and we sell our products directly to
the board manufacturers for resale to our indirect OEM customers.

   We employ a direct sales force with a thorough level of technical expertise,
product background and industry knowledge. Our sales force includes a highly
trained team of application engineers to assist customers in designing, testing
and qualifying system designs that incorporate our products. Our sales force
also supports the sales efforts of our distributors. We believe the depth and
quality of our sales support team is critical to:

  . achieving design wins,

  . improving customers' time to market,

  . maintaining a high level of customer satisfaction, and

  . engendering customer loyalty for our next generation of products.

   Our marketing strategy is focused on further building market awareness and
acceptance of our new products. We market our products directly to both
prospective and existing customers. Additionally, we undertake broad scale
marketing programs in conjunction with key local and global partners. Our
marketing organization also provides a wide range of programs, materials and
events to support the sales organization.

                                       46
As of June 30, 1999, we employed 54 individuals in sales, marketing and
support and maintained regional sales support operations in Tokyo, Japan,
Taipei, Taiwan and Paris, France.

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. As an example of our
commitment to technical leadership, we have developed expertise in the
following major areas:

  . Digital Signal Processing Algorithms. This expertise enables us to
    recognize ongoing revenue from the licensing of our reference designs, as
    well as further optimization for our software digital signal processing
    implementations.

  . Software Digital Signal Processing. This expertise has allowed us to
    provide the modem data pump functionality in the form of software. An
    expensive and power consuming digital signal processing chip is no longer
    needed.

  . Modem Protocol. This expertise has enabled us to develop software
    containing the necessary error correction and data compression protocols
    such as v.42, v.42bis, MNP 2-5, Soft ATM and SAR.

  . Telecommunications Infrastructure Interface. This expertise has allowed
    us to develop the software connection to the public telephone network
    through relays and the DAA. This portion of the software also performs
    the functionality of the UART, controller and memory while eliminating
    significant amounts of hardware.

  . Microsoft Windows Device Drivers. We have developed software expertise in
    working within the Windows environment. The interrupt-driven architecture
    of Windows operating systems presents many difficulties for software-
    based connectivity solutions, including latency and other technical
    issues. We have patented these solutions.

  . Central Processing Units and Operating Systems. We have demonstrated our
    expertise in porting our soft modem solution to all Windows operating
    systems, including Windows NT and Windows CE, in addition to other
    operating systems, such as OS/2, VXWorks and Linux. We have also ported
    our technology to various high performance processor platforms, such as
    those from Advanced Micro Devices, Cyrix, ARM, Intel StrongARM and MIPS.
    Expertise in these systems, which are utilized in embedded systems
    applications, allows us to integrate our technology into devices such as
    Internet appliances.

  . Host Signal Processing Architecture. We have leveraged our leadership in
    host signal processing and extended the architecture to include
    innovations such as accelerated host signal processing, which will be
    used in our future G.Lite product. This modification delivers maximum
    software content along with any required application-specific hardware to
    deliver the most cost-effective solution in the market.

   These multiple areas of expertise represent distinct disciplines which are
combined in one unique cross-functional development team. Communications
Systems Division, which we acquired in December 1998, provides us with
additional areas of expertise, including the experience of successfully
introducing intellectual property for inclusion into ITU standards. We believe
these technical and organizational skills provide us significant competitive
advantages. As of June 30, 1999, we employed 58 employees in research and
development, 36 of whom have advanced degrees, including nine who have earned
PhDs.

Manufacturing

   We outsource the manufacturing of our ASIC, CODEC and DAA chips to
independent foundries in order to avoid significant fixed overhead, staffing
and capital requirements associated with semiconductor fabrication.

                                       47
Our primary chipset suppliers are Delta Integration, Kawasaki/LSI, ST Micro
Electronics, Silicon Labs and Taiwan Semiconductor Manufacturing Corporation.
The major operations of each of these manufacturers meet ISO-9001 international
manufacturing standards. Our DAA chips are currently purchased from Silicon
Labs on a purchase order basis. We have a limited guaranteed supply of DAA
chips through a long-term contract arrangement with Silicon Labs. We have no
guaranteed supply or long-term contract agreements with any other of our
suppliers.

Licenses, Patents and Trademarks

   We seek to protect our technology through a combination of patents,
copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. We hold a total of 32 patents and also
have 26 additional patent applications pending or filed. We believe that our
patent portfolio is one of the largest in the analog modem market. To
supplement our proprietary technology, we have licensed rights to use patents
held by third parties.

   Our industry is characterized by frequent litigation regarding patent and
other intellectual property rights. We have been sued by Motorola, Inc. and by
ESS Technology on patent related claims. See "Business--Legal Proceedings" and
"Risk Factors--We have been sued by Motorola for patent infringement. If this
litigation resolves unfavorably to us, our business is likely to be harmed,"
and "--Other third parties may also assert that our products infringe their
intellectual property rights."

   In addition, there are numerous risks that result from our reliance on our
proprietary technology in the conduct of our business. See "Risk Factors--We
rely heavily on our intellectual property rights which offer only limited
protection against potential infringers. If we cannot protect these rights,
this could adversely affect our business."

Competition

   The connectivity device market is intensely competitive. Our current
competitors include 3Com, Conexant, ESS Technology, Lucent Technologies and
Motorola. Motorola introduced soft modems in the third quarter of 1998 and
Conexant introduced soft modems in the fourth quarter of 1998. We expect
competition to increase in the future as current competitors enhance their
product offerings, new suppliers enter the connectivity device market, new
communication technologies are introduced and additional networks are deployed.

   We may in the future also face competition from other suppliers of products
based on host signal processing technology or new or emerging communication
technologies, which may render our existing or future products obsolete or
otherwise unmarketable. We believe that these competitors may include Analog
Devices, Alcatel, Aware, Broadcom, Com21, Efficient Networks, Orckit, Terayon
Communications and Texas Instruments.

   Compared to us, many of our competitors, including those described above,
have:

  . longer operating histories with more experience in designing and selling
    connectivity device products and services,

  . greater presence in our connectivity device markets, which can provide an
    immediate advantage in marketing new product introductions,

  . greater name recognition, which can facilitate customer acceptance of new
    products and technologies,

  . access to a larger customer base,

  . substantially greater financial resources, which could enable a
    competitor to significantly reduce the price of new products below
    prevailing market rates to capture market share,

  . significantly greater research and development and other technical
    resources, which may enable a competitor to respond more quickly to new
    or emerging technologies and changes in customer requirements, or to
    introduce new products that are superior to our products, and

                                       48
. significantly greater sales and marketing resources to devote to the
    promotion, sale and support of competitive products which could be
    deployed to overcome business challenges.

   We believe that the principal competitive factors required by users and
customers in the connectivity device market include compatibility with industry
standards, price, functionality, ease of use and customer service and support.
We believe that our products currently compete favorably with respect to these
factors.

Employees

   As of June 30, 1999, we employed 125 people full-time, including 54 in sales
and marketing, 58 in research and development, and 13 in general and
administrative functions. Over 50% of our employees have advanced degrees, with
10 having earned doctoral level degrees. None of our employees is represented
by a labor union. We consider our employee relations to be good.

Properties

   Our administrative offices are located in San Jose, California, where we
currently lease approximately 32,000 square feet under a lease that expires in
2001. Our Communications System Division is located in Waterbury, Connecticut,
where we currently lease approximately 6,000 square feet under a lease that
expires in 2001. We also have a lease in Taipei, Taiwan for approximately 3,000
square feet which expires in 2002 and a lease in Tokyo, Japan for approximately
700 square feet which expires this June. We anticipate that we will relocate to
larger office facilities within the next six months.

Legal Proceedings

   We have been sued by Motorola, Inc., for patent infringement in an action
filed in the fall of 1998. See "Risk Factors--We have been sued by Motorola for
patent infringement. If this litigation resolves unfavorably to us, our
business is likely to be harmed."

   In April 1999, ESS Technology Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California, alleging that we failed
to grant licenses for some of our ITU-related patents to ESS on fair,
reasonable and non-discriminatory terms. ESS's complaint includes claims based
on antitrust law, patent misuse, equitable estoppel, breach of contract
mandating specific performance and unfair competition. In its complaint, ESS
also seeks a declaration that some of our ITU-related patents are unenforceable
and that we should be ordered by the court to grant a license to ESS on fair,
reasonable and non-discriminatory terms.

   Due to the nature of litigation generally and because the lawsuit brought by
ESS is at an early stage, we cannot ascertain the outcome of the final
resolution of the lawsuit, the availability of injunctive relief or other
equitable remedies, or estimate the total expenses, possible damages or
settlement value, if any, that we may ultimately incur in connection with ESS's
suit. This litigation could be time consuming and costly, and we will not
necessarily prevail given the inherent uncertainties of litigation. However, we
believe that we have valid defenses to this litigation, including the fact that
other companies license these ITU-related patents from us on the same terms
that are being challenged by ESS. We believe that it is unlikely this
litigation will have a material adverse effect on our financial condition or
results of operations. We are vigorously contesting, and intend to continue to
vigorously contest, all of ESS's claims. See "Risk Factors--Other third parties
may also assert that our products infringe their intellectual property rights."

                                       49
MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to the executive
officers and directors of PC-Tel as of August 2, 1999.
Name                      Age Position
----                      --- --------
Peter Chen...............  44 Chief Executive Officer, Chairman of the Board
William F. Roach.........  55 President and Chief Operating Officer
Andrew D. Wahl...........  50 Vice President, Finance, Chief Financial Officer
Steve Manuel.............  34 Vice President, Marketing
Frank Reo................  54 Vice President, Business Development
William Wen-Liang Hsu....  44 Vice President, Engineering, Director
Han Yeh..................  45 Vice President, Technology, Director
Derek S. Obata...........  41 Vice President, Sales
Richard C.
 Alberding(1)(2).........  68 Director
Martin H. Singer(2)......  48 Director
Wen C. Ko................  50 Director
Giacomo Marini(1)........  47 Director
Mike Min-Chu Chen........  50 Director
--------
(1)Member of audit committee
(2)Member of compensation committee

   Mr. Peter Chen co-founded PC-Tel in March 1994 and has served as Chief
Executive Officer and Chairman of the Board, since PC-Tel's inception. Mr. Chen
is also the cousin of one of our directors, Dr. Mike Min-Chu Chen. Mr. Chen has
over 14 years experience in data communications and modem development at
Digicom Systems, Inc. (a company which he co-founded), Cermetek, Inc., and
Anderson-Jacobson, Inc., all data communications companies. Mr. Chen has a
Bachelor of Science in Control Engineering from National Chiao-Tung University,
Taiwan, and holds a Master of Science in Electrical Engineering from Arizona
State University.

   Mr. William F. Roach has been the President and the Chief Operations Officer
of PC-Tel since August 1999. From January 1997 until joining PC-Tel, Mr. Roach
served as a Senior Vice President, Worldwide Sales and Marketing for Maxtor
Corporation, a data storage company, from November 1996 to January 1997 as
Executive Vice President for Worldwide Marketing for Wyle Electronics, an
electronic component distribution company, and from 1989 to November 1996, as
Executive Vice President, Worldwide Sales, for Quantum Corporation, a data
storage company. Mr. Roach received a Bachelor of Science in Industrial
Economics from Purdue University.

   Mr. Andrew D. Wahl has been the Vice President of Finance and Chief
Financial Officer of PC-Tel since January 1997. From March 1995 to April 1996,
Mr. Wahl served as Chief Financial Officer and, from April 1996 to January
1997, as President and Chief Executive Officer for Designs for Education, Inc.,
an apparel company. From 1993 to March 1995, Mr. Wahl served as Chief Financial
and Operations Officer for StarBase Corporation, an object-oriented database
developer. Prior to that, Mr. Wahl held various senior positions in general
management, finance and management consulting. Mr. Wahl received a Bachelor of
Arts in Political Science from Villanova University and a Master in Business
Administration in Accounting from Rutgers University.

   Mr. Steve Manuel has been Vice President of Marketing of PC-Tel since
September 1997. Prior to that, Mr. Manuel served as Vice President of Sales
between January 1997 and September 1997. From March 1992 to June 1995 he worked
at Logitech, Inc., a computer input devices company, where he served as the
Strategic OEM Account Development Manager and the Director of OEM Sales and
Marketing for the Imaging Division from June 1995 to January 1997. At Logitech,
Inc., Mr. Manuel was initially responsible for worldwide account

                                       50
management for numerous OEM customers, and later worldwide sales and sales
strategy development and implementation. Mr. Manuel received an Associate of
Science from Control Data Institute.

   Mr. Frank V. Reo has been PC-Tel's Vice President of Business Development
since February 1998. From February 1993 to February 1998, Mr. Reo served
initially as Manager and later as Director of Business Development for the
modem group at Cirrus Logic, a semiconductor company. In this position, he was
responsible for product marketing, business development and applications
engineering. Mr. Reo is a graduate in electronic engineering from Philco
Technical Institute, Philadelphia.

   Mr. William Wen-Liang Hsu co-founded PC-Tel and has served as the Vice
President of Engineering and a director since its inception in March 1994. From
August 1988 to March 1994, Mr. Hsu served in various positions with Sierra
Semiconductor, a semiconductor company, including Engineering Director. At
Sierra Semiconductor, Mr. Hsu managed a development group, and was responsible
for digital signal processing firmware development for modem products with
data, fax and voice features. Mr. Hsu received a Bachelor of Science in
Communication Engineering from National Chiao-Tung University, Taiwan, and a
Master of Science in Computer Engineering from Oregon State University.

   Mr. Han Yeh co-founded PC-Tel and has served as the Vice President of
Technology and a director since its inception in March 1994. Mr. Yeh was a
staff engineer at Sierra Semiconductor, a semiconductor company, from September
1993 to March 1994. Mr. Yeh holds a Bachelor of Science in Control Engineering
from National Chiao-Tung University, Taiwan, and a Master of Science in
Electrical Engineering from New York State University at Stony Brook.

   Mr. Derek S. Obata has been Vice President of Sales for PC-Tel since April
1998. From 1997 until joining PC-Tel, Mr. Obata was an independent consultant
providing strategic planning, business development, marketing and sales support
to emerging high technology companies. Mr. Obata served from 1996 to 1998 as
Vice President, Worldwide Sales for Network Peripherals Incorporated, a
networking company, and from 1992 to 1995 as Vice President, Worldwide Sales at
Ministor Peripherals Corporation, a data storage company. Prior to this period,
Mr. Obata served in a number of sales and sales management positions with
Conner Peripherals and Seagate Technologies, which are data storage companies.
Mr. Obata holds a Bachelor of Science in Engineering Sciences from the
University of California, Berkeley.

   Mr. Richard C. Alberding has been a director of PC-Tel since August 1999.
Mr. Alberding retired from the Hewlett-Packard Company, a computer, peripherals
and measurement products company, in June 1991, serving at that time as an
Executive Vice President with responsibility for worldwide company sales,
support and administration activities for measurement and computation products,
as well as all corporate level marketing activities. Mr. Alberding is a
director of Digital Link Corporation, Digital Microwave Corporation (which
included a nine month period as interim Chairman/CEO), JLK Direct Distribution
Inc., Paging Network, Inc., Sybase Inc. and Walker Interactive Systems. Mr.
Alberding holds a B.A. degree in Business Administration/Marketing from Augusta
College in Rock Island, Illinois, and an Associate of Science degree in
Electrical Engineering from DeVry Technical Institute in Chicago.

   Dr. Martin H. Singer has been a director of PC-Tel since August 1999. Since
December 1998, Dr. Singer has been President and CEO of SAFCO Technologies,
Inc., a wireless communications company. From 1994 to 1997, Mr. Singer served
as Vice-President and General Manger 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. Wen C. Ko has been a director for PC-Tel since May 1999. Since 1990, Mr.
Ko has served as Chairman of seven WK Investment Funds, which are high-tech
venture capital investment companies, and during 1992 to 1995 as Chairman of
Taipei Venture Capital Association. Prior to this, Mr. Ko served in a

                                       51
number of positions including Chairman & President and Computer Country Manager
at Hewlett Packard Taiwan Ltd., a computation and communication system
manufacturer and Research & Development Manager at International Business
Machines, an information system technology company. Mr. Ko holds a Bachelor of
Science in Electrical Engineering from National Cheng Kung University, Taiwan,
and a Master of Science in System Science from Michigan State University.

   Mr. Giacomo Marini has been a director of PC-Tel since October 1996. Since
March 1995 Mr. Marini has served as President of MK Group LLC, a private
investment and management consulting business that invests in and advises high
technology companies, and from February 1998 to February 1999 as Interim Chief
Executive Officer at FutureTel, Inc., a digital video capture company. From
August 1993 to February 1995, Mr. Marini served as President and Chief
Executive Officer of Common Ground Software, Inc. (formerly No Hands Software,
Inc.), an electronic publishing software company. He is currently on the board
of various private companies. He holds a Computer Science Laureate Degree from
the University of Pisa, Italy.

   Dr. Mike Min-Chu Chen has been a director of PC-Tel since February 1994 and
is the cousin of our Chief Executive Officer and Chairman of the Board, Peter
Chen. From May 1985 to August 1998, Dr. Chen served as the Executive Vice
President, Chief Executive Officer and Director of C & C International
Services, Inc., an engineering and procurement service company. From March 1987
to August 1998, Dr. Chen served as Executive Vice President, Chief Executive
Officer and Director of Act Engineering, Inc., an engineering design and
trading company. From December 1996 to February 1997, Dr. Chen served as
director of ERT Holding, Inc., a company engaged in the environmental rubber
recycling manufacturing business, and served as President of International
Operations from December 1996 to February 1997 and then as Chairman from
February 1997 to October 1997. He is currently on the board of various private
companies. Dr. Chen holds a Bachelor of Science in Naval Architecture from
National Taiwan Ocean University, a Master in Science in Mechanical Engineering
and Naval Architecture from National Taiwan University, Taiwan, and a Doctorate
in Ocean Engineering from Oregon State University.

Board Composition

   Our board of directors currently consists of eight members. Upon completion
of this offering, our bylaws will provide for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. As a result, a portion of our board of directors will be elected each
year. Class I directors' terms will expire at the annual meeting of
stockholders to be held in 2000, Class II directors' terms will expire at the
annual meeting of stockholders to be held in 2001 and Class III directors'
terms will expire at the annual meeting of stockholders to be held in 2002. The
Class I directors will be Peter Chen and Han Yeh, the Class II directors will
be Wen C. Ko, Richard C. Alberding and William Wen-Liang Hsu, and the Class III
directors will be Mike Min-Chu Chen, Giacomo Marini and Martin H. Singer. At
each annual meeting of stockholders held after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, our bylaws provide that the authorized number
of directors may be changed by an amendment to the bylaws, duly adopted by the
board of directors or by the stockholders or by a duly adopted amendment to the
certificate of incorporation. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
total number of directors. This classification of the board of directors may
delay or prevent a change in control of our company or in our management.

   Executive officers are appointed by the board of directors in accordance
with our bylaws, subject to the rights, if any, of an officer under any
contract of employment.

Board Committees

   We established an audit committee and a compensation committee in August
1999. The audit committee consists of Giacomo Marini and Richard C. Alberding.
The audit committee reviews our internal accounting

                                       52
procedures and consults with and reviews the services provided by our
independent accountants. The compensation committee consists of Richard C.
Alberding and Martin H. Singer. The compensation committee reviews and
recommends to the board of directors the compensation and benefits of all our
officers and directors, including stock compensation and loans, and establishes
and reviews general policies relating to the compensation and benefits of our
employees.

Compensation Committee Interlocks and Insider Participation

   Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.

Director Compensation

   We do not pay our directors cash compensation for their service as members
of the board of directors, although they are reimbursed for expenses in
connection with attendance at board and committee meetings. Under our 1998
director option plan, non employee directors automatically receive stock option
grants subject to the terms and conditions.

Limitations On Directors' Liability And Indemnification

   Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

  . any breach of their duty of loyalty to the corporation or its
    stockholders;

  . acts of omissions not in good faith or which involve intentional
    misconduct or a knowing violation of law;

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions; or

  . any transaction from which the director derived an improper personal
    benefit.

   The limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable
remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in their capacity as an officer, director, employee or other
agent, regardless of whether the bylaws would permit indemnification.

                                       53
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of
our directors, executive officers and controller for judgment, fines,
settlement amounts and expenses, including attorneys' fees incurred by the
director, executive officer or controller in any action or proceeding,
including any action by or in the right of PC-Tel, arising out of the person's
services as a director, executive officer or controller of us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

   The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors
and officers under these indemnification provisions.

   At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.

   Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of us pursuant
to the foregoing provisions or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

Executive Compensation

                           Summary Compensation Table

   The following table sets forth the compensation earned, awarded or paid for
services rendered to us in all capacities for the fiscal year ended December
31, 1998, by our Chief Executive Officer and our four next most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the fiscal year ended December 31, 1998 whom we refer to in this
prospectus collectively as the named executive officers:
Long-Term
                                                               Compensation
                                  Annual Compensation             Awards
                         ------------------------------------- ------------
                                                 All Other      Securities
                                                   Annual       Underlying     All Other
                         Salary ($) Bonus ($) Compensation ($) Options (#)  Compensation ($)
                         ---------- --------- ---------------- ------------ ----------------
Peter Chen..............  $173,750   $56,316         --          125,000          $102(1)
 Chief Executive Officer
  and Chairman
Andrew D. Wahl..........   136,500    31,833         --           15,000           288(1)
 Vice President, Finance
  and Chief Financial
  Officer
William Wen-Liang Hsu...   136,876    31,244         --           90,000           102(1)
 Vice President,
  Engineering
Han Yeh.................   136,876    31,244         --           90,000           174(1)
 Vice President,
  Technology
Derek Obata.............   105,192    68,641         --          195,000            72(1)
 Vice President, Sales
--------
(1) Consists of premiums paid by us for term life insurance.

                                       54
OPTION GRANTS DURING LAST FISCAL YEAR

   The following table shows information regarding stock options granted to the
named executive officers during the fiscal year ended December 31, 1998. The
potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
projections or estimates of future stock price growth. Potential realizable
values are computed by:

  . Multiplying the number of shares of common stock subject to a given
    option by the exercise price;

  . Assuming that the total stock value derived from that calculation
    compounds at the annual 5% or 10% rate shown in the table for the entire
    ten-year term of the option; and

  . Subtracting from that result the total option exercise price.

   Actual gains, if any, on stock option exercises will be dependent on the
future performance of the common stock. The percentage of total options is
based on an aggregate of 1,393,900 options granted by us during the fiscal year
ended December 31, 1998, to our employees, directors and consultants, including
the named executive officers. Options were granted with an exercise price equal
to the fair market value of our common stock, as determined in good faith by
our board of directors.
Individual Grants
                         -------------------------------------------
                                                                     Potential Realizable
                                      % of Total                       Value at Assumed
                          Number of    Options                          Annual Rates of
                         Securities   Granted to Exercise             Stock Appreciation
                         Underlying   Employees   Price                 for Option Term
                           Options      During     Per    Expiration ---------------------
Name                     Granted (#)    Period    Share      Date     5% ($)     10% ($)
----                     -----------  ---------- -------- ---------- --------- -----------
Peter Chen..............   125,000(1)    8.97%    $7.45    1/30/08     585,658   1,484,173
Andrew D. Wahl..........    15,000(2)    1.08%    $7.45    2/27/08      70,279     178,101
William Wen-Liang Hsu...    90,000(3)    6.46%    $7.45    1/30/08     421,674   1,068,604
Han Yeh.................    90,000(4)    6.46%    $7.45    1/30/08     421,674   1,068,604
Derek S. Obata..........   130,000(5)    9.33%    $7.45    3/31/08     609,084   1,543,540
                            65,000(6)    4.66%    $4.85    4/30/08     198,259     502,427
--------
(1) As of June 30, 1999, 44,271 shares of the option to purchase 125,000 shares
    of common stock have vested. The options for Mr. Chen vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(2) As of June 30, 1999, 5,000 shares of the option to purchase 15,000 shares
    of common stock have vested. The options for Mr. Wahl vested as to 25% on
    February 1, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(3) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
    of common stock have vested. The options for Mr. Hsu vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(4) As of June 30, 1999, 31,875 shares of the option to purchase 90,000 shares
    of common stock have vested. The options for Mr. Yeh vested as to 25% on
    January 2, 1999, and the balance vests in a series of monthly installments
    over the next three years of service.
(5) As of June 30, 1999, 32,500 shares of the option to purchase 130,000 shares
    of common stock have vested. The options for Mr. Obata vested as to 25% on
    April 20, 1999, and the balance vests in a series of yearly installments
    over the next three years of service.
(6) The fair market value of our common stock on the date of grant was $7.45.
    As of June 30, 1999, 18,958 shares of the non-qualified option to purchase
    65,000 shares of common stock have vested. The shares for Mr. Obata under
    this option vests five years from the anniversary date of the grant (April
    20, 2003) or vesting may accelerate for a portion of the options based on a
    performance based vesting schedule.

                                       55
AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

   The following table sets forth information with respect to the named
executive officers concerning option exercises for the year ended December 31,
1998 and exercisable and unexercisable options held as of December 31, 1998.
The value of unexercised in-the-money options is based on a price of $9.25 per
share, the fair market value of our stock on December 31, 1998 as determined by
our board of directors, minus the per share exercise price, multiplied by the
number of shares underlying the option. As of June 30, 1999, no options to
purchase our common stock granted since January 1, 1998 have been exercised by
the named executive officers.
Value of Unexercised
                         Number of Securities Underlying         In-the-Money Options at
                          Options at December 31, 1998              December 31, 1998
                         -----------------------------------    -------------------------
                          Exercisable        Unexercisable      Exercisable Unexercisable
                         ---------------    ----------------    ----------- -------------
Peter Chen..............            87,502              162,498  $767,830     $554,045
Derek Obata.............                --              195,000        --      520,000
Andrew Wahl.............            62,292               82,708   498,336      568,664
Han Yeh.................            45,000              135,000   394,875      556,875
William Wen-Liang Hsu...            45,000              135,000   394,875      556,875
Incentive Stock Plans

1995 Stock Plan

   Our 1995 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or the Code, and for the granting to employees and
consultants of nonstatutory stock options. The maximum aggregate number of
shares which may be optioned and sold under the 1995 stock plan is 3,200,000
shares of common stock. As of December 31, 1998, options to purchase an
aggregate of 662,753 shares of common stock were outstanding under the 1995
stock plan, with a weighted average exercise price of $0.234. The board of
directors has determined that no further options will be granted under the 1995
stock plan after this offering. The 1995 stock plan provides that in the event
of a merger of our company with or into another corporation, or the sale of
substantially all of our assets, each outstanding option will be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the options, the options will terminate as
of the closing of the merger or sale of assets.

1997 Stock Plan

   Our 1997 stock plan, as amended and restated August 3, 1999, provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Code, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights, or SPRs. The 1997 stock
plan was originally approved by the board of directors in November 1996 and was
amended by our board of directors in August 1999, and was approved by our
stockholders in August 1999. As of December 31, 1998, options to purchase an
aggregate of 2,422,555 shares of common stock were outstanding under the 1997
stock plan with a weighted price of $5.575. Unless terminated sooner, the 1997
stock plan will terminate automatically in 2007. A total of 5,500,000 shares of
common stock are currently reserved for issuance pursuant to the 1997 stock
plan, plus annual increases equal of the lesser of:

  . 700,000 shares,

  . 4% of the outstanding shares on such date, or

  . a lesser amount determined by the board.

   The 1997 stock plan may be administered by the board of directors or a
committee of the board. The board of directors or committee of the board has
the power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability

                                       56
thereof, and the form of consideration payable upon such exercise. In addition,
the board of directors or committee of the board has the authority to amend,
suspend or terminate the 1997 stock plan, provided that no such action may
affect any share of common stock previously issued and sold or any option
previously granted under the 1997 stock plan.

   Options and SPRs granted under the 1997 stock plan are not generally
transferable by the optionee, and each option and SPR is exercisable during the
lifetime of the optionee only by such optionee. Options granted under the 1997
stock plan must generally be exercised within three months of the end of
optionee's status as an employee or consultant of our company, or within twelve
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's ten year term. The exercise
price of all incentive stock options granted under the 1997 stock plan must be
at least equal to 100% of the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1997 stock plan is determined by the board of directors or a
committee of the board, but with respect to nonstatutory stock options intended
to qualify as "performance based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to 100% of the
fair market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1997 stock plan may not
exceed ten years.

   The 1997 stock plan provides that in the event of a merger of our company
with or into another corporation, a sale of substantially all of our assets,
each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or SPR as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable for a
period of fifteen days from the date of such notice, and the option or SPR will
terminate upon the expiration of such period.

1998 Employee Stock Purchase Plan

   Our 1998 employee stock purchase plan was adopted by the board of directors
in May 1998 but will not become effective until the closing date of this
offering. A total of 800,000 shares of common stock has been reserved for
issuance under the 1998 employee stock purchase plan, plus annual increases
equal to the lesser of:

  . 350,000 shares,

  . 2% of the outstanding stock on such date, or

  . a lesser amount determined by the board of directors.

   The 1998 employee stock purchase plan, which is intended to qualify under
Section 423 of the Code, contains successive six-month offering periods. The
offering periods generally start on the first trading day on or after February
15 and August 15 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before February 14, 2000.

   Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However any employee who:

  . immediately after grant owns stock possessing 5% or more of the total
    combined voting power or value of all classes of our capital stock, or

  . whose rights to purchase stock under all employee stock purchase plans of
    our company accrues at a rate which exceeds $25,000 worth of stock for
    each calendar year

may not be granted an option to purchase stock under the 1998 employee stock
purchase plan.

                                       57
The 1998 employee stock purchase plan permits participants to purchase
common stock through payroll deductions of up to 15% of the participant's
compensation. The maximum number of shares a participant may purchase during a
single offering period is 2,000 shares.

   Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1998 employee stock purchase plan is 85% of either the fair
market value of the common stock at the beginning or end of the offering period
whichever is lower. Participants may end their participation at any time during
an offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us.

   Rights granted under the 1998 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 1998 employee stock purchase
plan. The 1998 employee stock purchase plan provides that, in the event of a
merger of our company with or into another corporation or a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date, before the
date of the proposed sale or merger, will be set. The 1998 employee stock
purchase plan will terminate in 2008. The board of directors has the authority
to amend or terminate the 1998 employee stock purchase plan, except that no
such action may adversely affect any outstanding rights to purchase stock under
the 1998 employee stock purchase plan.

1998 Director Option Plan

   Non employee directors are entitled to participate in the 1998 director
option plan. The 1998 director option plan was adopted by the board of
directors in May 1998, but it will not become effective until the closing date
of this offering. The 1998 director option plan has a term of ten years, unless
terminated sooner by the board of directors. A total of 200,000 shares of
common stock have been reserved for issuance under the 1998 director option
plan.

   The 1998 director option plan provides for the automatic grant of options to
purchase 15,000 shares of common stock to each new non employee director upon
election to the board of directors. Options to purchase 15,000 shares will vest
one-third on 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 option is granted to the non employee
director, he or she shall automatically be granted an option to purchase 7,500
shares on January 1 of each year, if on such date he or she shall have served
on the board of directors for at least six months. The 7,500 share options
shall vest completely on the anniversary of their date of grant, provided that
the optionee continues to serve as a director on such dates. All of the options
granted under the 1998 director option plan shall have a term of 10 years. 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.

   The 1998 director option plan provides that in the event of a merger of our
company with or into another corporation, a sale of substantially all of our
assets, each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
board of directors or a committee of the board shall provide for the optionee
to have the right to exercise the option or SPR as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable for a
period of thirty days from the date of such notice, and the option or SPR will
terminate upon the expiration of such period. Options granted under the 1998
director option plan must be exercised within three months of the end of the
optionee's tenure as a director of our company, or within twelve months after
such director's termination by death or disability, but in no event later than
the expiration of the option's ten year term. No option granted under the 1998
director option plan is transferable by the optionee other than by will or the
laws of descent and distribution, and each option is exercisable, during the
lifetime of the optionee, only by such optionee.

                                       58
401(k) Plan

   Our 401(k) plan covers all of our employees beginning the first of the month
following the month of their employment. Pursuant to this plan, employees may
elect to contribute up to 15% of their current compenation to the 401(k) plan
up to the statutorily prescribed annual limit, which was $10,000 in 1998.
Contributions by employees to the 401(k) plan, and income earned on plan
contributions, are not taxable to employees until withdrawn. Further,
contributions by PC-Tel, if any, will be deductible by PC-Tel, when made.
Participating employees vest in employer contributions over five years at a
rate of 20% for each year of service. There have been no employer contributions
to the 401(k) plan during the year.

Employment Agreements and Change of Control Arrangements

   We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination the employee will not solicit our employees. At the time of
commencement of employment, our employees also generally sign offer letters
specifying basic terms and conditions of employment. In general, our employees
are not subject to written employment agreements.

   We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides, among other things, that his employment is at-will, he will receive
an annual salary of $150,000 and that in the event of a change in control of
our company, he will be entitled to one year severance pay.

   We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides, among other things, that his employment will be at-will and
his annual salary will be initially set at $250,000 per year with an annual
bonus of $150,000 payable upon our achieving quarterly net income targets.

   In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares of our common stock which vests according to the
following schedule: 30% at the end of his first year of employment, 25% in
years two and three and 20% in year four. Vesting after the twelfth month of
employment is on a monthly basis. If this offering should take place within the
first year of his employment, 50% of his first year's options will vest at the
time of the offering, and the remaining 50% of his first year's options will
vest upon reaching the completion of his twelfth month of employment. In
addition, if his employment is terminated for any reason, other than for cause,
he will be entitled to one year of severance. If the termination occurs within
the first year of employment, he will be entitled to exercise his entire first
year stock options.

                                       59
CERTAIN TRANSACTIONS

   Since January 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount exceeds $60,000, and in which any director,
executive officer, holder of more than 5% of our common stock or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest other than compensation agreements and other
agreements, which are described under "Management," and the transactions
described below.

Transactions with Directors, Executive Officers and 5% Stockholders

   Series A preferred stock. Between February 10, 1994 and March 14, 1995 we
sold 4,413,333 shares of our common stock at a per share price between $0.10
and $0.30. On May 9, 1995 we effected a recapitalization of our outstanding
stock converting each share of common stock into 1 share of Series A preferred
stock. On June 29, 1995 we sold 222,222 shares of our Series A preferred stock
at a price per share of $0.30. The following table lists the number of shares
of Series A preferred stock sold to our directors, executive officers, or 5%
stockholders (and any members of the immediate family of such persons):
Shares of
                                                                   Series A
                                                                preferred stock
   Purchaser                                                       purchased
   ---------                                                    ---------------
Peter & Sophia Chen.........................................     666,666
   Han C. Yeh..................................................     280,000
   I-Chung Yeh.................................................     133,333
   Der-Chin Yeh................................................      66,666
   Yan-Chiou Yeh...............................................      26,666
   Mike Min-Chu Chen...........................................     666,666
   Wen-Liang Hsu...............................................     200,000
   Rai-Yei Lee.................................................     800,000
   Steel Su....................................................     800,000
   Ming-Hsiung Michael Ho......................................     106,666
Series B preferred stock. Between October 18, 1995 and January 10, 1996 we
sold 3,250,000 shares of our Series B preferred stock at a price per share of
$1.20. The following table lists the number of shares of Series B preferred
stock sold to our directors, executive officers, and 5% stockholders (and any
members of the immediate family of such persons):
Shares of
                                                                   Series B
                                                                preferred stock
   Purchaser                                                       purchased
   ---------                                                    ---------------
WK Technology Fund..........................................     555,800
   WK Technology Fund II.......................................     402,500
   WK Technology Fund III......................................     958,366
Series C preferred stock. On February 4, 1998, we sold 625,200 shares of its
Series C preferred stock at a price per share of $8.00. The sale of Series C
preferred stock included, among others, the sale of 125,000 shares of Series C
preferred stock to WK Technology Funds, which is a holder of more than 5% of
our common stock. In addition, Wen C. Ko, one of our directors, is Chairman of
WK Technology Fund, WK Technology Fund II and WK Technology Fund III.

                                       60
Employment Agreements With Executive Officers

   We entered into an agreement on March 31, 1998 with Derek S. Obata which
provides, among other things, that his employment is at-will and he will
receive an annual salary of $150,000.

   We entered into an agreement on July 20, 1999 with William F. Roach. The
agreement provides, among other things, that his employment will be at-will and
his annual salary will be initially set at $250,000 per year with an annual
bonus of $150,000 payable upon our achieving quarterly net income targets.

   In addition, the agreement provides for Mr. Roach to be granted an option to
purchase 400,000 shares of our common stock which vests according to the
following schedule: 30% at the end of his first year of employment, 25% in
years two and three and 20% in year four. Vesting after the twelfth month of
employment is on a monthly basis. If this offering should take place within the
first year of his employment, 50% of his first year's options will vest at the
time of the offering, and the remaining 50% of his first year's options will
vest upon reaching the completion of his twelfth month of employment. In
addition, if his employment is terminated for any reason, other than for cause,
he will be entitled to one year of severance. If the termination occurs within
the first year of employment, he will be entitled to exercise his entire first
year stock options.

Loan to Executive Officer

   On August 3, 1999, our board authorized an unsecured loan to William F.
Roach, our President and Chief Operating Officer, pursuant to a full-recourse
promissory note, for a principal amount of $54,000 with a per annum interest
rate of 8%. The promissory note shall become immediately due and payable upon
the earlier of (i) one year from the date the promissory note is executed or
(ii) the termination of Mr. Roach's employment with us.

Other Transactions

   Steel Su, a holder of more than 5% of our common stock and a member of our
board of directors from March 1995 until November 1997, served as the President
of BTC, a significant customer. For the years ended December 31, 1995, 1996,
1997 and 1998, the revenues generated from BTC were approximately $99,000,
$1,660,000, $2,153,000 and $4,953,000, respectively.

Indemnification

   We have entered into indemnification agreements with each of our directors,
officers and controller. These indemnification agreements will require us to
indemnify our officers to the fullest extent permitted by Delaware law.

   All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors or, if required by law, a majority of disinterested
stockholders, and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.

                                       61
PRINCIPAL STOCKHOLDERS

   The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted
to reflect the sale of common stock in this offering by:

  . each stockholder known by us to own beneficially more than 5% of our
  common stock,

  . each of the named executive officers,

  . each of our directors, and

  . all of our directors and executive officers as a group.

   The table below assumes no exercise of the underwriters' over-allotment
option. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after June
30, 1999 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Unless
otherwise indicated in the footnotes below (i) the persons and entities named
in the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable and
(ii) except as set forth in the footnotes to the table, the address of each of
the individuals listed in the table is PC-Tel, Inc., 70 Rio Robles, San Jose,
California 95134. As of June 30, 1999, there were 11,204,495 shares of common
stock outstanding, as adjusted to reflect the conversion of all outstanding
shares of preferred stock and warrants upon closing of this offering.
Shares
                                                       Beneficially Owned
                                                   ---------------------------
                                                             Percent  Percent
                                                             prior to  after
Name of Beneficial Owner                            Number   offering offering
------------------------                           --------- -------- --------
5% Stockholders
Entities affiliated with the WK Technology
 Funds(1)......................................... 1,932,812   17.2     12.2
Steel Su(2).......................................   599,479    5.1%     3.8%
Directors and Executive Officers
Peter Chen(3).....................................   726,980    6.4      4.3
Andrew D. Wahl(4).................................    89,583      *        *
Steve Manuel(5)...................................    55,417      *        *
William Wen-Liang Hsu(6)..........................   548,958    4.9      3.5
Han Yeh(7)........................................   688,958    6.1      4.3
Derek S. Obata(8).................................    54,176      *        *
Frank Reo(9)......................................    32,500      *        *
Mike Min-Chu Chen(10).............................   232,812    2.1      1.5
Giacomo Marini(11)................................    26,146      *        *
Richard C. Alberding..............................         0      *        *
William F. Roach..................................         0      *        *
Martin H. Singer..................................         0      *        *
Wen C. Ko(1)...................................... 1,932,812   17.2     12.2
All directors and executive officers as a group
 (13 persons)(12)................................. 4,388,333   37.2     26.7
--------
*Less than 1% of the outstanding shares of common stock.
(1) Includes 555,800 shares held by WK Technology Fund, 402,500 shares held by
    WK Technology Fund II, and 958,366 shares held by WK Technology Fund III
    and options to purchase 16,146 shares of our common stock held by WK
    Associates which are exercisable within 60 days of June 30, 1999. Wen C. Ko
    is one of our directors and is Chairman of the WK Technology Funds. The WK
    Technology Funds'

                                       62
principal addresses is 10th Floor, 115, Sec. 3, Ming Sheng East Road,
    Taipei, Taiwan 23136. Mr. Ko disclaims beneficial ownership of the shares
    held by WC Technology Fund, WC Technology Fund II, and WK Technology Fund
    III, except to the extent of his pecuniary interest therein.
 (2) Includes 583,333 shares held by Mr. Su individually and options to
     purchase 16,146 shares exerciseable within 60 days of June 30, 1999.
 (3) Includes 240,666 shares held by Mr. Chen with his wife as community
     property, 333,333 owned by himself individually, and 8,000, held by each
     of his minor children living at home, Robert and Michael Chen.
     Additionally includes options held by Mr. Chen to purchase 136,981 shares
     of our common stock exercisable within 60 days of June 30, 1999. Mr. Chen
     disclaims beneficial ownership of the shares held by his children, except
     to the extent of his pecuniary interest therein.
 (4) Includes options to purchase 89,583 share of our common stock exercisable
     within 60 days June 30, 1999.
 (5) Includes options to purchase 55,417 shares of our common stock
     exercisable within 60 days of June 30, 1999.
 (6) Includes 285,300 shares held by the William Wen-Liang Hsu and Rai-Yun Lee
     Family Trust, a revocable trust, over which shares Mr. Hsu has joint
     dispositive power, 123,700 shares held by himself personally, 20,830 held
     by each of his children living at home, Frederick and Joanne Hsu, 2,673
     shares held by Hui-Ju Wang, Mr. Hsu's mother, and options to purchase
     95,625 shares of our common stock exercisable within 60 days of June 30,
     1999. Mr. Hsu disclaims the beneficial ownership of the shares held by
     his children and mother, except to the extent of his pecuniary interest
     therein.
 (7) Includes 577,333 shares owned by Mr. Yeh individually. Additionally
     includes 16,000 shares held by Emily C. Yeh, a minor daughter who lives
     in Mr. Yeh's home, and options to purchase 95,625 share of our common
     stock exercisable within 60 days of June 30, 1999. Mr. Yeh disclaims
     beneficial ownership of the shares held by Emily G. Yeh, except to the
     extent of his pecuniary interest therein.
 (8) Includes options to purchase 54,167 shares of our common stock
     exercisable within 60 days of June 30, 1999.
 (9) Includes options to purchase 32,500 shares of our common stock
     exercisable within 60 days of June 30, 1999.
(10) Includes 193,966 shares owned by Mr. Chen individually. Additionally
     includes 11,350 shares held by each of his children living at home.
     Willis and Thomas L. Chen, a minor son living at Mr. Chen's home, and
     options to purchase 16,146 shares exercisable within 60 days of June 30,
     1999. Mr. Chen disclaims beneficial ownership of the shares held by his
     children, except to the extent of his pecuniary interest therein.
(11) Includes 12,800 shares held by Mr. Marini individually and options to
     purchase 13,346 shares exerciseable within 60 days of June 30, 1999.
(12) Includes shares held by each director and executive officer and family
     members in each of their households. Additionally includes options to
     purchase our common stock, held by each director and executive officer,
     exerciseable within 60 days of June 30, 1999.

                                      63
DESCRIPTION OF CAPITAL STOCK

General

   Upon completion of the offering we will be authorized to issue 50,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock does not purport to be complete and is subject to and qualified in its
entirety by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.

Common Stock

   As of June 30, 1999, there were 11,002,078 shares of common stock
outstanding which were held of record by 163 stockholders, as adjusted to
reflect the conversion of all outstanding shares of preferred stock upon
closing of this offering.

   The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of PC-Tel, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and nonassessable,
and the shares of common stock to be issued upon the closing of this offering
will be fully paid and nonassessable.

Preferred Stock

   Immediately prior to this offering, our certificate of incorporation
provided for three series of preferred stock, Series A preferred stock of which
4,635,548 shares were issued and outstanding, Series B preferred stock, of
which 3,250,000 shares were issued and outstanding, and Series C preferred
stock, of which 625,200 shares were issued and outstanding. Upon the closing of
this offering, each outstanding share of Series A preferred stock, Series B
preferred stock, and Series C preferred stock will automatically convert into
one share of common stock.

   Upon the closing of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
preferred stock, $0.001 par value per share, in one or more series, each of the
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the board of directors. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights
of holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for others to acquire, or of discouraging others from
attempting to acquire, a majority of the outstanding voting stock of PC-Tel. We
have no present plans to issue any shares of preferred stock.

Warrants

   At June 30, 1999, there were warrants outstanding to purchase a total of
200,000 shares of Series C preferred stock and 2,417 shares of common stock.
Upon the closing of this offering, the warrants to purchase 200,000 shares of
Series C preferred stock will become exercisable for an aggregate of 200,000
shares of common stock and will expire on December 31, 2008, unless earlier
exercised. The warrants to purchase 2,417 shares of common stock will expire on
February 4, 2001, unless earlier exercised. All warrants may be exercised on a
"net" basis whereby, in lieu of paying the exercise price in cash, the holder
may instruct us to retain a number of shares that has a fair market value at
the time of exercise equal to the aggregate exercise price.

                                       64
Registration Rights

   The holders of 3,875,200 shares of common stock, and the holders of warrants
to purchase 200,000 shares of common stock or their permitted transferees, are
entitled to rights with respect to registration of the shares under the
Securities Act at any time after 180 days following the closing of this
offering. These rights are provided under the terms of an agreement between us
and the holders of registrable securities. Subject to limitations in the
agreement, the holders of at least 30% of the registrable securities then
outstanding may require, on two occasions beginning after the date of this
prospectus, that we use our best efforts to register the registrable securities
for public resale. If we register any of our securities either for our own
account or for the account of other security holders, the holders of
registrable securities are entitled to include their shares of common stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. The holders of registrable
securities may also require us to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
us, provided, among other limitations, that the proposed aggregate selling
price (net of any underwriters' discounts and expenses of sale) is at least
$1.0 million. All registration expenses must be borne by us and all selling
expenses relating to registrable securities must be borne by the holders of the
securities being registered.

Delaware Anti-Takeover Law and Charter and Bylaw Provisions

   Provisions of Delaware law and our certificate of incorporation and bylaws
could make it more difficult to acquire us by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of us to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposed to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.

   We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.

   Upon the closing of this offering, our certificate of incorporation and
bylaws will require that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition, upon
the close of this offering, special meetings of our stockholders may be called
only by the board of directors or some of our officers. Our certificate of
incorporation and bylaws also provide that, effective upon the closing of this
offering, our board of directors will be divided into three classes, with each
class serving staggered three-year terms. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
PC-Tel.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, St. Paul, Minnesota,
55075 and its telephone number at this location is (615) 450-4189.

                                       65
SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no market for our common stock, and a
significant public market for the common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of common stock
(including shares issued upon exercise of outstanding options and warrants) in
the public market following this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sale of our equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering because
of contractual restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.

   Upon completion of this offering we will have outstanding 15,602,078 shares
of common stock (based upon shares outstanding as of June 30, 1999), assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants that do not expire prior to completion of this
offering. Of these shares, the 4,600,000 shares sold in this offering will be
freely tradable without restriction under the Securities Act except for any
shares purchased by "affiliates" of PC-Tel as that term is defined in Rule 144
under the Securities Act.

   The remaining 11,204,495 shares of common stock, including common stock
equivalents of 202,417 shares, held by existing stockholders were issued and
sold by us in reliance on exemptions from the registration requirements of the
Securities Act. All of our stockholders and all of our directors and officers
have entered into lock-up agreements with the underwriters that provide that we
and those holders of stock and options may not dispose of or hedge any common
stock or securities convertible into or exchangeable for shares of common
stock. These restrictions will be in effect for a period of 180 days after the
date of this prospectus. At any time and without notice, Banc of America
Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements. In addition, holders of stock options
could exercise such options and sell some of the shares issued upon exercise as
described below:
Approximate
                                  Shares Eligible
           Relevant Dates         for Future Sale                  Comment
   ------------------------------ --------------- ------------------------------------------
On effective date(1)..........                 Shares sold in this offering and eligible
                                                  for sale under Rule 144(k)

   90 days after effective                        Additional shares eligible for sale under
    date(2)......................                 Rules 144 and 701

   180 days after effective                       All shares subject to lock-up released;
    date(2)......................                 additional shares eligible for sale under
                                                  Rules 144 and 701

   More than 181 days after ef-                   Additional shares becoming eligible for
    fective date(2)..............                 sale under Rule 144 more than 180 days
                                                  after the effective date
--------
  (1) Assumes no exercise of the underwriters' over-allotment option.
  (2) Assumes an effective date of September 30, 1999.

   In addition, as of June 30, 1999, there were outstanding options and
warrants to purchase 4,018,127 shares of common stock. All such options and
warrants are subject to lock-up agreements.

Rule 144

   In general, under Rule 144, an affiliate of PC-Tel, or person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of

  . 1% of the then outstanding shares of common stock (approximately 15,804
    shares immediately after this offering) or

                                       66
. the average weekly trading volume during the four calendar weeks
    preceding the date on which notice of the sale is filed with the SEC.

   Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about PC-Tel.

Rule 144(k)

   Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.

Rule 701

   Rule 701, as currently in effect, permits resale of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to PC-Tel who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provision of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. All holders of Rule 701
shares are required to wait until 90 days after the date of this Prospectus
before selling such shares. However, all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after
the offering upon obtaining the prior written consent of Banc of America
Securities LLC.

   We are unable to estimate the number of shares that will be sold under Rule
144, as this will depend on the market price for the common stock, the personal
circumstances of the sellers and other factors.

   180 days following the date of this prospectus, we intend to file a
registration statement on Form S-8 under the Securities Act covering, among
other things, shares of common stock subject to outstanding options under the
1995 stock plan, the 1997 stock plan, the 1998 director option plan and the
1998 employee stock purchase plan. Based on the number of shares subject to
outstanding options as of September 30, 1999 and currently reserved for
issuance under the incentive plans, such registration statement would cover
approximately 9,700,000 shares. Such registration statement will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of PC-Tel, be available for sale in the open market immediately
after the 180-day lock-up agreements expire.

Registration Rights

   Also beginning six months after the date of this offering, holders of
3,875,200 shares of common stock, as converted, and the holders of warrants to
purchase 200,000 shares of common stock, as converted, or their permitted
transferees will be entitled to certain rights with respect to registration of
such shares for sale in the public market. See "Description of Capital Stock--
Registration Rights." Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchase by affiliates) immediately upon
the effectiveness of such registration.

                                       67
UNDERWRITING

   We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, Warburg
Dillon Read LLC and Needham & Company, Inc., are the representatives of the
underwriters. We have entered into an underwriting agreement with the
representatives. Subject to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and each of the
underwriters has agreed to purchase, the number of shares of common stock
listed next to its name in the following table:
Number of
   Underwriter                                                          Shares
   -----------                                                         ---------
Banc of America Securities LLC.....................................
   Warburg Dillon Read LLC............................................
   Needham & Company, Inc.............................................
                                                                       ---------
     Total............................................................ 4,600,000
                                                                       =========
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $    per share. The underwriters
also may allow, and any other dealers may reallow, a concession of not more
than $    per share to some other dealers. If all the shares are not sold at
the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered subject to a
number of conditions, including:

  . receipt and acceptance of our common stock by the underwriters and

  . the right to reject orders in whole or in part.

   We have granted an option to the underwriters to buy up to 690,000
additional shares of common stock. These additional shares would cover sales of
shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.

   We, all our stockholders and all of our officers and directors have entered
into lock-up agreements with the underwriters. Under those agreements, we and
those holders of stock and options may not dispose of or hedge any common stock
or securities convertible into or exchangeable for shares of common stock.
These restrictions will be in effect for a period of 180 days after the date of
this prospectus. At any time and without notice, Banc of America Securities LLC
may, in its sole discretion, release all or some of the securities from these
lock-up agreements.

   We will indemnify the underwriters against some liabilities, including some
liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.

   The shares of common stock have been approved for listing on the Nasdaq
National Market under the symbol "PCTI."

   In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:

  . short sales,

  . stabilizing transactions, and

  . purchase to cover positions created by short sales.

                                       68
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.

   The underwriters also may impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.

   The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:

  . over-allotment,

  . stabilization,

  . syndicate covering transactions, and

  . imposition of penalty bids.

   As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.

   The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.

   Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and the
underwriters. Among the factors to be considered in such negotiations are:

  . our history and prospects, and the history and prospectus of the industry
    in which we compete,

  . our past and present financial performance,

  . an assessment of our management,

  . the present state of our development,

  . our prospects for future earnings,

  . the prevailing market conditions of the applicable U.S. securities market
    at the time of this offer,

  . market valuations of publicly traded companies that we and the
    underwriters believe to be comparable to us, and

  . other factors deemed relevant by us and the underwriters.

   The underwriters have reserved up to 200,000 shares of the common stock
offered hereby for sale to certain of our employees, directors, and friends at
the initial public offering price set forth on the cover page of this
prospectus. Such persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase these reserved shares.

                                       69
LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Brobeck Phleger & Harrison, LLP, San Francisco, California. Certain legal
matters related to intellectual property will be passed on for PC-Tel by
Knobbe, Martens, Olson & Bear, LLP, Newport Beach, California.

                                    EXPERTS

   The consolidated financial statements and schedule of PC-Tel, Inc. included
in this prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.

   The financial statements of the Communications Systems Division, a division
of General DataComm, Inc. included in this prospectus and elsewhere in the
registration statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein, in reliance upon the authority of said firm
as experts in giving said report.

                   WHERE YOU CAN FIND ADDITIONAL INFORMATION

   We filed with the Securities and Exchange Commission, Washington, D.C., a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock sold in this offering. This prospectus does not contain
all the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to PC-Tel and our
common stock, we refer you to the registration statement and to the exhibits
and schedules that were filed with the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Securities
and Exchange Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the site is http://www.sec.gov.

   Upon completion of this offering, PC-Tel will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and, in accordance with the requirements of the Securities Exchange
Act of 1934, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. These periodic reports, proxy
statements and other information will be available for inspection and copying
at the regional offices, public reference facilities and web site of the
Securities and Exchange Commission referred to above.

                                       70
PC-TEL, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PC-Tel, Inc.
  Report of Independent Public Accountants...............................  F-2
  Consolidated Balance Sheets............................................  F-3
  Consolidated Statements of Operations..................................  F-4
  Consolidated Statements of Stockholders' Equity........................  F-5
  Consolidated Statements of Cash Flows..................................  F-6
  Notes to the Consolidated Financial Statements.........................  F-7
Communications Systems Division, a division of General DataComm, Inc.
  Report of Independent Public Accountants...............................  F-22
  Balance Sheets.........................................................  F-23
  Statements of Income and Divisional Equity.............................  F-24
  Statements of Cash Flows...............................................  F-25
  Notes to Financial Statements..........................................  F-26
Unaudited Pro Forma Condensed Combined Statement of Operations of PC-Tel,
 Inc. and Communications Systems Divison
  Pro Forma Condensed Combined Statement of Operations for the Year Ended
   December 31, 1998 (unaudited).........................................  P-1
  Notes to Pro Forma Condensed Combined Statement of Operations
   (unaudited) ..........................................................  P-3
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PC-Tel, Inc.:

   We have audited the accompanying consolidated balance sheets of PC-Tel, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PC-Tel,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

                                          ARTHUR ANDERSEN LLP

San Jose, California
March 4, 1999

                                      F-2
PC-TEL, INC.

                          CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share data)
December 31,
                                        ---------------
                                                                  June 30, 1999
                                                                    Pro Forma
                                                          June    Stockholders'
                                                           30,       Equity
                                         1997    1998     1999      (Note 8)
                                        ------- -------  -------  -------------
                                                              (unaudited)
                                     ASSETS
CURRENT ASSETS:
  Cash and cash equivalents............ $ 6,685 $12,988  $17,252
  Short-term investments...............      --      --    6,282
  Accounts receivable, net of allowance
   for doubtful accounts of $604,
   $1,689 and $3,382, respectively.....   6,058  12,931    5,516
  Subscriptions receivable.............   5,002      --       --
  Inventories..........................     989   2,073    3,590
  Prepaid expenses and other assets....     926     264      472
  Deferred tax asset...................   2,680   4,205    4,658
                                        ------- -------  -------
    Total current assets...............  22,340  32,461   37,770
PROPERTY AND EQUIPMENT, net............     713   1,042    1,475
GOODWILL AND OTHER INTANGIBLE ASSETS,
 net...................................      --  10,812    9,730
OTHER ASSETS...........................      95   1,681    1,508
                                        ------- -------  -------
                                        $23,148 $45,996  $50,483
                                        ======= =======  =======
                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of long-term debt.... $    -- $ 1,640  $ 1,847
  Accounts payable.....................   1,577   5,155    3,564
  Accrued royalties....................   6,505   5,144    6,516
  Income taxes payable.................      --   1,207    2,044
  Accrued liabilities..................   1,418   3,002    5,021
                                        ------- -------  -------
    Total current liabilities..........   9,500  16,148   18,992
                                        ------- -------  -------
LONG-TERM DEBT, net of current
 portion...............................      38  14,709   13,630
                                        ------- -------  -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.001 par value;
   aggregate liquidation preference of
   $10,015 as of December 31, 1998 and
   June 30, 1999
   Authorized--9,385,548
   Outstanding--7,885,548, 8,510,748,
    8,510,748 and 0 shares pro forma,
    respectively; subscribed--625,200,
    0, 0 and 0 shares pro forma,
    respectively.......................       9       9        9     $    --
  Common stock, $0.001 par value
   Authorized--50,000,000
   Outstanding--2,208,990, 2,412,247,
    2,491,330 and 11,002,078 shares pro
    forma, respectively................       2       2        2          11
  Additional paid-in capital...........   9,667  10,915   12,881      12,881
  Deferred compensation................      --    (214)  (2,162)     (2,162)
  Retained earnings....................   3,932   4,427    7,131       7,131
                                        ------- -------  -------     -------
    Total stockholders' equity.........  13,610  15,139   17,861      17,861
                                        ------- -------  -------     -------
                                        $23,148 $45,996  $50,483     $50,483
                                        ======= =======  =======     =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
PC-TEL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
Six Months
                                                                   Ended
                                     Year Ended December 31,     June 30,
                                     -----------------------  ----------------
                                      1996    1997    1998     1998     1999
                                     ------- ------- -------  -------  -------
                                                                (unaudited)
REVENUES............................ $16,573 $24,009 $33,004  $12,343  $33,046
COST OF REVENUES....................   9,182  12,924  13,878    5,948   16,997
                                     ------- ------- -------  -------  -------
GROSS PROFIT........................   7,391  11,085  19,126    6,395   16,049
                                     ------- ------- -------  -------  -------
OPERATING EXPENSES:
  Research and development..........   2,152   3,348   4,932    2,455    4,423
  Sales and marketing...............     839   3,168   5,624    2,407    4,945
  General and administrative........     477   1,612   2,169      791    2,063
  Acquired in-process research and
   development (Note 4).............      --      --   6,130       --       --
  Amortization of deferred
   compensation.....................      41      --      43       10      164
                                     ------- ------- -------  -------  -------
    Total operating expenses........   3,509   8,128  18,898    5,663   11,595
                                     ------- ------- -------  -------  -------
INCOME FROM OPERATIONS..............   3,882   2,957     228      732    4,454
                                     ------- ------- -------  -------  -------

OTHER INCOME (EXPENSE), NET:
  Interest income...................     127     299     504      254      303
  Interest expense..................      --      --     (25)     (11)    (895)
                                     ------- ------- -------  -------  -------
    Total other income (expense),
     net............................     127     299     479      243     (592)
                                     ------- ------- -------  -------  -------

INCOME BEFORE PROVISION FOR INCOME
 TAXES..............................   4,009   3,256     707      975    3,862
PROVISION FOR INCOME TAXES..........   1,005     955     212      292    1,158
                                     ------- ------- -------  -------  -------

NET INCOME.......................... $ 3,004 $ 2,301 $   495  $   683  $ 2,704
                                     ======= ======= =======  =======  =======

Basic earnings per share............ $  4.79 $  1.13 $  0.21  $  0.29  $  1.10
Diluted earnings per share.......... $  0.29 $  0.20 $  0.04  $  0.06  $  0.21
Shares used in computing basic
 earnings per share.................     627   2,032   2,355    2,320    2,461
Shares used in computing diluted
 earnings per share.................  10,280  11,645  12,325   12,400   12,638
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
PC-TEL, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               (in thousands, except share and per share amounts)
(Accumulated
                         Preferred Stock    Common Stock   Additional               Deficit)/
                         ---------------- ----------------  Paid-In     Deferred     Retained
                          Shares   Amount  Shares   Amount  Capital   Compensation   Earnings    Total
                         --------- ------ --------- ------ ---------- ------------ ------------ -------
BALANCE, DECEMBER 31,
 1995................... 7,562,208  $ 8          --  $--    $ 4,593     $    --      $(1,373)   $ 3,228
 Issuance of Series B
  convertible preferred
  stock for cash at
  $1.20 per share.......   323,340   --          --   --        388          --           --        388
 Issuance of common
  stock on exercise of
  stock options.........        --   --   1,454,999    1         27          --           --         28
 Stock compensation
  expense for stock
  option grants.........        --   --          --   --         41          --           --         41
 Net income.............        --   --          --   --         --          --        3,004      3,004
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1996................... 7,885,548    8   1,454,999    1      5,049          --        1,631      6,689
 Subscription for Series
  C convertible
  preferred stock for
  cash at $8.00 per
  share, net of issuance
  costs of $406.........   625,200    1          --   --      4,595          --           --      4,596
 Issuance of common
  stock on exercise of
  stock options.........        --   --     753,991    1         23          --           --         24
 Net income.............        --   --          --   --         --          --        2,301      2,301
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1997................... 8,510,748    9   2,208,990    2      9,667          --        3,932     13,610
 Issuance costs for
  Series C convertible
  preferred stock.......        --   --          --   --        (44)         --           --        (44)
 Deferred compensation
  expense for stock
  option grants.........        --   --          --   --        257        (257)          --         --
 Stock compensation
  expense for stock
  option grants.........        --   --          --   --         --          43           --         43
 Issuance of common
  stock on exercise of
  stock options.........        --   --     203,257   --         34          --           --         34
 Issuance of Series C
  convertible stock
  warrants in
  conjunction with notes
  payable...............        --   --          --   --      1,350          --           --      1,350
 Costs incurred related
  to initial public
  offering..............        --   --          --   --       (349)         --           --       (349)
 Net income.............        --   --          --   --         --          --          495        495
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, DECEMBER 31,
 1998................... 8,510,748    9   2,412,247    2     10,915        (214)       4,427     15,139
 Deferred compensation
  expense for stock
  option grants
  (unaudited)...........        --   --          --   --      2,112      (2,112)          --         --
 Stock compensation
  expense for option
  grants (unaudited)....        --   --          --   --         --         164           --        164
 Issuance of common
  stock on exercise of
  stock options
  (unaudited)...........        --   --      79,083   --         10          --           --         10
 Costs incurred related
  to initial public
  offering (unaudited)..        --   --          --   --       (156)         --           --       (156)
 Net income
  (unaudited)...........        --   --          --   --         --          --        2,704      2,704
                         ---------  ---   ---------  ---    -------     -------      -------    -------
BALANCE, JUNE 30, 1999
 (unaudited)............ 8,510,748  $ 9   2,491,330  $ 2    $12,881     $(2,162)     $ 7,131    $17,861
                         =========  ===   =========  ===    =======     =======      =======    =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
PC-TEL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
Six Months Ended
                                 Year Ended December 31,         June 30,
                                 --------------------------  ------------------
                                  1996     1997      1998      1998      1999
                                 -------  -------  --------  --------  --------
                                                                (unaudited)
CASH FLOWS FROM OPERATING AC-
 TIVITIES:
 Net income....................  $ 3,004  $ 2,301  $    495  $    683  $  2,704
 Adjustments to reconcile net
  income to net cash provided
  by operating activities:
 Acquired in-process research
  and development..............       --       --     6,130        --        --
 Depreciation and
  amortization.................       59      193       303       139     1,350
 Amortization of deferred debt
  costs........................       --       --        --        --       152
 Increase in allowance for
  doubtful accounts............       70      534     1,085       484     1,693
 Increase in inventory
  reserves.....................    1,514      488       330       146       525
 Stock compensation expense for
  stock option grants..........       41       --        43        10       164
 Changes in assets and
  liabilities, net of
  acquisitions:
  (Increase) decrease in
   accounts receivable.........   (2,247)  (4,363)   (8,391)   (3,196)    5,722
  (Increase) decrease in
   inventories.................   (1,850)     869    (1,352)     (135)   (2,042)
  (Increase) decrease in
   prepaid expenses and other
   assets......................      (16)    (975)      598       685      (190)
  Increase in deferred tax
   asset.......................   (2,489)    (191)   (1,525)      (73)     (453)
  Increase in accounts payable
   and accrued liabilities.....    1,053    1,170     5,157       516       428
  Increase (decrease) in
   accrued royalties...........    2,531    3,974    (1,361)    1,758     1,372
  Increase (decrease) in income
   taxes payable...............    2,532   (2,532)    1,207        63       837
  Increase (decrease) in
   deferred revenue............      551     (551)       --        --        --
                                 -------  -------  --------  --------  --------
  Net cash provided by
   operating activities........    4,753      917     2,719     1,080    12,262
                                 -------  -------  --------  --------  --------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
 Purchase of property and
  equipment....................     (310)    (427)     (512)     (149)     (698)
 Proceeds from sale of
  available-for-sale
  investments..................       --    1,003        --        --     3,254
 Purchase of available-for-sale
  investments..................     (948)      --        --        --    (9,536)
 Purchase of Communications
  Systems Division, net of cash
  acquired.....................       --       --   (16,832)       --        --
                                 -------  -------  --------  --------  --------
  Net cash provided by (used
   in) investing activities....   (1,258)     576   (17,344)     (149)   (6,980)
                                 -------  -------  --------  --------  --------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
 Proceeds from notes payable...       --       --    16,313        --        --
 Principal payments on notes
  payable......................       --       --        --        --      (859)
 Proceeds from issuance of
  preferred stock..............      388       --     5,002     5,002        --
 Costs incurred related to
  issuance of preferred stock..       --     (406)      (44)       --        --
 Costs incurred related to
  proposed initial public
  offering.....................       --       --      (349)     (262)     (156)
 Proceeds from issuance of
  common stock.................       28       24        34        30        10
 Principal payments on capital
  lease obligations............       (2)     (11)      (28)      (14)      (13)
                                 -------  -------  --------  --------  --------
  Net cash provided by (used
   in) financing activities....      414     (393)   20,928     4,756    (1,018)
                                 -------  -------  --------  --------  --------
  Net increase in cash and cash
   equivalents.................    3,909    1,100     6,303     5,687     4,264
CASH AND CASH EQUIVALENTS,
 beginning of period...........    1,676    5,585     6,685     6,685    12,988
                                 -------  -------  --------  --------  --------
CASH AND CASH EQUIVALENTS, end
 of period.....................  $ 5,585  $ 6,685  $ 12,988  $ 12,372  $ 17,252
                                 =======  =======  ========  ========  ========
SUPPLEMENTAL CASH FLOW
 INFORMATION:
 Cash paid for interest........  $    --  $    --  $     25  $     11  $    895
 Cash paid for income taxes....  $   961  $ 4,372  $    462  $    317  $    775
 Property and equipment
  acquired under capital
  leases.......................  $     7  $    67  $     --  $     --  $     --
 Issuance of warrants for
  preferred and common stock...  $    --  $    --  $  1,400  $     50  $     --
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
PC-TEL, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Information relating to the six months ended June 30, 1998 and June 30, 1999
                                 is unaudited)

                               DECEMBER 31, 1998

1. ORGANIZATION AND OPERATIONS OF THE COMPANY:

   PC-Tel, Inc. ("the Company") is a corporation that was originally
incorporated in California in February 1994. In July 1998, the Company
reincorporated in Delaware and this reincorporation has been reflected
retroactively in the accompanying consolidated financial statements. The
Company is a leading provider of software based connectivity solutions to
individuals and businesses worldwide. The Company designs, develops, produces
and markets advanced software-based high performance, low cost modems that are
flexible and upgradeable, with functionality that can include data/fax
transmission at various speeds, video conferencing and telephony features. The
Company's host signal processing software architecture utilizes the host PC's
central processing unit to perform digital signal processing and other
operations typically handled by dedicated hardware found in conventional
hardware-based modems. The Company's host signal processing technology allows
the elimination of this dedicated hardware, lowering costs and enhancing
capabilities.

   The Company is subject to certain risks including, but not limited to,
competition from larger, more established companies, reliance on a limited
number of customers, dependence on new product introductions, short product
life cycles, the Company's ability to develop and bring to market new products
on a timely basis, volatility of the industry including technical obsolescence,
dependence on key employees and the ability to attract and retain additional
qualified personnel to manage the anticipated growth of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 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 period.
Actual results could differ from those estimates.

 Consolidation and Foreign Currency Translation

   The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany accounts
and transactions. The functional currency of the Company's subsidiaries is the
United States dollar, accordingly, all translation gains and losses resulting
from transactions denominated in currencies other than United States dollars
are included in net income. As of December 31, 1998, the Company has
subsidiaries in the Cayman Islands and Japan.

 Cash and Cash Equivalents

   For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments or money-market type funds with an original maturity of three
months or less to be cash equivalents.

 Short-Term Investments

   At June 30, 1999, short-term investments consist of U.S. Government
investments with an original maturity of approximately four months and a
certificate of deposit with an original maturity in excess of three months.
These short-term investments are classified as available-for-sale and are
recorded at their fair value. If

                                      F-7
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

material, any unrealized gains or losses would be classified as Other
Comprehensive Income in the accompanying statement of stockholders' equity. As
of June 30, 1999, the cost and fair value of the short-term investments were
not materially different.

 Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash investments and trade receivables. The
Company has cash investment policies that limit its investments to short-term,
low-risk investments. With respect to trade receivables, the Company's
customers are concentrated in the personal computer industry and modem board
manufacturer industry segment and in certain geographic locations. The Company
actively markets and sells products in Asia. The Company performs ongoing
evaluations of its customers' financial conditions and generally requires no
collateral. As of December 31, 1997, approximately 55% of gross accounts
receivable was concentrated with three customers. As of December 31, 1998,
approximately 54% of gross accounts receivable was concentrated with three
customers. As of June 30, 1999, approximately 48% of gross accounts receivable
was concentrated with three customers.

 Inventories

   Inventories are stated at the lower of cost or market and include material,
labor and overhead costs. Inventories at December 31, 1997 and 1998 and June
30, 1999 were composed of finished goods only. Inventories included certain
finished goods that were in excess of the Company's expected requirements and
the excess amounts were fully reserved as of December 31, 1997, 1998 and June
30, 1999. Due to competitive pressures and technological innovation, it is
possible these estimates could change in the near term.

 Property and Equipment

   Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets. Assets acquired under capital leases are recorded at the present
value of the related lease obligations and are depreciated on a straight-line
basis over the shorter of the estimated useful life or lease term. Included in
property and equipment are assets acquired under capital lease obligations with
an original cost of approximately $74,000. Accumulated amortization on the
leased assets was approximately $6,000 and $22,000 as of December 31, 1997 and
1998, respectively. Leasehold improvements are amortized over the corresponding
lease term.

   Property and equipment consists of the following (in thousands):
December 31,
                                                  -------------
                                                  1997    1998   June 30, 1999
                                                  -----  ------  -------------
                                                                  (unaudited)
Computer and office equipment................. $ 868  $1,296     $1,962
   Furniture and fixtures........................   119     264        271
   Leasehold improvements........................     6      55         72
                                                  -----  ------     ------
       Total property and equipment..............   993   1,615      2,305
   Less: Accumulated depreciation and
    amortization.................................  (280)   (573)      (830)
                                                  -----  ------     ------
       Property and equipment, net............... $ 713  $1,042     $1,475
                                                  =====  ======     ======
F-8
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Accounting for Impairment of Long-Lived Assets

   The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an on-
going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including costs in excess of net assets of
businesses acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although
the assumptions may vary from transaction to transaction, they generally
include revenue growth, operating results, cash flows and other indicators of
value. Management then determines whether there has been a permanent impairment
of the value of long-lived assets by comparing future estimated undiscounted
cash flows to the asset's carrying value. If the estimated future undiscounted
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value. To date, the Company has
not needed to record any impairment losses on long-lived assets.

 Software Development Costs

   The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company's products include a software component. The Company has expensed all
software development costs to date, and substantially all development costs
have been incurred prior to the Company's products attaining technological
feasibility.

 Revenue Recognition

   Revenues consist primarily of sales of products to original equipment
manufactures ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company provides for estimated sales returns and
allowances related to sales to OEMs at the time of shipment. Revenues from
sales to distributors are made under agreements allowing price protection and
rights of return on unsold products. In the fourth quarter of 1998, the Company
began to record revenue relating to sales to distributors upon sell-through
from the distributor to the end customer. Prior to this change, the Company
recognized revenues upon shipment to distributors, net of reserves for
estimated returns and price protection arrangements. This change did not have a
material effect on the Company's financial statements.

   The Company has also generated revenues from engineering contracts. Revenues
from engineering contracts are recognized as contract milestones are achieved.
Royalty revenue is recognized when confirmation of royalties due to the Company
is received from licensees.

 Stock-Based Compensation

   The Company accounts for stock based compensation in accordance with SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 permits the use
of either a fair value based method or the method defined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25"), to account for stock-based compensation arrangements. Companies
that elect to employ the valuation method provided in APB No. 25 are required
to disclose the pro forma net income (loss) that would have resulted from the
use of the fair value based method. The Company has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB No. 25 and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 8.

 Earnings Per Share

   The Company computes 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

                                      F-9
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

diluted, and present per share data for all periods in which a statement of
operations is presented. Basic earnings per share is computed by dividing net
income per share by the weighted average number of shares of common stock
outstanding.

   Diluted earnings per share is computed using the weighted average number of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents consist of preferred stock using the "if converted" method
and stock options and warrants using the treasury stock method. Preferred
stock, common stock options and warrants are excluded from the computation of
diluted earnings per share if their effect is anti-dilutive.

   Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock issued or granted for
nominal consideration prior to the anticipated effective date of the proposed
initial public offering must be included in the calculation of basic and
diluted net income per common share as if they had been outstanding for all
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.

   The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
three years ended December 31, 1998 and for the six months ended June 30, 1998
and June 30, 1999, respectively (in thousands, except per share data):
Six Months
                                                                     Ended
                                        Year Ended December 31,    June 30,
                                        ----------------------- ---------------
                                         1996    1997    1998    1998    1999
                                        ------- ------- ------- ------- -------
                                                                  (unaudited)
Net income............................. $ 3,004 $ 2,301 $   495 $   683 $ 2,704
                                        ======= ======= ======= ======= =======
Basic earnings per share:
  Weighted average common shares
   outstanding.........................     627   2,032   2,355   2,320   2,461
                                        ------- ------- ------- ------- -------

Basic earnings per share............... $  4.79 $  1.13 $  0.21 $  0.29 $  1.10
                                        ======= ======= ======= ======= =======
Diluted earnings per share:
  Weighted average common shares
   outstanding.........................     627   2,032   2,355   2,320   2,461
  common stock option grants and
   outstanding warrants................   1,848   1,727   1,518   1,687   1,666
  Weighted average preferred stock
   outstanding.........................   7,805   7,886   8,452   8,393   8,511
                                        ------- ------- ------- ------- -------
  Total weighted average common shares
   and common stock equivalents........  10,280  11,645  12,325  12,400  12,638
                                        ------- ------- ------- ------- -------
Diluted earnings per share............. $  0.29 $  0.20 $  0.04 $  0.06 $  0.21
                                        ======= ======= ======= ======= =======
Comprehensive Income

   Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." Comprehensive income is to include amounts which have
been previously excluded from net income and reflected instead in stockholders'
equity. For all periods presented, comprehensive income is the same as reported
net income.

 The Cost of Computer Software Developed or Obtained for Internal Use

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,"

                                      F-10
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

which the Company adopted in fiscal 1999. SOP No. 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
has been met. The adoption did not have a material impact on the Company's
financial position or results of operations.

 Costs of Start-Up Activities

   In April 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which the Company
adopted in fiscal 1999. SOP No. 98-5 requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-up costs
that were previously capitalized must be written off when SOP No. 98-5 is
adopted. The adoption did not have a material impact on the Company's financial
position or results of operations.

 Proposed Initial Public Offering

   The Board of Directors has approved a plan to file a registration statement
with the Securities and Exchange Commission to register shares of its common
stock in connection with a proposed initial public offering ("IPO"). Costs
incurred by the Company related to the IPO have been recorded within the
consolidated statements of stockholders' equity. If the Company is not able to
complete the IPO, these capitalized costs would be expensed in the consolidated
statements of operations.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. The Company becomes subject to SFAS No. 133
for the first quarter beginning after January 1, 2001. Because the Company does
not currently hold any derivative instruments and does not engage in hedging
activities, the adoption of SFAS No. 133 is not expected to have a material
impact on the financial position or results of operations of the Company.

3. RISKS AND UNCERTAINTIES:

   For the year ended December 31, 1998, the Company's purchases of integrated
circuits were primarily concentrated with a limited number of vendors. If these
vendors were unable to provide integrated circuits in a timely manner and the
Company was unable to find alternative vendors, the Company's business,
operating results and financial condition could be adversely affected.

   The majority of the Company's revenues are derived from a limited number of
products utilizing host signal processing technology. The market for these
products is characterized by frequent transitions in which products rapidly
incorporate new features and performance standards. A failure to develop
products with required feature sets or performance standards or a delay in
bringing a new product to market could adversely affect the Company's operating
results.

4. ACQUISITIONS:

 Communications Systems Division

   On December 22, 1998, the Company acquired substantially all of the assets
and certain of the liabilities of Communications Systems Division ("CSD"), a
division of General DataComm, Inc., for a total purchase

                                      F-11
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

price of approximately $17 million. The acquisition, which was accounted for as
a purchase, was paid for in cash and financed primarily with notes payable. In
conjunction with the acquisition, the Company and one of its wholly owned
subsidiaries entered into Notes Payable arrangements for approximately $16.3
million (Note 5). The consolidated statement of operations for the year ended
December 31, 1998, includes the results of operations of CSD from the date of
acquisition. The excess purchase price over the net tangible assets acquired
was $16.8 million of which $6.1 million was allocated to in-process research
and development and $10.7 million was allocated to other intangible assets.
Amounts allocated to other intangible assets (classified as Goodwill and Other
Intangible Assets, net in the accompanying consolidated balance sheets) include
patents and intellectual property of $8.7 million, work force of $1.3 million
and goodwill of $671,000, all of which are being amortized over their useful
lives which was five years on a weighted average basis. The allocation of
purchase price is a preliminary estimate by management and is subject to
further adjustment.

   Upon completion of the CSD acquisition, the Company immediately expensed
$6.1 million representing purchased in-process technology that had not yet
reached technological feasibility and had no alternative future use. The value
assigned to purchased in-process technology, based on a percentage of
completion discounted cash flow method, was determined by identifying research
projects in areas for which technological feasibility has not been established.
The value was determined by estimating the costs to develop the purchased in-
process technology into commercially viable products, estimating the resulting
net cash flows from such projects and discounting the net cash flows back to
their present value. The discount rate includes a risk adjusted discount rate
to take into account the uncertainty surrounding the successful development of
the purchased in-process technology. The valuation includes cash inflows from
in-process technology through 2002 with revenues commencing in 1999 and
increasing significantly in 2000 before declining in 2002. A royalty payment of
3% was assumed from in-process technology to existing technology, based on
management's estimate of a patent license rate. The High Density Remote Access
System and industrial modem projects were approximately 56% complete at the
time of the valuation and the expected timeframe for achieving these product
releases was assumed to be in the second half of 1999. The DSL project was
approximately 56% complete at the time of the valuation and the expected time
frame for achieving this product release is assumed to be in early 2000. The
percentage complete calculations for all projects were estimated based on
research and development expenses incurred to date and management estimates of
remaining development costs. Significant remaining development efforts must be
completed in the next 6 to 18 months in order for CSD's projects to become
implemented in a commercially viable timeframe. If these projects are not
successfully developed, the Company's future revenue and profitability may be
adversely affected. Additionally, the value of other intangible assets acquired
may become impaired.

   The unaudited pro forma financial information for the years ended December
31, 1997 and 1998 is presented below as if CSD had been acquired on January 1,
1997.
Year Ended
                                                                 December 31,
                                                                ---------------
                                                                 1997    1998
                                                                ------- -------
Revenues.................................................. $28,573 $35,632
     Net income................................................ $ 2,272 $ 2,978
     Diluted net income per share.............................. $  0.20 $  0.24
5. NOTES PAYABLE:

   On December 22, 1998, the Company and one of its wholly owned subsidiaries,
each entered into a note payable arrangement ("the Notes Payable") with a bank.
The Notes Payable are for a total amount of $16.3 million. The Notes Payable
bear interest at the bank's prime interest rate plus 0.5% (8.25% at
December 31, 1998) and are subject to certain financial and non-financial
covenants. In addition, the bank

                                      F-12
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

received a primary security interest in all assets, including intellectual
property, of the Company. The Notes Payable are to be repaid in 59 equal
monthly installments of approximately $258,000 and a final payment of
approximately $5.9 million in January 2004. The Company will be required to pay
a 3% penalty if the Notes Payable are paid prior to maturity. No payments on
the Notes Payable were required to be made by December 31, 1998.

   As of December 31, 1998, the aggregate principal maturities of the Notes
Payable are as follows (in thousands):
1999.............................................................. $1,614
       2000..............................................................  1,936
       2001..............................................................  2,111
       2002..............................................................  2,291
       2003..............................................................  2,489
       2004..............................................................  5,882
In connection with the Notes Payable, the Company issued a warrant to
purchase 200,000 shares of Series C preferred stock at an exercise price of
$8.00 per share. The warrants are immediately exercisable and expire ten years
from the date of issuance. The fair value of the warrants at the date of the
issuance was estimated to be approximately $1.4 million using the Black-Scholes
option pricing model. The Company has recorded the fair value of the warrants
as a deferred charge which will be amortized over the term of the Notes
Payable.

6. COMMITMENTS AND CONTINGENCIES:

   The Company leases its facilities under operating leases which expire
through September 2001. In addition, the Company leases certain of its
equipment under capital leases. As of December 31, 1998, the future minimum
lease commitments under all leases were as follows (in thousands):
Capital Operating
                                                               Leases   Leases
                                                               ------- ---------
1999.....................................................   $29    $  647
     2000.....................................................     4       517
     2001.....................................................     4        62
     2002.....................................................     3        --
                                                                 ---    ------
     Total minimum lease payments.............................    40    $1,226
                                                                        ======
     Less: Amounts representing interest......................    (4)
                                                                 ---
     Present value of minimum lease payments..................   $36
                                                                 ===
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was approximately $139,000, $248,000 and $364,000, respectively.

   As of December 31, 1997 and 1998, the Company has accrued royalties of
approximately $6.5 million and $5.1 million, respectively. The Company has
entered into royalty agreements in fiscal 1998 and continues to negotiate
royalty agreements with several other third parties. Accordingly, the Company
has accrued its best estimate of the amount of royalties payable based on
royalty agreements already signed or in negotiation, as well as advice from
patent counsel. Should the final agreements result in royalty rates
significantly different from these assumptions, the Company's business,
operating results and financial condition could be materially and adversely
affected.

   During 1998, Motorola, Inc. ("Motorola") filed an action for patent
infringement against the Company (and one other defendant) of seven Motorola
patents. In its complaint, Motorola seeks damages for the

                                      F-13
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's alleged infringement, including treble damages for the Company's
alleged willful infringement and an injunction against the Company. Motorola is
also seeking attorney's fees and costs.

   The Company filed an answer to Motorola's complaint denying infringement of
the seven asserted Motorola patents and asserted that each patent is invalid or
unenforceable. In addition, the Company asserted counterclaims and declaratory
relief for invalidity and/or unenforceability and noninfringements of each of
the seven asserted Motorola patents. By its counterclaims, the Company seeks
compensatory and punitive damages, an injunction against Motorola, and an award
of treble damages for Motorola's violation of the Federal and state antitrust
laws, and for violation of Massachusetts General Law. The Company also seeks
its costs and attorney's fees in this action. An initial conference with the
Court under Delaware local rule was held in April 1999 and discovery started in
June 1999.

   Due to the nature of litigation generally and because the lawsuit brought by
Motorola is at an early stage, management cannot ascertain the availability of
injunctive relief or other equitable remedies or estimate the total expenses,
possible damages or settlement value, if any, that may ultimately be incurred
in connection with Motorola's suit. However, management believes, based on the
advice of legal counsel, that the Company has meritorious defenses to the
allegations contained in Motorola's complaint. This litigation could be time
consuming and costly, and the Company will not necessarily prevail given the
inherent uncertainties of litigation. In the event that the Company does not
prevail in litigation, the Company could be prevented from selling soft modem
products or be required to enter into royalty or licensing agreements or pay
monetary damages. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the event of a
successful claim against the Company, the Company's financial position and
results of operations could be materially adversely affected.

7. PREFERRED STOCK:

   Series A convertible preferred stock ("Series A"), Series B convertible
preferred stock ("Series B") and Series C convertible preferred stock ("Series
C") consist of the following, net of issuance costs (dollars in thousands):
December 31,
                                                    --------------
                                                                     June 30,
                                                     1997    1998      1999
                                                    ------  ------  -----------
                                                                    (unaudited)
Series A:
  $0.001 par value; Authorized--4,635,548
  Outstanding--4,635,548 shares; liquidation pref-
   erence of $1,113................................ $    5  $    5      $ 5
Series B:
  $0.001 par value; Authorized--3,250,000
  Outstanding--3,250,000 shares; liquidation pref-
   erence of $3,900................................      3       3        3
Series C:
  $0.001 par value; Authorized--1,500,000
   Outstanding or subscribed--625,200 shares;
   liquidation preference of $5,002................      1       1        1
                                                    ------  ------      ---
                                                    $    9  $    9      $ 9
                                                    ======  ======      ===
The Series C preferred stock was subscribed as of December 31, 1997 and was
subsequently issued, and payment was received, in February 1998. Accordingly, a
subscription receivable of approximately $5.0 million was recorded as a current
asset at December 31, 1997 in the accompanying consolidated balance sheets.

                                      F-14
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The rights, restrictions and preferences of the Series A, Series B and
Series C (collectively "convertible preferred stock") are as follows:

  . In the event of any liquidation, dissolution or winding up of the
    Company, either voluntary or involuntary, the holders of Series C shares
    shall be entitled to receive $8.00 per share, prior and in preference to
    any distribution of the assets or surplus funds to the holders of Series
    A, Series B and common stock, plus all declared but unpaid dividends on
    each share of Series C. After payment of the full amount due to the
    holders of Series C, the holders of Series A and Series B shall be
    entitled to receive, prior to any distribution of the Company's assets or
    property to the holders of common stock, the amount of $0.24 and $1.20
    per share, respectively, plus all declared but unpaid dividends on each
    share of Series A and Series B. The Series A and Series B shall rank on
    parity as to the receipt of any respective preferential amount for Series
    A and Series B shares. After payment of the full amount to Series A,
    Series B and Series C shareholders, the holders of common stock shall be
    entitled to receive an amount per share equal to $82,000 divided by the
    number of common shares outstanding at the time of distribution
    (excluding shares of common then issuable upon conversion of the
    convertible preferred stock). Any remaining assets shall be distributed
    ratably to the holders of convertible preferred stock and common stock,
    each share of preferred being treated as the number of shares of common
    into which it could then be converted.

  . Each share of convertible preferred stock is convertible, at the option
    of the shareholder, into one share of common stock, subject to
    adjustments to prevent dilution as provided in the respective stock
    agreements.

  . The holders of convertible preferred stock are entitled to the number of
    votes equal to the number of shares of common stock into which each share
    of convertible preferred stock could be converted.

  . Each share of convertible preferred stock will automatically convert into
    common stock in the event of the closing of an underwritten public
    offering of the Company's common stock from which the Company receives
    gross proceeds in excess of $15,000,000 and for which the offering price
    is not less than $16.00 per share.

  . Each convertible preferred stock shareholder is entitled to receive
    annual dividends at a rate of $0.019 per Series A share, $0.096 per
    Series B share and $0.64 per Series C share when, and if, declared by the
    Board of Directors. No dividends shall be paid on shares of Series A or
    Series B or common stock until total dividends have been paid, declared
    or set apart for Series C shareholders. Series A, Series B and Series C
    shareholders shall receive dividends prior to payment of dividends on
    common stock. Dividends are non-cumulative. No dividends have been
    declared to date.

8. COMMON STOCK:

   As of June 30, 1999, the Company had reserved shares of its common stock for
future issuance as follows (unaudited):
Conversion of Series A preferred stock............................  4,635,548
   Conversion of Series B preferred stock............................  3,250,000
   Conversion of Series C preferred stock............................    625,200
   Conversion of Series C and common stock warrants..................    202,417
   1995 and 1997 Stock Option Plans..................................  4,208,670
   Director Option Plan and Employee Stock Purchase Plan.............  1,000,000
                                                                      ----------
                                                                      13,921,835
                                                                      ==========
F-15
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Unaudited Pro Forma Stockholders' Equity

   The Board of Directors have authorized the filing of a registration
statement with the Securities and Exchange commission to register shares of its
common stock in connection with a proposed initial public offering ("IPO"). If
the IPO is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will be converted into 8,510,748 shares
of common stock upon the closing of the IPO. The effect of the conversion has
been reflected as unaudited pro forma stockholders' equity in the accompanying
balance sheet as of June 30, 1999.

Stock Option Plans

   The Company has two stock option plans, the 1995 Stock Option Plan ("1995
Plan") and the 1997 Stock Option Plan ("1997 Plan"). Under the 1995 Plan and
the 1997 Plan, the Board of Directors may grant to employees and consultants
options and/or purchase rights to purchase the Company's common stock at terms
and prices determined by the Board of Directors. The number of authorized
shares available for issuance under the 1995 Plan was 3,200,000. As of December
31, 1998, the number of shares that remain available to be granted under the
1995 Plan is 152,673. The number of authorized shares available for issuance
under the 1997 Plan is 3,500,000. As of December 31, 1998, the number of shares
that remain available to be granted under the 1997 Plan is 1,049,772.

   In May 1998, the Board of Directors approved an increase in the number of
authorized shares available for issuance under the 1997 Plan to 4,500,000
shares of common stock. In August 1999, the Board of Directors approved the
amendment and restatement of the 1997 Plan and approved an additional increase
in the number of authorized shares available for issuance under the 1997 Plan
to 5,500,000 shares of common stock. The increase to 5,500,000 authorized
shares requires stockholder approval. The number of authorized shares under the
1997 Plan will increase annually 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 and
vesting of all grants are to be determined by the Board of Directors. Options
granted under the 1997 Plan expire 10 years from the date of grant. The 1997
Plan will terminate in 2007.

 1998 Director Option Plan ("Directors Plan")

   The Directors Plan will not become effective until the effectiveness of the
proposed initial public offering. A total of 200,000 shares of common stock
have been reserved for issuance under the Directors Plan. The 1998 Director's
Plan provides for the automatic grant of 15,000 shares of common stock to each
new non-employee director upon election to the Board of Directors. 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 option is granted
to the non-employee director, he or she shall automatically be granted an
option to purchase 7,500 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
7,500 share options shall vest completely on the anniversary of their date of
grant, provided that the optionee continues to serve as a director on such
dates. All of the options granted under the 1998 Director's Plan shall have a
term of 10 years. 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.

 Employee Stock Purchase Plan ("Purchase Plan")

   In May 1998, a total of 800,000 shares of common stock were reserved for
future issuance under the 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. The Purchase Plan
will enable eligible employees to purchase common stock at the lower of 85% of
the fair market value of the Company's

                                      F-16
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

common stock on the first or last day of each six-month offering period. The
first offering period will begin upon the closing date of the proposed initial
public offering. The Purchase Plan will terminate in 2008.

   Nonqualified options granted under the 1995 Plan and 1997 Plan must be
issued at a price equal to at least 85% of the fair market value of the
Company's common stock at the date of grant. The options 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 stock
option agreement, and vest over a vesting schedule determined by the Board of
Directors.

Deferred Compensation

   In connection with the grant of certain stock options to employees during
fiscal 1998 and the six months ended June 30, 1999, the Company recorded
deferred compensation of $257,000 and $2.1 million, respectively, representing
the difference between the estimated fair value of the common stock for
accounting purposes and the option exercise price of such options at the date
of grant. Such amount is presented as a reduction of stockholders' equity and
is amortized ratably over the vesting period of the applicable options. During
1996, the Company granted options to purchase shares of common stock at an
exercise price below the fair value of the Company's common stock at the date
of grant. Compensation expense of $41,000 was recognized in relation to those
grants in the year ended December 31, 1996. The amortization expense relates to
options awarded to employees in all operating expense categories. The
amortization of deferred compensation has not been separately allocated to
these categories. The amount of deferred compensation expense to be recorded in
future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

Valuation of Stock Options

   Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS No. 123.
The fair value for the stock options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions for
fiscal years 1996, 1997 and 1998: risk-free interest rates in the range of 5.2%
to 6.5%; dividend yields of zero; an estimated volatility factor of the market
price of the Company's common stock in the range of 40% to 55%; and an expected
life of the option of six months after vest date. The weighted-average
estimated fair value of options granted during fiscal 1996, 1997 and 1998 was
$0.37, $2.32 and $3.43 per share, respectively.

   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 the Company's 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, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

                                      F-17
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. The Company's
pro forma net income (loss) would have been approximately $3.0 million, $2.0
million and $(984,000) for fiscal years 1996, 1997 and 1998, respectively. Pro
forma diluted net income (loss) per share would have been $0.29, $0.17 and
($0.42) for fiscal years 1996, 1997 and 1998, respectively.

   The following table summarizes stock option activity under the 1995 Plan and
1997 Plan:
Options Outstanding
                                                  ----------------------------
                                       Options                Weighted Average
                                      Available     Shares     Exercise Price
                                      ----------  ----------  ----------------
Balance, December 31, 1995........    437,003   2,762,997       $0.02
     Granted.........................   (674,670)    674,670       $0.26
     Exercised.......................         --  (1,454,999)      $0.02
     Forfeited.......................    237,667    (237,667)      $0.05
                                      ----------  ----------       -----
   Balance, December 31, 1996........         --   1,745,001       $0.12
     Authorized......................  1,500,000          --
     Granted......................... (1,172,830)  1,172,830       $2.32
     Exercised.......................         --    (753,991)      $0.03
     Forfeited.......................     95,590     (95,590)      $0.91
                                      ----------  ----------       -----
   Balance, December 31, 1997........    422,760   2,068,250       $1.36
     Authorized......................  2,000,000          --         --
     Granted......................... (1,393,900)  1,393,900       $8.13
     Exercised.......................         --    (203,257)      $0.17
     Forfeited.......................    173,585    (173,585)      $2.52
                                      ----------  ----------       -----
   Balance, December 31, 1998........  1,202,445   3,085,308       $4.43
     Granted (unaudited).............   (893,193)    893,193       $9.83
     Exercised (unaudited)...........         --     (79,083)      $0.12
     Forfeited (unaudited)...........     83,708     (83,708)      $7.18
                                      ----------  ----------       -----
   Balance, June 30, 1999
    (unaudited)......................    392,960   3,815,710       $5.72
                                      ==========  ==========       =====
Options Outstanding                Options Exercisable
                                ----------------------------------------- ---------------------------
                     Number            Weighted-                             Number
                 Outstanding at         Average             Weighted-     Exercisable    Weighted-
   Range of       December 31,         Remaining         Average Exercise December 31,    Average
Exercise Prices       1998      Contractual Life (Years)      Price           1998     Exercise Price
---------------  -------------- ------------------------ ---------------- ------------ --------------
$0.02-$0.12        389,583              7.09                $0.07         307,832        $0.05
  $0.48-$0.48        528,000              8.00                $0.48         283,190        $0.48
  $1.25-$2.00        423,200              8.10                $1.40         197,721        $1.39
  $2.35-$3.50        244,000              8.33                $3.01          99,968        $3.00
  $4.50-$4.85         87,500              9.12                $4.76           8,438        $4.50
  $7.45-$9.25      1,413,025              9.32                $8.24          30,355        $7.45
                   ---------                                                -------
                   3,085,308                                  $4.43         927,504
                   =========                                                =======
Warrants

   In connection with the issuance of the Series C preferred stock, the Company
issued warrants to a Company advisor to acquire 31,260 shares of common stock
at $6.96 per share. The warrants expired unexercised in February 1999. The fair
value of this warrant at the date of issuance was $50,000 and this

                                      F-18
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

amount has been included as an issuance cost of the Series C preferred stock.
The Company also issued warrants to acquire 2,417 shares of common stock at
$8.00 in February 1998. The warrants expire in February 2001 and the fair value
at the date of issuance was not material. See Note 5 for warrants to purchase
200,000 shares of Series C preferred stock issued in conjunction with the
Company's Notes Payable arrangements.

9. INCOME TAXES:

   The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires that deferred taxes be
calculated using an asset and liability approach under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.

   The domestic and foreign components of income before provision for income
taxes were as follows (in thousands):
Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
Domestic........................................ $  4,009  $ 2,438   ($1,390)
   Foreign.........................................       --      818     2,097
                                                    --------  -------  --------
                                                    $  4,009  $ 3,256  $    707
                                                    ========  =======  ========

   The provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
Current:
     Federal....................................... $  2,848  $   827  $  1,188
     State.........................................      646      237       482
     Foreign.......................................       --       82        67
                                                    --------  -------  --------
                                                       3,494    1,146     1,737
                                                    --------  -------  --------
   Deferred:
     Federal.......................................   (2,152)    (240)     (942)
     State.........................................     (337)      49      (583)
                                                    --------  -------  --------
                                                      (2,489)    (191)   (1,525)
                                                    --------  -------  --------
                                                    $  1,005  $   955  $    212
                                                    ========  =======  ========

   The provision for income taxes differs from the amount computed by applying
the Federal statutory income tax rate as follows (in thousands):
Year Ended December 31,
                                                    ---------------------------
                                                      1996     1997      1998
                                                    --------  -------  --------
Provision at Federal statutory rate............. $  1,403  $ 1,140  $    247
   State income tax, net of Federal benefit........      241       95        25
   Change in valuation allowance...................     (577)      --        --
   Foreign taxes in excess of statutory rate.......       --       82        67
   R & D credit....................................       --     (224)     (310)
   Other...........................................      (62)    (138)      183
                                                    --------  -------  --------
                                                    $  1,005  $   955  $    212
                                                    ========  =======  ========
F-19
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The net deferred tax asset consists of the following (in thousands):
December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
Accrued royalties............................................. $2,070 $1,152
   Inventory reserve.............................................     58    262
   Deferred amortization of purchased assets.....................     --  2,302
   California income tax payable.................................     82     --
   Other cumulative temporary differences........................    470    489
                                                                  ------ ------
                                                                  $2,680 $4,205
                                                                  ====== ======
Other cumulative temporary differences consist of items currently deductible
for financial reporting purposes, but not for tax purposes. These items are
primarily estimated reserves and accruals. The realization of the deferred tax
asset is dependent on generating sufficient taxable income in future years.
Although realization is not assured, management believes it is more likely than
not that the deferred tax asset will be realized. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during future years is reduced.

10. RELATED PARTY TRANSACTIONS:

   The President of a significant customer of the Company was a member of the
Company's Board of Directors from inception to November 1, 1997. For the years
ended December 31, 1996 and 1997, revenues generated from sales to this related
party customer were approximately $1.7 million and $2.2 million, respectively.

11. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION:

   Effective January 1, 1998, the Company adopted SFAS No. 131, ("SFAS 131")
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for business segments of a company and related
disclosures. The Company is organized based upon the nature of the products it
offers. Under this organizational structure, the Company operates in one
segment, that segment being software-based modems using host signal processing
technology. The Company markets its products worldwide through its sales
personnel, independent sales representatives and distributors.

   The Company's sales to customers outside of the United States, as a percent
of total revenues, are as follows:
Six Months Ended
                             Year Ended December 31,           June 30,
                             ---------------------------   -------------------
                              1996      1997      1998       1998       1999
                             -------   -------   -------   --------   --------
                                                              (unaudited)
Taiwan...................      37%       46%       48%        62%        21%
   China (Hong Kong)........      15%       20%       --         --         47%
   Singapore................      19%        9%       --         --          2%
   Rest of Asia.............       3%        2%       28%        15%        29%
   Other....................       9%        2%        1%         3%        --
                             -------   -------   -------   --------   --------
                                  83%       79%       77%        80%        99%
                             =======   =======   =======   ========   ========
F-20
PC-TEL, INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Sales to major customers representing greater than 10% of total revenues are
as follows:
Six Months
                             Year Ended December 31,       Ended June 30,
                             ---------------------------   -----------------
   Customer                   1996      1997      1998      1998      1999
   --------                  -------   -------   -------   -------   -------
                                                             (unaudited)
A, related party (See
    Note 10)................      10%        9%       13%        5%       --
   B........................      16%        4%       12%       21%        6%
   C........................       5%        6%       15%       11%       10%
   D........................      22%       20%        4%       15%        1%
   E........................      13%       --        --        --        --
   F........................      --        18%       12%       12%        3%
   G........................      --        --         8%       --        20%
   H........................      --        --         3%       --        42%
As of December 31, 1997, the Company's long-lived assets were primarily
located in the United States. The Company's long-lived assets, comprising
primarily intangible assets, by geographic region as of December 31, 1998 and
June 30, 1999 are as follows:
December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (unaudited)
United States.......................................    $5,357      $5,314
   Cayman Islands......................................    $8,178      $7,399
F-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Management of
General DataComm, Inc.:

   In our opinion, the accompanying balance sheets and the related statements
of income and divisional equity and of cash flows present fairly, in all
material respects, the financial position of the Communications Systems
Division, a division of General DataComm, Inc., at September 30, 1998 and 1997,
and the results of its operations and its cash flows for each of the years then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

                                          PricewaterhouseCoopers LLP

Stamford, Connecticut
December 15, 1998

                                      F-22
COMMUNICATIONS SYSTEMS DIVISION

                                 BALANCE SHEETS
September 30,
                                                                  -------------
                                                                   1998   1997
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
ASSETS
Assets:
  Fixed assets, net.............................................. $  119 $  117
  Capitalized software...........................................  1,993  1,359
  Security deposit and accrued interest..........................      8     --
  Patents........................................................     --     --
                                                                  ------ ------
    Total assets................................................. $2,120 $1,476
                                                                  ====== ======
                           LIABILITIES
Liabilities:
  Income taxes payable........................................... $  568 $  940
  Deferred income tax liabilities................................    251    535
                                                                  ------ ------
    Total liabilities............................................    819  1,475
                                                                  ------ ------
Divisional Equity................................................  1,301      1
                                                                  ------ ------
    Total liabilities and divisional equity...................... $2,120 $1,476
                                                                  ====== ======
The accompanying notes are an integral part of these financial statements.

                                      F-23
COMMUNICATIONS SYSTEMS DIVISION

                   STATEMENTS OF INCOME AND DIVISIONAL EQUITY
For the years
                                                                      ended
                                                                  September 30,
                                                                  -------------
                                                                   1998   1997
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
Licensing revenues............................................... $3,531 $4,564
Operating Expenses:
  General and Administrative.....................................    135     83
  Selling and Marketing..........................................    174    146
  Research and Development.......................................  1,209    685
                                                                  ------ ------
                                                                   1,518    914
Net income before income taxes...................................  2,013  3,650
Income tax provision.............................................    819  1,475
                                                                  ------ ------
  Net income..................................................... $1,194 $2,175
Divisional equity at beginning of year........................... $    1 $  133
Cash transfer from (to) parent...................................    106 (2,307)
                                                                  ------ ------
  Divisional equity at end of year............................... $1,301 $    1
                                                                  ====== ======
The accompanying notes are an integral part of these financial statements.

                                      F-24
COMMUNICATIONS SYSTEMS DIVISION

                            STATEMENTS OF CASH FLOWS
For the years
                                                                    ended
                                                                September 30,
                                                                --------------
                                                                 1998    1997
                                                                ------  ------
                                                                     (in
                                                                 thousands)
Cash flows from operating activities:
  Net income................................................... $1,194  $2,175
  Adjustments to reconcile net income to net cash provided by
   operating activities
    Depreciation expense.......................................     78      62
    Increase in security deposit...............................     (8)     --
    (Decrease) increase in income taxes payable................   (372)    940
    (Decrease) increase in deferred income taxes...............   (284)    526
                                                                ------  ------
      Net cash provided by operating activities................    608   3,703
                                                                ------  ------
Cash flows from investing activities:
  Acquisition of property, plant and equipment.................    (80)    (37)
  Capitalized software development costs.......................   (634) (1,359)
                                                                ------  ------
      Net cash used in investing activities....................   (714) (1,396)
  Net cash borrowed from (transferred to) GDC..................    106  (2,307)
                                                                ------  ------
      Net increase in cash and cash equivalents................     --      --
Cash and cash equivalents at beginning of year.................     --      --
                                                                ------  ------
Cash and cash equivalents at end of year....................... $   --  $   --
                                                                ======  ======
The accompanying notes are an integral part of these financial statements.

                                      F-25
COMMUNICATIONS SYSTEMS DIVISION

                         NOTES TO FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies

 Description of Business

   Communications Systems Division (the "Company") is a division of General
DataComm, Inc., which is a subsidiary of General DataComm Industries, Inc.
("GDC"). The Company, which is principally comprised of scientists and
engineers, develops, patents and licenses advanced modem and access
technologies.

 Basis of Presentation

   The Company's balance sheets and statements of operations include assets,
liabilities, revenues and expenses that are specifically identifiable to the
Company. In addition, GDC provides certain services, as discussed in Note 6,
which are allocated to the Company.

 Cash

   All cash balances are transferred to GDC as they arise.

 Property, Plant and Equipment

   Property, plant and equipment are stated at cost and depreciated or
amortized using the straight-line method over their estimated useful lives.

 Capitalized Software Development Costs

   Software development costs are capitalized for those products that have met
the requirements of technological feasibility. When the products under
development begin to be sold, such capitalized costs will be amortized on a
product-by-product basis over the estimated economic life of the product. No
amortization was recorded in either fiscal 1998 or fiscal 1997 as the products
in development had reached the technological feasibility stage but had not
reached the marketability stage. Unamortized costs are reviewed for
recoverability and, if necessary, are adjusted so as not to exceed estimated
net realizable value.

 Patents

   The Company holds various technology patents. The third party cost of these
patents has been fully amortized. Registration costs are expensed as incurred.

 Revenue Recognition

   The Company has entered into numerous technology licensing agreements
whereby licensees pay the Company fees for the use or sale of specific patented
technology. Technology licensing fee revenue is recognized in the period
received, or alternatively, may be accrued when readily determinable.

 Income Taxes

   Income taxes are calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement requires that deferred income taxes reflect the impact of temporary
differences in bases of assets and liabilities recognized for financial
reporting purposes and amounts recognized for tax purposes. As a division, the
Company is included in the consolidated income tax returns of GDC, however, the
Company's provision for income taxes has been calculated on a separate return
basis.

                                      F-26
COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Employee Benefits and Incentive Plans

   The Company's employees participate in plans for post-retirement benefits,
post-employment benefits, stock option plans, and retirement savings and
deferred profit sharing plans, which are sponsored by GDC. No assets,
liabilities or expenses have been reflected in the balance sheets and
statements of operations related to the post-retirement and post-employment
plans, as it is not practical to segregate these amounts.

 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
reporting periods presented. Actual results could differ from those estimates.
For example, the markets the Company is involved in are characterized by
intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company's
capitalized software.

2. Property, Plant and Equipment

   Property, plant and equipment consists of:
September
                                                          30,
                                                       ---------   Estimated
                                                       1998 1997  Useful Life
                                                       ---- ---- -------------
Test equipment and fixtures, office equipment...... $651 $578 2 to 10 years
     Less: accumulated depreciation...................  532  461
                                                       ---- ----
                                                       $119 $117
                                                       ==== ====
Depreciation expense amounted to $78 and $62 in fiscal 1998 and 1997,
respectively.

3. Income Taxes

   For purposes of the financial statements, income taxes are provided on a
stand-alone basis as if the Company is a separate entity.

   The provision for income taxes consists of the following amounts:
September
                                                                         30,
                                                                     -----------
                                                                     1998  1997
                                                                     ---- ------
Current:
     State.......................................................... $146 $  246
     Federal........................................................  422    694
                                                                     ---- ------
                                                                      568    940
   Deferred:
     State.......................................................... $ 66 $  144
     Federal........................................................  185    391
                                                                     ---- ------
                                                                      251    535
                                                                     ---- ------
       Total provision.............................................. $819 $1,475
                                                                     ==== ======
F-27
COMMUNICATIONS SYSTEMS DIVISION

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

   The tax effects of temporary differences which give rise to deferred income
tax assets and liabilities consisted of the following:
September
                                                                      30,
                                                                  ------------
                                                                  1998   1997
                                                                  -----  -----
Deferred income tax assets:
     Property, plant and equipment............................... $   3  $   8
   Deferred income tax liabilities:
     Capitalized software........................................  (254)  (543)
                                                                  -----  -----
       Net deferred income tax liabilities....................... $(251) $(535)
                                                                  =====  =====
4. Operating Leases

   GDC entered into an operating lease on June 1, 1998 to provide separate
facilities for the operation of the Company. Such lease expires in May 2001.
The lease contains renewal options and provisions for payment by the lessee of
executory costs (taxes, maintenance and insurance).

   The following is a schedule of the future minimum payments under the lease
as of September 30, 1998:
Year                                                               Amount
     ----                                                               ------
1999                                                                $50
     2000                                                                 50
     2001                                                                 33
Rent expense under the lease was $17 for the year ended September 30, 1998.
Prior to June 1, 1998, the operations of the Company were conducted in
facilities shared with other GDC operations. The amounts allocated by GDC,
which are included in the statements of income, were $74 and $100 for
September 30, 1998 and 1997, respectively.

5. Employment Incentive Plans

 Stock Option Plans

   Officers and key employees of GDC may be granted incentive stock options at
an exercisable price equal to or greater than the market price on the date of
grant and non-incentive stock options at an exercisable price equal to or less
than the market price on the date of grant. While individual options can be
issued under various provisions, most options, once granted, generally vest in
increments of 25% per year over a four-year period and expire within ten
years.

                                     F-28
COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   The following summarizes activity related to the Company in fiscal 1997 and
1998 under these stock option plans:
Weighted
                                                                  Average
                                                      Shares   Exercise Price
                                                      -------  --------------
Options outstanding, September 30, 1996 (10,497
    exercisable).....................................  79,747      $6.49
   Options granted...................................  86,530       7.44
   Options exercised.................................      --         --
   Options cancelled or expired...................... (53,890)      6.50
                                                      -------      -----
   Options outstanding, September 30, 1997 (20,097
    exercisable)..................................... 112,387       6.60
   Options granted...................................  85,750       4.32
   Options exercised.................................      --         --
   Options cancelled or expired...................... (11,450)      7.14
                                                      -------      -----
   Options outstanding, September 30, 1998 (30,632
    exercisable)..................................... 186,687      $6.96
                                                      =======      =====
The following summarizes additional information related to the Company
regarding options outstanding and exercisable options as of September 30, 1998:
Options Outstanding at September                   Options Exercisable at
               30, 1998                                 September 30, 1998
   -----------------------------------   Weighted     ------------------------
                             Weighted     Average                  Weighted
                   Number    Average    Contractual                 Average
     Exercise        of      Exercise      Life        Number     Contractual
      Prices       Shares     Price       (Years)     of Shares      Price
     --------      -------   --------   -----------   ---------   -----------
$ 3.38-$ 4.81    65,947    $ 3.81       9.47           197       $ 4.81
   $ 5.25-$ 6.75    89,540      6.34       7.98        19,035         5.63
   $ 7.31-$ 9.63    25,700      8.95       7.46         9,900         6.83
   $10.00-$15.50     5,500     10.92       7.69         1,500        11.83
                   -------    ------       ----        ------       ------
                   186,687    $ 6.96       8.43        30,632       $ 6.96
The weighted average option price of exercisable options was $6.96 and $6.60
at September 30, 1998 and 1997, respectively. All options granted during the
two fiscal years ended September 30, 1998 were granted at an option price equal
to fair market value at date of grant.

 Employee Retirement Savings and Deferred Profit Sharing Plan

   Under the retirement savings provisions of GDC's retirement plan established
under Section 401(k) of the Internal Revenue Code, employees are generally
eligible to contribute to the plan after three months of continuous service, in
amounts determined by the plan. GDC contributes an additional 50 percent of the
employee contribution up to certain limits (not to exceed 2 percent of total
eligible compensation). Employees become fully vested in GDC's contributions
after three years of continuous service, death, disability or upon reaching age
65. The amounts contributed related to the Company's employees for the years
ended September 30, 1998 and 1997 were $28 and $33, respectively.

   The deferred profit sharing provisions of the plan include retirement and
other related benefits for substantially all of GDC's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of GDC. There were no such
contributions for fiscal 1998 or 1997.

                                      F-29
COMMUNICATIONS SYSTEMS DIVISION

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

6. Related Party Transactions and Net Equity

   The Company is comprised of intellectual property and property, plant and
equipment and certain employees that GDC has contributed to the business. All
of the Company's cash transactions are managed by GDC. All intercompany
accounts which represent all contributed property and the net amounts funded by
GDC to date are included in divisional equity.

   In addition, in fiscal 1998 and fiscal 1997, the Company performed product
development work on behalf of GDC. The cost of such work, estimated to be $434
and $480, respectively in fiscal 1998 and fiscal 1997, has been excluded from
the operating costs included in the Company's statements of income, as these
costs have been fully reimbursed by GDC.

   GDC provides accounting, treasury, tax and audit, legal, medical and risk
insurance services and various other services to the Company. An allocation
related to these costs has been made and is included in the statements of
income.

                                      F-30
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

              PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                  (unaudited)

   In December 1998, PC-Tel, Inc. (the "Company" or "PC-Tel") completed the
acquisition of substantially all the assets and certain liabilities of
Communications Systems Division, a division of General DataComm, Inc., a
Delaware corporation ("CSD"). CSD develops patents and licenses advanced modem
and access technologies. The acquisition of CSD has been accounted for as a
purchase.

   The accompanying pro forma condensed combined statement of operations for
PC-Tel's fiscal year ended December 31, 1998 assumes that the acquisition took
place as of January 1, 1998, and combines PC-Tel's statement of operations for
the year ended December 31, 1998 and CSD's statement of operations for its
fiscal year ended September 30, 1998. No pro forma condensed balance sheet is
required as the acquisition of CSD took place in December 1998 and is already
reflected in PC-Tel's consolidated balance sheet as of December 31, 1998,
included elsewhere in this Prospectus. The pro forma condensed combined
statement of operations for the year ended December 31, 1998 does not include
the effect of any nonrecurring charges directly attributable to the
acquisition.

   The purchase price allocation reflected in the accompanying pro forma
condensed combined statement of operations has been prepared on an estimated
basis. The effects resulting from any differences in the final allocation of
the purchase price are not expected to have a material effect on the Company's
financial statements.

   The accompanying pro forma condensed combined statement of operations should
be read in conjunction with the historical financial statements and related
notes thereto for both PC-Tel and CSD, which are included in this Prospectus.

                                      P-1
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

              PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)
Year Ended December 31, 1998
                                  ---------------------------------------------
                                  Historical Historical  Pro Forma    Pro Forma
                                    PC-Tel     CSD(a)   Adjustments   Combined
                                  ---------- ---------- -----------   ---------
                                                             (unaudited)
REVENUES                           $33,004     $3,531     $  (903)(b)   35,632
COST OF REVENUES................    13,878         --      (2,162)(c)   16,040
                                   -------     ------                  -------
GROSS PROFIT....................    19,126      3,531                   19,592
                                   -------     ------                  -------
OPERATING EXPENSES:
  Research and development......     4,932      1,209                    6,141
  Sales and marketing...........     5,624        174                    5,798
  General and administrative....     2,169        135                    2,304
  Acquired in-process research
   and development..............     6,130         --      (6,130)(d)       --
  Amortization of deferred
   compensation.................        43         --                       43
                                   -------     ------                  -------
    Total operating expenses....    18,898      1,518                   14,286
                                   -------     ------                  -------
INCOME FROM OPERATIONS..........       228      2,013                    5,306
                                   -------     ------                  -------
OTHER INCOME (EXPENSE), net:
  Interest income...............       504         --                      504
  Interest expense..............       (25)        --      (1,530)(e)   (1,555)
                                   -------     ------                  -------
    Total other income
     (expense), net.............       479         --                   (1,051)
                                   -------     ------                  -------
INCOME BEFORE PROVISION FOR
 INCOME TAXES...................       707      2,013                    4,255
PROVISION FOR INCOME TAXES......       212        819         246 (f)    1,277
                                   -------     ------                  -------
NET INCOME......................   $   495     $1,194                  $ 2,978
                                   =======     ======                  =======
BASIC NET INCOME PER SHARE......   $  0.21                             $  1.26
                                   =======                             =======
DILUTED NET INCOME PER SHARE....   $  0.04                             $  0.24
                                   =======                             =======
SHARES USED IN COMPUTING BASIC
 EARNINGS PER SHARE.............     2,355                               2,355
SHARES USED IN COMPUTING DILUTED
 EARNINGS PER SHARE.............    12,325                              12,325
P-2
PC-TEL, INC. AND COMMUNICATIONS SYSTEMS DIVISION

         NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                                  (unaudited)

Note 1. Pro Forma Adjustments

   Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined statement of operations as described below:

     (a) Includes CSD's historical condensed statement of operations for the
  year ended September 30, 1998.

     (b) Reflects the elimination of revenues from licensing arrangements
  between the Company and CSD.

     (c) Reflects the amortization of goodwill and other intangibles acquired
  of $10.8 million for CSD which will be amortized on a straight line basis
  over their estimated weighted average useful lives of five years.

     (d) Eliminates the acquired in-process research and development expense
  of approximately $6.1 million associated with the acquisition of CSD.

     (e) Reflects the interest expense and amortization of deferred finance
  charges on the debt incurred for the CSD acquisition.

     (f) Reflects adjustment to record a provision for income taxes in
  accordance with PC-Tel's effective tax rate for fiscal 1998.

                                      P-3
Inside back cover

Background of space shot of planet earth. Text captions "PCtel Technology for
connectivity," "Broadband," "Wireless," "Remote Access," "Analog," and
"solutions"
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                4,600,000 Shares

                          [ PCtel Logo appears here ]

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

                                   Prospectus

                                        , 1999

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

                         Banc of America Securities LLC

                            Warburg Dillon Read LLC

                            Needham & Company, Inc.

   Until        , 1999, all dealers that buy, sell or trade the common stock
may be required to deliver a prospectus, regardless of whether they are
participating in this offering. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by PC-Tel in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
SEC registration fee................................................ $   23,530
NASD filing fee.....................................................      9,000
Nasdaq National Market listing fee..................................     90,000
Printing and engraving costs........................................    150,000
Legal fees and expenses.............................................    790,000
Accounting fees and expenses........................................    300,000
Blue sky fees and expenses..........................................     15,000
Transfer agent and registrar fees...................................     17,000
Directors and officers insurance....................................    300,000
Miscellaneous expenses..............................................    105,470
                                                                     ----------
  Total............................................................. $1,800,000
                                                                     ==========
Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors, officers and controller provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

   Article Ninth of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest
extent permissible under Delaware law.

   Article VI of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of PC-Tel if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to our
best interest, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.

   We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intended to enter into indemnification agreements with any new directors
and executive officers in the future. The indemnification agreements may
require us, among other things, to indemnify our directors and officers against
certain liability that may arise by reason of their status or service as
directors and officers (other than liabilities arising from willful misconduct
of culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors and officers' insurance, if available on reasonable terms.

   Reference is also made to Section 8 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of PC-Tel against
certain liabilities.

Item 15. Recent Sales of Unregistered Securities

   Since inception, we have issued unregistered securities to a limited number
of persons, as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. The

                                      II-1
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us.

     1. On or about February 10, 1994 we issued 2,800,000 shares of our
  common stock at a per share price of $0.10 for an aggregate purchase price
  of $420,000 to our founders and certain individuals with whom we had a pre-
  existing business or personal relationship.

     2. On or about November 4, 1994 we issued 1,613,333 shares of our common
  stock at a per share price of $0.25 for an aggregate purchase price of
  $605,000 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     3. On May 9, 1995 we effected a recapitalization of our outstanding
  stock with our then current stockholders by which each share of our common
  stock was converted into one (1) share of Series A preferred stock and
  through which we received no consideration.

     4. On June 29, 1995 we sold 222,222 shares of our Series A preferred
  stock at a per share price of $0.30 for an aggregate purchase price of
  $100,000 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     5. Between October 18, 1995 and on or about January 10th of 1996 we sold
  3,250,000 shares of our Series B preferred stock at a per share price of
  $l.20 to certain individuals with whom we had a pre-existing business or
  personal relationship.

     6. On October 4, 1995, we effected, by amendment to our articles of
  incorporation, a 3 for 2 reverse stock split of our then outstanding
  capital stock.

     7. On February 4, 1998 we sold 625,200 shares of our Series C preferred
  stock at a per share price of $8.00 for an aggregate purchase price of
  $5,00l,600 to certain accredited investors, as that term is defined under
  Rule 50l of the Securities Act. State Street Securities, Needham & Company,
  Inc. and Beckman White & Reed acted as placement agents for us and, as
  partial consideration for services performed, Beckman White & Reed received
  a one-year warrant to purchase 31,260 shares of our common stock at an
  exercise price of $6.96 per share and State Street Securities, Edward
  Gibstein, Mitchell Segal, and Irving Minnaker each received three-year
  warrants to purchase an aggregate of 2,417 shares of our common stock at an
  exercise price of $8.00.

     8. On December 31, 1998 we issued ten (10) year warrants to purchase an
  aggregate of 200,000 shares of our Series C preferred stock at an exercise
  price of $8.00 to Pentech Financial Services, Inc. and PFF Bank & Trust,
  Inc. in connection with the Technology Alliance Group acquisition from
  General DataCom, Inc.

     9. From inception to December 3l, 1998, we issued and sold an aggregate
  of 2,412,247 shares of our common stock to employees, consultants, and
  directors for an aggregate consideration of $83,421 pursuant to exercise of
  options granted under our 1995 stock plan, 1997 stock plan, and our 1997
  stock plan as amended August 3, 1999.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

  *1.1  Form of Underwriting Agreement.

   3.1  Amended and Restated Certificate of Incorporation of the Registrant,
        as currently in effect.

  *3.2  Form of Amended and Restated Certificate of Incorporation of the
        Registrant to be filed after the closing of the offering made under
        this Registration Statement.

   3.3  Amended and Restated Bylaws of the Registrant.

                                      II-2
*4.1 Specimen common stock certificate.

    4.2 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to Pentech Financial Services, Inc.

    4.3 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to PFF Bank and Trust, Inc.

    4.4 Warrant to purchase shares of common stock of the Registrant issued
        to Edward Gibstein.

    4.5 Warrant to purchase shares of common stock of the Registrant issued
        to Irving Minnaker.

    4.6 Warrant to purchase shares of common stock of the Registrant issued
        to Mitchell Segal.

    4.7 Warrant to purchase shares of common stock of the Registrant issued
        to State Street Securities, Inc.

    4.8 Amended and Restated Rights Agreement dated December 31, 1997.

    4.9 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.

   4.10 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and Pentech Financial Services, Inc. dated February 1,
        1999.

   *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation.

   10.1 Form of Indemnification Agreement between PC-Tel and each of its
        directors and officers.

   10.2 1995 Stock Option Plan and form of agreements thereunder.

   10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
        form of agreements thereunder.

   10.4  1998 director option plan and form of agreements thereunder.

   10.5 1998 employee stock purchase plan and form of agreements thereunder.

   10.6 Employment offer letter between Derek S. Obata and the Registrant
        dated March 31, 1998.

   10.7 Employment offer letter between William F. Roach and the Registrant
        dated July 19, 1999.

   10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
        September 24, 1998.

   10.9 Commercial Security Agreement by and between the Registrant and PPF
        Bank and Trust and related documents.

  10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
        Technologies, Ltd. And General Datacomm, Inc. dated as of December
        22, 1998.

  10.11 Escrow Agreement by and between the Registrant and General DataComm,
        Inc. dated December 22, 1998.

  10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
        General DataComm, Inc. dated December 22, 1998.

  10.13 Form of Acquisition Bonus Agreement by and between the Registrant and
        General DataComm, Inc. dated on December 22, 1998.

  10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
        Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.

  10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
        Laboratories, Inc. and the Registrant.

   21.1 List of Subsidiaries of the Registrant.

   23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.

   23.2 Consent of PricewaterhouseCoopers, Independent Accountants.

  *23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
        (included in Exhibit 5.1).

   24.1 Power of Attorney (see Pages II-5 and II-6).

   27.1 Financial Data Schedule.

      * To be filed by amendment.

                                      II-3
(b) Financial Statement Schedules

   Schedule II Valuation and Qualifying Accounts and Reserves (included on
pages S-1 and S-2 of this registration statement).

   Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.

   Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by director,
officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

   We hereby undertake that:

     (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of Prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.

                                      II-4
SIGNATURES

   Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 6th day of August, 1999.

                                          PC-Tel, Inc.

                                                      /s/ Peter Chen
                                          By: _________________________________
                                            Peter Chen, Chief Executive
                                            Officer and Chairman

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter Chen and Andrew D. Wahl and each of them,
his attorneys-in-fact, each with the power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all 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 and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Peter Chen             Chief Executive Officer      August 6, 1999
______________________________________  and Chairman of the Board
             (Peter Chen)               (Principal Executive
                                        Officer)

         /s/ William F. Roach          President and Chief          August 6, 1999
______________________________________  Operating Officer
          (William F. Roach)

          /s/ Andrew D. Wahl           Vice President, Finance      August 6, 1999
______________________________________  and Chief Financial
           (Andrew D. Wahl)             Officer (Principal
                                        Financial Officer)

      /s/ William Wen-Liang Hsu        Vice President,              August 6, 1999
______________________________________  Engineering Director
       (William Wen-Liang Hsu)
II-5
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Han Yeh               Vice President, Technology   August 6, 1999
______________________________________  Director
              (Han Yeh)

       /s/ Richard C. Alberding        Director                     August 6, 1999
______________________________________
        (Richard C. Alberding)

         /s/ Martin H. Singer          Director                     August 6, 1999
______________________________________
          (Martin H. Singer)

            /s/ Wen C. Ko              Director                     August 6, 1999
______________________________________
             (Wen C. Ko)

       /s/ Michael Min-Chu Chen        Director                     August 6, 1999
______________________________________
        (Michael Min-Chu Chen)

          /s/ Giacomo Marini           Director                     August 6, 1999
______________________________________
(Giacomo Marini)

                                      II-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To PC-Tel, Inc.:

   We have audited, in accordance with generally accepted auditing standards,
the financial statements of  PC-Tel, Inc. (a Delaware corporation) included in
this Registration Statement and have issued our report thereon dated March 4,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose 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 audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth herein in relation to the basic financial statements
taken as a whole.

                                          Arthur Andersen LLP

San Jose, California
March 4, 1999

                                      S-1
PC-TEL, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at  Charged to
                               Beginning of Costs and              Balance at
         Description              Period     Expenses  Deductions End of Period
         -----------           ------------ ---------- ---------- -------------
Year Ended December 31, 1996:
  Allowance for doubtful
   accounts...................     $ --       $   70    $    --      $   70

Year Ended December 31, 1997:
  Allowance for doubtful
   accounts...................     $ 70       $  534    $    --      $  604

Year Ended December 31, 1998:
  Allowance for doubtful
   accounts...................     $604       $3,356    $(2,271)     $1,689
S-2
EXHIBIT INDEX

 Number  Description
 ------  -----------

   *1.1 Form of Underwriting Agreement.

    3.1 Amended and Restated Certificate of Incorporation of the Registrant,
        as currently in effect.

   *3.2 Form of Amended and Restated Certificate of Incorporation of the
        Registrant to be filed after the closing of the offering made under
        this Registration Statement.

    3.3 Amended and Restated Bylaws of the Registrant.

   *4.1 Specimen common stock certificate.

    4.2 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to Pentech Financial Services, Inc.

    4.3 Warrant to purchase shares of Series C preferred stock of the
        Registrant issued to PFF Bank and Trust, Inc.

    4.4 Warrant to purchase shares of common stock of the Registrant issued
        to Edward Gibstein.

    4.5 Warrant to purchase shares of common stock of the Registrant issued
        to Irving Minnaker.

    4.6 Warrant to purchase shares of common stock of the Registrant issued
        to Mitchell Segal.

    4.7 Warrant to purchase shares of common stock of the Registrant issued
        to State Street Securities, Inc.

    4.8 Amended and Restated Rights Agreement dated December 31, 1997.

    4.9 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and PFF Bank and Trust, Inc. dated February 1, 1999.

   4.10 Addendum to the Amended and Restated Rights Agreement by and between
        the Registrant and Pentech Financial Services, Inc. dated February 1,
        1999.

   *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation.

   10.1 Form of Indemnification Agreement between PC-Tel and each of its
        directors and officers.

   10.2 1995 Stock Option Plan and form of agreements thereunder.

   10.3 1997 Stock Option Plan, as amended and restated, August 3, 1999, and
        form of agreements thereunder.

   10.4 1998 director option plan and form of agreements thereunder.

   10.5 1998 employee stock purchase plan and form of agreements thereunder.

   10.6 Employment offer letter between Derek S. Obata and the Registrant
        dated March 31, 1998.

   10.7 Employment offer letter between William F. Roach and the Registrant
        dated July 19, 1999.

   10.8 Sublease between KLA-Tencor Corporation and the Registrant dated
        September 24, 1998.

   10.9 Commercial Security Agreement by and between the Registrant and PPF
        Bank and Trust and related documents.

  10.10 Asset Purchase Agreement by and among PC-Tel, Inc., PC-Tel Global
        Technologies, Ltd. And General Datacomm, Inc. dated as of December
        22, 1998.

  10.11 Escrow Agreement by and between the Registrant and General DataComm,
        Inc. dated December 22, 1998.

  10.12 Bonus Pool Disbursement Agreement by and between the Registrant and
        General DataComm, Inc. dated December 22, 1998.

  10.13 Form of Acquisition Bonus Agreement by and between the Registrant and
        General DataComm, Inc. dated on December 22, 1998.
EXHIBIT INDEX

  Number Description
  ------ -----------

  10.14 Direct Sales Agreement by and between PC-Tel Global Technologies,
        Ltd. and Kawasaki LSI U.S.A. dated December 4, 1998.

  10.15 Volume Purchase Agreement dated June 1, 1998 by and between Silicon
        Laboratories, Inc. and the Registrant.

   21.1 The subsidiaries of the Registrant.

   23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.

   23.2 Consent of PricewaterhouseCoopers, Independent Accountants.

  *23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
        (included in Exhibit 5.1).

   24.1 Power of Attorney (see Pages II-5 and II-6).

   27.1 Financial Data Schedule.

      * To be filed by amendment