Summary of PC TEL INC - Yahoo! Finance

Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report and in conjunction with the financial statements for the year ended December 31, 2007 contained in our Form 10-K filed on March 21, 2008. Except for historical information, the following discussion contains forward looking statements that involve risks and uncertainties, including statements regarding our anticipated revenues, gross profits, costs and expenses and revenue mix. These forward-looking statements include, among others, those statements including the words "may," "will," "plans," "seeks," "expects," "anticipates," "intends," "believes" and words of similar import. Such statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. Introduction
PCTEL focuses on wireless broadband technology related to propagation and optimization. We design and develop innovative antennas that extend the reach of broadband and other wireless networks and that simplify the implementation of those networks. We provide highly specialized software-defined radios that facilitate the design and optimization of broadband wireless networks. We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers and other original equipment manufacturers. Additionally, we have licensed our intellectual property, principally related to a discontinued modem business, to semiconductor, PC manufacturers, modem suppliers, and others. We operate in two separate product segments: a Broadband Technology Group ("BTG") and Licensing. BTG includes our Antenna Products Group and RF Solutions Group. PCTEL maintains expertise in several technology areas. These include digital signal processing chipset programming, radio frequency, software engineering, mobile, antenna design and manufacture, mechanical engineering, product quality and testing, advanced algorithm development, and cellular engineering.
On January 4, 2008, we sold our Mobility Solutions Group ("MSG") to Smith Micro Software, Inc. (NASDAQ: SMSI). MSG produced mobility software products for WiFi, Cellular, IP Multimedia Subsystem, and wired applications. The financial results for MSG are presented in the financial statements as discontinued operations. On March 14, 2008, we acquired the assets of Bluewave Antenna Systems, Ltd
("Bluewave"). The Bluewave product line augments our Land Mobile Radio ("LMR")
and Private Mobile Radio ("PMR") antenna product lines.
On October 9, 2008, we sold certain antenna products and related assets to Sigma Wireless Technology Ltd, a Scotland-based company ("SWTS").
Growth in product revenue is dependent both on gaining further traction with current and new customers for the existing product portfolio as well as further acquisitions to support our wireless initiatives. Revenue growth for antenna products is correlated to overall global wireless market growth. Specific growth areas are last mile wireless broadband Internet delivered over standards-based solutions such as Worldwide Interoperability for Microwave Access (WiMAX) or vendor specific proprietary solutions; traditional LMR/PMR solutions supporting public safety, commercial (2-way and trunked systems), and industrial automation markets; GPS and Mobile SATCOM solutions for network timing, fleet and asset tracking; and in-building solutions to extend traditional cellular network technologies. Revenue for scanning receivers is tied to the deployment of new wireless technology, such as 2.5G and 3G, and the need for existing wireless networks to be tuned and reconfigured on a regular basis.
We have an intellectual property portfolio in the area of analog modem technology, which we have actively licensed for revenue since 2002. The number of U.S. patents and applications in this technology portfolio reached to over 100 in 2005. We have since sold or divested most of these patents. Companies under license include Agere, US Robotics, 3COM, Intel, Conexant, Broadcom, Silicon Laboratories, Texas Instruments, Smartlink, and ESS Technologies. At this time, these licenses are substantially paid up in full. We believe that there are no significant modem market participants remaining to be licensed and we expect minimal modem licensing revenue going forward.
PCTEL also has an intellectual property portfolio related to antennas, the mounting of antennas, and scanning receivers. These patents are being held for defensive purposes and are not part of an active licensing program.

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Results of Operations
Three Months and Nine Months Ended September 30, 2008 and 2007
Revenues

                                                  BTG        LICENSING       TOTAL
      Three months ended September 30, 2008
      Revenue                                 $ 20,015       $    72      $ 20,087
      Percent change from year ago period         14.7 %       (57.9 %)       14.0 %

      Three months ended September 30, 2007
      Revenue                                 $ 17,455       $   171      $ 17,626
      Percent change from year ago period         (1.3 %)      (60.9 %)       (2.7 %)

      Nine months ended September 30, 2008
      Revenue                                 $ 58,448       $   213      $ 58,661
      Percent change from year ago period         17.0 %       (72.4 %)       15.6 %

      Nine months ended September 30, 2007
      Revenue                                 $ 49,972       $   771      $ 50,743
      Percent change from year ago period         (0.9 %)      (90.6 %)      (13.5 %)

BTG revenues were approximately $20.0 million for the three months ended September 30, 2008, an increase of approximately 15% from the prior year period. Both scanning receivers and antenna revenues were higher in the three months ended September 30, 2008 versus the same period in 2007. Scanning receivers contributed 5% of the revenue growth and antennas provided 10% of the revenue growth. BTG revenues were approximately $58.4 million for the nine months ended September 30, 2008, an increase of 17% from the prior year period. In the nine months ended September 30, 2008 versus the nine months ended September 30, 2007, scanning receivers contributed 11% of the revenue growth and antennas provided 6% of the revenue growth. The revenue growth for scanning receivers is primarily due to the strength of Universal Mobile Telecommunications Systems ("UMTS") deployments. The revenue growth for antennas is primarily due to the acquisition of Bluewave in March 2008.
Licensing revenues were $72 in the three months ended September 30, 2008 compared to $171 for the same period in 2007. Licensing revenues were $213 in the nine months ended September 30, 2008 compared to $771 for the same period in 2007. The decline in licensing revenues was expected and we expect minimal modem licensing revenue going forward because we have sold or divested most of our modem patents.

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Gross Profit

                                                      BTG        LICENSING        TOTAL
  Three months ended September 30, 2008
  Gross profit                                     $  9,489      $     71      $  9,560
  Percentage of revenue                                47.4 %        98.6 %        47.6 %
  Percent of revenue change from year ago period        3.2 %         2.1 %         2.9 %

  Three months ended September 30, 2007
  Gross profit                                     $  7,708      $    165      $  7,873
  Percentage of revenue                                44.2 %        96.5 %        44.7 %
  Percent of revenue change from year ago period        4.1 %        (0.8 %)        3.3 %

  Nine months ended September 30, 2008
  Gross profit                                     $ 27,826      $    208      $ 28,034
  Percentage of revenue                                47.6 %        97.7 %        47.8 %
  Percent of revenue change from year ago period        3.8 %        (0.5 %)        3.2 %

  Nine months ended September 30, 2007
  Gross profit                                     $ 21,887      $    757      $ 22,644
  Percentage of revenue                                43.8 %        98.2 %        44.6 %
  Percent of revenue change from year ago period        3.5 %        (1.6 %)       (4.0 %)

The increase in overall gross profit as a percentage of revenues for the three months and nine months ended September 30, 2008 compared to the prior periods in 2007 is due to higher BTG margins. Higher BTG margins have offset the lower mix of licensing revenues in the three and nine months ended September 30, 2008. BTG margin was 47.4% in the three months ended September 30, 2008 and 47.6% in the nine months ended September 30, 2008, approximately 3.2% and 3.8%, respectively better than the comparable periods in fiscal 2007. Scanning receivers contributed 1.8% of the margin percentage increase and antennas contributed 1.5% of the margin percentage increase in the three months ended September 30, 2008. Scanning receivers contributed 3.4% of the margin percentage increase and antennas contributed 0.4% of the margin percentage increase in the nine months ended September 30, 2008. The margin improvement reflects favorable product mix of scanning receiver revenues and the favorable impact of leveraging fixed costs over higher volume.
Licensing margin was approximately 98.6% for the three months ended September 30, 2008 and 96.5% for the three months ended September 30, 2007. The margin was approximately 97.7% for the nine months ended September 30, 2008 and 98.2% for the nine months ended September 30, 2007. The decline in margin is due to lower revenues.

Research and Development

                                                     Three Months Ended          Three Months Ended          Nine Months Ended          Nine Months Ended
                                                     September 30, 2008          September 30, 2007         September 30, 2008         September 30, 2007
Research and development                              $         2,591            $        2,156               $         7,387            $         7,381
Percentage of revenues                                           12.9 %                    12.2 %                        12.6 %                     14.5 %
Percent change from year ago period                              20.2 %                   (12.7 %)                        0.1 %                     13.5 %

Research and development expenses include costs for software and hardware development, prototyping, certification and pre-production costs. All costs incurred prior to establishing the technological feasibility of computer software products to be sold are research and development costs and expensed as incurred in accordance with SFAS 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". No significant costs have been incurred subsequent to determining the technological feasibility. Research and development expenses were $0.4 million higher in the three months ended September 30, 2008 compared to the same period in 2007 and virtually unchanged for the nine months ended September 30, 2008 compared to the same period in 2007.

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For the three months ended September 30, 2008, expenses were higher than the prior year period because we invested in headcount for scanning receivers and for an antenna design center in China. For the nine month period, these investments in scanning receiver and antenna development offset the reduction in expense related to the exit from the UMTS antenna product line and the related closure of our engineering offices in Ireland and the United Kingdom in Q2 2007.

Sales and Marketing

                                                       Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                       September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Sales and marketing                                    $        2,543              $         2,825            $       8,180              $       8,233
Percentage of revenues                                           12.7 %                       16.0 %                   13.9 %                     16.2 %
Percent change from year ago period                             (10.0 %)                       4.2 %                   (0.6 %)                    (1.0 %)

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and trade show expenses.
Sales and marketing expenses were approximately $0.3 million and $0.1 million lower for the three months and nine months ended September 30, 2008, respectively, compared to the same periods in fiscal 2007. These decreases in sales and marketing expense are due to cost controls and lower outside sales commissions. Our outside sales commissions were lower because we reduced the number of outside rep firms in 2008.

General and Administrative

                                                         Three Months Ended          Three Months Ended          Nine Months Ended          Nine Months Ended
                                                         September 30, 2008          September 30, 2007         September 30, 2008         September 30, 2007
General and administrative                               $        2,619              $        3,129              $       8,372              $       9,700
Percentage of revenues                                             13.0 %                      17.8 %                     14.3 %                     19.1 %
Percent change from year ago period                               (16.3 %)                     (0.4 %)                   (13.7 %)                    (4.0 %)

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, public company costs, and other operating expenses to the extent not otherwise allocated to other functions.
General and administrative expenses decreased approximately $0.5 million for the three months ended September 30, 2008 compared to the same period in 2007. This expense decrease is due to lower expenses for corporate overhead. For the nine months ended September 30, 2008, general and administrative expenses decreased $1.3 million compared to the same period in 2007. Approximately $0.3 million of the decrease is due to the positive impact from our exit from UMTS antenna product operations in Ireland and the remainder of the decrease is due to lower expenses for corporate overhead. Corporate overhead expenses declined in the three and nine months ended September 30, 2008 because we streamlined our corporate overhead structure after the MSG sale.

Amortization of Intangible Assets

                                                     Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                     September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Amortization of other intangible assets                $         552              $         408              $         1,544            $         1,579
Percentage of revenues                                           2.7 %                      2.3 %                        2.6 %                      3.1 %

Amortization expense increased approximately $0.1 million in the three months ended September 30, 2008 compared to the same period in 2007, and was virtually unchanged for the nine months ended September 30, 2008 compared to the same period in 2007. The increase in the three months ended September 30, 2008 was due to the purchase of Bluewave in March 2008. For the nine months ended September 30, 2008, amortization for Bluewave intangible assets offset lower amortization for the intangible assets related to UMTS antenna products. The intangible assets related to UMTS antennas were written off in 2007 because we exited

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UMTS antenna product operations during the second quarter of 2007.

Restructuring Charges

                                                       Three Months Ended          Three Months Ended          Nine Months Ended          Nine Months Ended
                                                       September 30, 2008          September 30, 2007         September 30, 2008         September 30, 2007
Restructuring charges                                    $           -             $        (152 )              $         364              $         1,922
Percentage of revenues                                             0.0 %                    (0.9 %)                       0.6 %                        3.8 %

For the nine months ended September 30, 2008, we incurred charges of $0.3 million related to corporate overhead restructuring and $0.1 million related to adjustments to our UMTS restructuring reserves.
In January 2008, we streamlined our corporate overhead structure to reduce general and administrative expenses. In 2007, we exited from UMTS antenna product operations. We closed our research and development facility in Dublin, Ireland as well as a related engineering satellite office in the United Kingdom, and discontinued the UMTS portion of our contract manufacturing, which was located in St. Petersburg, Russia.

Impairment Charge

                                                     Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                     September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Impairment charge                                      $         882              $           -              $         882              $           -
Percentage of revenues                                           4.4 %                      0.0 %                      1.5 %                      0.0 %

On August 14, 2008, we entered into an asset purchase agreement for the sale of certain antenna products and related assets to SWTS. SWTS purchased the intellectual property, dedicated inventory, and certain fixed assets related to four of our antenna product families in the BTG segment for $650,000, payable in installments at close and over a period of 18 months. The four product families represent the last remaining products acquired by us through our acquisition of Sigma Wireless Technologies Ltd. ("Sigma") in July 2005. The sale transaction closed on October 9, 2008.
At September 30, 2008, we accounted for this transaction as an impairment charge, separately within operating expenses in the financial statements. At September 30, 2008, the long-lived assets sold to SWTS in October 2008 are subject to impairment under FAS 144 and the goodwill is subject to impairment under FAS 142. The net charge calculated of $0.9 million included the impairment charges for the assets sold to SWTS and the incentive payments due the new employees of SWTS, net of the proceeds due to us. The major components of the net impairment charge consisted of the net book value of inventory for $0.8 million, impairment of intangible assets including goodwill of $0.5 million, and incentive payments of $0.1 million. We calculated $0.5 million in proceeds based on the principle value of the installment payments excluding imputed interest .

Gain on sale of assets and related royalties

                                                     Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                     September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Gain on sale of assets and related royalties           $         200              $         250              $         600              $         750
Percentage of revenues                                           1.0 %                      1.4 %                      1.0 %                      1.5 %

All royalty amounts represent royalties from Conexant. Under terms of our agreement with Conexant, the minimum royalty payments declined from $250 per quarter in 2007 to $200 per quarter in 2008. Payments under the royalty agreement with Conexant run through June 30, 2009.

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Other Income, Net

                                                    Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                    September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Other income, net                                     $         120              $         820              $         1,557            $         2,620
Percentage of revenues                                          0.6 %                      4.7 %                        2.7 %                      5.2 %

Other income, net, consists primarily of interest income and foreign exchange gains and losses. Other income, net, declined for the three months ended September 30, 2008 compared to the same period in fiscal 2007 due to lower interest rates, foreign exchange losses, and to the negative impact of approximately $0.2 million loss of value resulting from a mark to market adjustment of the funds in Columbia Strategic Cash Portfolio ("CSCP"). Other income, net, was $1.0 million lower for the nine months ended September 30, 2008 compared to the same period in fiscal 2007 due to the negative impact of approximately $0.7 million loss of value resulting from a mark to market adjustment and also due to lower average interest rates.
In December 2007, we recorded in "Short-Term Investment Securities" cash and investments held in the CSCP. The fund was closed to new subscriptions or redemptions in December 2007. The mark to market losses included in "Other Income, net" relate to the estimated fair value of this fund. The fair value was determined from the net asset value provided by Columbia management. The net asset value (NAV) of the CSCP declined since the end of the quarter ended September 30, 2008. As of November 7, 2008, the change in the NAV represented a $0.5 million mark to market adjustment to our investment balance. During October 2008, we received redemptions of $1.9 million from the CSCP. With the redemptions and the mark to market adjustment, the value of our investment value in the CSCP was $11.5 million at November 5, 2008. We will adjust the CSCP investment balance to the new NAV at December 31, 2008.
In the three months ended September 30, 2008 and 2007, we recorded foreign exchange losses of $134 and $76, respectively. In the nine months ended September 30, 2008 and 2007, we recorded foreign exchange gains (losses) of $83 and ($179), respectively.

Provision for Income Taxes

                                                    Three Months Ended         Three Months Ended         Nine Months Ended          Nine Months Ended
                                                    September 30, 2008         September 30, 2007         September 30, 2008        September 30, 2007
Provision for income taxes                          $       (10,216 )            $          34            $       (8,451 )           $         612
Effective tax rate                                          (1474.2 %)                     5.9 %                  (244.1 %)                  (21.8 %)

For the nine months ended September 30, 2008, we recorded an income tax benefit of $8.5 million for continuing operations. The tax benefit differs from the statutory rate of 35% because we recorded a tax benefit of $10.4 million for the reversal of allowances on our deferred tax assets. We reversed deferred tax asset allowances because we expect to realize tax deductions related to the complete disposition of our Sigma acquisition in October 2008, the income from the sale of MSG , and the revised projections of future income, it is more likely than not that we will realize our deferred tax assets For the nine months ended September 30, 2008, the tax benefit of $8.5 million includes continuing tax expense of $1.9 million offset by benefit for the reversal of the allowance on our deferred tax assets.
We recorded tax expense of $0.6 million for continuing operations for the nine months ended September 30, 2007. The tax rate of -22% differs from the statutory rate of 35% because we provided valuation allowances on our deferred tax assets. The tax rate for the three months and nine months ended September 30, 2007 differs from the statutory rate of 35% because we provided valuation allowances on our deferred tax assets at September 30, 2007. We reversed $7.9 million of valuation allowances in the quarter ended December 31, 2007. With the sale of MSG in January 2008 it is more likely than not that we will realize these deferred tax assets.
We regularly evaluate our estimates and judgments related to uncertain tax positions and, when necessary, establish contingency reserves to account for our uncertain tax positions. As we obtain more information via the settlement of tax audits and through other pertinent information, these projections and estimates are reassessed and may be adjusted accordingly. These adjustments

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may result in significant income tax provisions or provision reversals.

Discontinued operations, net of tax

                                                          Three Months Ended         Three Months Ended          Nine Months Ended          Nine Months Ended
                                                          September 30, 2008         September 30, 2007         September 30, 2008         September 30, 2007
Net income from discontinued operations, net of tax         $         157               $        98               $        37,035             $        89

Discontinued operations for the three months ended September 30, 2008 included a $0.2 million benefit for state income taxes. Discontinued operations for the nine months ended September 30, 2008 included the gain on the sale of MSG of $60.3 million in addition to net loss from operations of $0.3 million and income tax expense of $23.0 million. Discontinued operations for the nine months ended . . .